-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LnpbDbdbXeusgJvIFd5/ot+B2uncAIvYyNV5nONHW9H99/iLuZbthDdO/V7x9IRi 4WSqeiHeSo8ajjx+u7giyg== 0000950005-97-000405.txt : 19970414 0000950005-97-000405.hdr.sgml : 19970414 ACCESSION NUMBER: 0000950005-97-000405 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970411 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNRISE TECHNOLOGIES INTERNATIONAL INC CENTRAL INDEX KEY: 0000846771 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 770148208 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10428 FILM NUMBER: 97578991 BUSINESS ADDRESS: STREET 1: 47257 FREMONT BLVD CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106239001 MAIL ADDRESS: STREET 1: 47257 FREMONT BLVD. CITY: FREMONT STATE: CA ZIP: 94538 FORMER COMPANY: FORMER CONFORMED NAME: SUNRISE TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. Commission File No. 1-10428 Sunrise Technologies International, Inc. (Exact name of Registrant as specified in its charter) Delaware 77-0148208 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 47257 Fremont Boulevard, Fremont, California 94538 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 623-9001 Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $34,836,000 as of March 21, 1997 based upon the closing price on the OTC Bulletin Board for that date. There were 27,868,613 shares of the Registrant's Common Stock issued and outstanding on March 21, 1997. DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12, and 13 of Part III incorporate information by reference from the Proxy Statement for the 1997 Annual Meeting of Stockholders. PART I ITEM 1. BUSINESS Overview Sunrise Technologies International, Inc. (the "Company") develops, manufactures and markets laser systems for applications in ophthalmology and dentistry. In addition, the Company has developed, manufactures and markets an air abrasive cavity preparation system for dentistry (the "MicroPrep(R)"). Through the end of 1991, the Company was the exclusive developer and manufacturer of dental laser systems for American Dental Technologies, Inc. ("ADT"), formerly known as American Dental Laser, Inc., and derived substantially all of its revenues from the sale of the dLase 300 Dental Laser system (the "dLase 300 system") to ADT for distribution in the United States and overseas markets. ADT commenced foreign sales of the dLase 300 system in December 1988 for the treatment of caries (tooth decay) and soft tissue (such as gingivectomies). Following the clearance by the United States Food and Drug Administration ("FDA") to market the product for soft tissue applications, the Company commenced distributing the product in the United States in May 1990. The Company filed a Pre-Market Approval application ("PMA") for commercial sales of the dLase 300 in the United States for treatment of hard tissue in October 1988, which was not recommended for approval in August 1990 and again denied in February 1996. The Company is currently evaluating this development in relation to its overall marketing of the dental laser. Since mid-1992, the Company has focused a significant portion of its efforts on engineering and development of its laser corneal shaping product (the "LTK system") for the treatment of refractive errors of the eye, such as myopia, hyperopia and astigmatism. The LTK system is based upon patented technology acquired in the Company's acquisitions of in-process technology from Laser Biotech, Inc. and Emmetropix Corporation in 1992. The LTK system was introduced overseas in the fourth quarter of 1993 for the treatment of hyperopia and astigmatism. The Company conducted Phase IIa clinical trials of this system for the treatment of hyperopia in the United States pursuant to an Investigational Device Exemption ("IDE") from the FDA through 1994. In February 1995, the Company filed its request with the FDA to commence Phase IIb clinical trials. In a March 1995 letter, the FDA cited various deficiencies in the Company's February letter and requested additional information. In December 1995, the Company submitted the requested additional information. In January 1996, the FDA responded to the Company's submittal by requesting current follow-up data on all Phase IIa patients. In March 1996, the Company provided the current follow-up data on all Phase IIa patients. On September 5, 1996, the FDA authorized Sunrise to treat an additional 100 subjects at five United States locations in a continuation of Phase IIa clinical trials using a treatment algorithm developed by Sunrise in the course of the initial Phase IIa clinical trials and in the course of studies conducted by ophthalmologists in Mexico, Great Britain and Canada. The continued clinical trial is limited to the treatment of forty subjects for the +1 diopter treatment group and sixty subjects for the +2 diopter treatment group (See "Products", "Government Regulation", "Patents and Licenses" and "Management's Discussion and Analysis of Financial Condition and Results of Operations"). In April 1993, the Company commenced development of the MicroPrep(R) pursuant to a joint development and exclusive manufacturing agreement with Danville Engineering, Inc. The Company filed a 510(k) application with the FDA in June 1993, and received FDA market clearance during the second quarter of 1994 (See "Products" and "Government Regulation"). Initial shipment of the product began in June 1994. In October 1995, the Company introduced the Associate, a table-top version of the MicroPrep(R). The Company has incurred substantial losses in the past three years which have seriously depleted its working capital. Sales of its existing dental products at current levels will not be sufficient to sustain both the existing business and the continued development and regulatory licensing of additional products including the LTK system. Historically, the Company has been able to raise additional working capital for all aspects of its business through the private placement of its common stock. These private placements raised approximately $15.3 million in 1994, 1995 and 1996 in new equity for the Company. In February and March 1997, the Company raised approximately $3.7 million through private placements of 5% convertible notes due 1999 (convertible into common stock) and warrants to purchase common stock (the "1997 Notes Placement"). The Company is seeking to raise additional working capital for all aspects of its business. If the Company is unable to obtain additional working capital, it may be required to reduce substantially, or eliminate, certain business, limit or suspend its operations in their entirety or, under certain circumstances, seek protection from creditors under the Bankruptcy Act. 2 Proposed Sale of Dental Assets On March 26, 1997, the Company entered into an asset purchase agreement with Lares Research, a California corporation ("Lares"), providing for the sale of the Company's assets associated with its dental laser, air abrasion and composite curing systems (the "Dental Assets"). Lares is a privately held company located in Chico, California. Consummation of the proposed dental sale is subject to Lares' ability to raise $4,000,000 to fund the closing date payment described below. There is no assurance that Lares will be able to attract the required financing from banking institutions and members of the Lares family, and, if Lares is unsuccessful, the transaction will be abandoned. If Lares is able to raise the required capital, the Company would transfer to Lares all of the Dental Assets except for cash and accounts receivable (book value at December 31, 1996 of approximately $1,904,000). All liabilities of the Company related to its operations associated with tbe Dental Assets (the "Dental Business") would be retained by the Company, except for certain obligations relating to royalties and a supply contract. Lares would pay Sunrise $4,000,000 at closing and would issue $1.5 million in notes ("Lares Notes"). The $1,000,000 Lares Note would be payable three years from the date of closing, and interest at the rate of 8% per annum would begin to accrue at the end of the first quarter following the closing and would be payable quarterly. The $500,000 Lares Note would be payable four years from the date of closing, and interest at the rate of 8% per annum would be accrued for the first two years following the date of closing, with interest payable quarterly thereafter. The Company intends to recognize proceeds from the sale and interest on the notes as cash is received. In the event the transaction with Lares is not consummated, the Company will seek to sell the Dental Assets to another purchaser. The Company's revenues are substantially derived from the sale of its dental laser and air abrasive products. In 1996, these sales represented 98% of the Company's revenues. If the proposed sale of the Dental Assets is consummated, $4,000,000 of the purchase price will be paid in cash which the Company will use to fund its ophthalmic activities; however, by selling the Dental Assets, the Company will lose a significant source of continued revenue. PRODUCTS Dental SunLase Dental Laser Systems The SunLase series of dental laser systems are portable laser systems designed to be used in dentistry, without the use of local anesthetic, for hard tissue applications such as treatment of dental caries (cavities) and pre-carious dental lesions (the precursor of cavities) and for soft tissue cutting procedures in the oral cavity. The Company introduced the SunLase 800 for sales in international markets during the third quarter of 1992 for hard and soft tissue applications. The SunLase 800, which was developed using technology from the Company's ophthalmic and surgical laser technologies, uses a pulsed Nd:YAG with a variable power of 0.3 watts to 8 watts and provides a choice of pulse rates from 10 to 50 pulses per second. The SunLase 800 incorporates a memory feature that allows the practitioner the choice of up to eight programmable treatment settings. The application of solid-state laser technology provides low-cost, efficient and reliable operations. No special utilities are required and the unit plugs into any standard electrical outlet. In March 1993, the Company introduced two new dental laser systems in the United States market for soft tissue applications--the SunLase 400, a four watt dental laser system and the SunLase Master, an eight watt dental laser system with a pulse rate of from 10 pulses per second to 100 pulses per second. The Company obtained FDA clearance to market these procedures prior to their introduction. MicroPrep(R) Dental Applications The Company entered into a joint development agreement with Danville Engineering in April 1993, to develop the MicroPrep(R), a low-cost, compact, microprocessor-controlled air abrasive unit. Pursuant to the terms of the agreement, Danville Engineering provides the air abrasive module for incorporation into the 3 MicroPrep(R). In addition, Danville Engineering may act as a non-exclusive distributor of the product. The MicroPrep(R) uses a high speed air stream containing small particles which, when directed at teeth, have an abrasive action that can be used to cut enamel and dentin, thereby prepare a cavity for restorative material. The air abrasive method allows for rapid cutting of the tooth structure with minimal heat, vibration and pressure, thereby permitting cavity preparation without the use of local anesthetic in most cases. In cases where the tooth is hypersensitive, pulpal stimulation can be controlled by reducing the pressure of abrasive material delivered to the tooth structure. The MicroPrep(R) Director is approximately suitcase-sized (similar to the Company's dental laser packaging) and has a built-in compressor which improves the portability of the system as compared to the competitive product which uses the dentist's existing compressed air supply. The Director utilizes a standard 115 volt outlet, delivers abrasive at from 80 psi to 120 psi, and operates at three different pressures, three different abrasive concentrations and also has a pulsed mode to allow the dentist innumerable variations on delivering abrasive to the target tooth structure. The Company filed a 510(k) with the FDA in June 1993 and received clearance to market the product in May 1994. Initial product shipment began in June 1994. In October 1995, the Company introduced the "Associate(R)," a table-top version of the MicroPrep(R). Ophthalmic Ophthalmic Laser System for Glaucoma In 1990, the Company developed the gLase 210 ophthalmic system (the "gLase 210 system"), a holmium laser system designed to perform a filtering procedure for the treatment of glaucoma. Conventional filtering procedures, whereby a permanent drainage duct is created to relieve the pressure in the eye, is a difficult surgical procedure and is currently being performed only by a limited number of glaucoma specialists. The gLase 210 system emits radiation at a wavelength that is highly absorbed by water, and therefore by all tissues in the body because water is the main constituent of all body tissues. The goal of a filtering procedure is to relieve the pressure inside the eye by making a small hole in the sclera, the strong wall of the eye. The pulsed nature of the holmium laser combined with the wavelength, provide an effective and efficient way of creating a hole in the sclera with minimal disturbance to surrounding tissues. The laser beam is brought to the target inside the eye with a 200 micron fiber built into a special probe that emits the laser beam at a right angle to the fiber axis. The design characteristics and the unique delivery device of the gLase 210 system enables the ophthalmologist to perform this procedure on an outpatient basis, thus avoiding the use of an operating room and the hospitalization sometimes required with traditional filtering surgery. Foreign sales of the gLase 210 system commenced on a limited basis during the second quarter of 1990; domestic sales commenced in December 1990 when the Company received FDA clearance to begin commercial sale of the product line in the United States for the filtering procedure. The gLase 210 system is currently marketed directly and through dealers, distributors and manufacturer's representatives in the United States and through distributors internationally. Sales of the gLase 210 system have been limited and never represented more than 11% of revenues in any year. Corneal Shaping System In April 1992, the Company acquired Laser Biotech, Inc., a California corporation ("Laser Biotech"), through a merger of a wholly-owned subsidiary of the Company with Laser Biotech (the "Merger"). Laser Biotech was founded in 1986 by Bruce J. Sand, M.D., FACS, to research and develop a precision laser instrument for eye surgery. In connection with the Merger, the Company also acquired certain patent and patent applications held by Dr. Sand covering a patented technique for reshaping the cornea using a laser. The technique, called Laser Thermal Keratoplasty ("LTK" or the "Corneal Shaping System"), alters the shape of the cornea to correct refractive disorders such as hyperopia (farsightedness), astigmatism and presbyopia (decline in near vision due to aging) 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. and VISX, Inc. remove parts of the cornea to achieve changes in refraction. Laser Biotech conducted pre-clinical studies to 4 gain preliminary information on the efficacy and safety of the product, which resulted in positive indications the Corneal Shaping System can be applied successfully and safely to correct refractive errors. In May 1992, the Company acquired substantially all of the in-process technology of Emmetropix Corporation, a Texas corporation ("Emmetropix"), including an assignment of certain patent applications and related technology from an Emmetropix shareholder which the Company believes will be useful in developing the LTK system. The Company received an IDE from the FDA to begin Phase I clinical trials on human subjects in the first quarter of 1992. Phase I trials commenced in June 1992 using a prototype LTK System designed and developed by the Company. The Company completed Phase I of the clinical work for the LTK system and filed its results with the FDA in June 1993. In September 1993, the Company received clearance to begin Phase IIa clinical trials for the treatment of hyperopia. The trials were conducted at Doheny Eye Institute at USC and Baylor University and completed in November 1994. In February 1995, the Company filed its request with the FDA to commence Phase IIb clinical trials. In March 1995 the FDA cited various deficiencies in the Company's February letter and requested additional information which the Company submitted in December 1995. In January 1996, the FDA responded to the Company's submittal by requesting current follow-up data on all Phase IIa patients. In March 1996, the Company provided the current follow-up data on all Phase IIa patients. On September 5, 1996, the FDA authorized the Company to treat an additional 100 subjects at five United States locations in a continuation of Phase IIa clinical trials using a treatment algorithm developed by the Company in the course of the initial Phase IIa clinical trials and in the course of studies conducted by ophthalmologists in Mexico, Great Britain and Canada. The continued clinical trial is limited to the treatment of forty subjects for the +1 diopter treatment group and sixty subjects for the +2 diopter treatment group. In addition, clinical trials were initiated outside the United States in early 1993 and are ongoing. The Company has obtained FDA export clearance to market the Corneal Shaping System in most European countries, Turkey, Saudi Arabia, Canada, Mexico, Brazil, Japan, China, Korea, Hong Kong, the Bahamas, and other countries, although such sales are subject to the individual regulatory authority of each country. Following regulatory approvals, the Company commenced marketing the Corneal Shaping System overseas, primarily in Europe, for the treatment of hyperopia and astigmatism in December 1993. Some preliminary experiments have been done on myopia. The Corneal Shaping System incorporates the Sun 1000, a modified gLase 210 system as the laser source into a delivery system that is built into a standard slit-lamp to perform the LTK procedure. A slit-lamp is a binocular microscope used regularly by ophthalmologists to examine an eye binocularly under high magnification. The Corneal Shaping 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 a two second exposure for the treatment. To date, international sales of the Corneal Shaping System have been limited. Revenue in the United States cannot be expected until the Company is granted approval from the FDA to market in the U.S., which will not be until 1999 at the earliest. There can be no assurance the Company will successfully develop or market the Corneal Shaping System, the FDA will approve the results of continued clinical trials, or the PMA will be approved which will result in the Company marketing the product in the future. (See "Government Regulation" and "Marketing and Sales"). GOVERNMENT REGULATION The Company's products are subject to significant government regulation in the United States and other countries. In order to test clinically, produce and market products for human diagnostic and therapeutic use, the Company must comply with mandatory procedures and safety standards established by the FDA and comparable state and foreign regulatory agencies. Typically, such standards require products be approved by the government agency as safe and effective for their intended use before being marketed for human applications. The clearance process is expensive and time consuming, and no assurance can be given that any agency will grant clearance for the sale of the Company's products for routine clinical applications or the time the clearance process will require will not be extensive. 5 No clinical testing of the Company's products on humans may be undertaken without first obtaining an IDE from the FDA. To date, sales of the Company's dental and ophthalmic laser systems in the United States for clinical testing on humans have been pursuant to approved IDE's. The Company is subject to regulation under the Radiation Control for Health and Safety Act administered by the FDA which requires laser manufacturers to file new product and annual reports; to maintain quality control, product testing and sales records; to incorporate certain design and operating features in lasers sold to end-users; and to certify and label each laser sold to an end-user as belonging to one of four classes, based on the level of radiation from the laser that is accessible to users. Various warning labels must be affixed and certain protective devices installed, depending on the class of the product. The CDRH (Center for Devices and Radiological Health) is empowered to seek fines and other remedies for violations of the regulatory requirements. Foreign sales of the Company's dental and ophthalmic laser systems are subject in each case to clearance by the FDA for export to the recipient country. Regulatory requirements vary widely among the countries, from electrical approvals to clinical applications similar to the PMA application filed with the FDA for sales in the United States. There can be no assurance the Company will be successful in obtaining such approvals for its products in the future. MARKETING AND SALES The Company's strategy is to market its products through established medical or dental equipment distributors overseas. In the United States, the Company sells its dental products through a small direct sales force coupled with distributors and dealers where appropriate. Through 1992, substantially all of the Company's revenues were derived from sales of dental laser systems to ADT. In September 1992, the Company commenced sale of the SunLase 800 internationally through distributors for hard and soft tissue applications. Following settlement of its dispute with ADT in February 1993, the Company expanded its network of established international distributors for sale of its dental laser systems and commenced marketing dental laser systems in the United States for soft tissue applications. Unlike ophthalmology where lasers have been used for many years, the introduction of laser systems for dental applications represents a significant innovative treatment method. The ultimate success of the Company in penetrating the dental market is dependent upon a well-trained and educated direct sales and distributor organizations. The Company believes dental trade shows as well as local dental organization trade meetings also represent an important opportunity to provide dentists with an understanding of the application of the Company's products to their practice and the dental market currently lacks the educational programs necessary to provide the practitioner with an understanding of the benefits of the Company's products not only to the patient but to their practice. Furthermore, the Company's initial marketing efforts indicate dentists have been confused by the variety of lasers offered for dental applications and the market for dental lasers may not expand significantly until FDA approval for hard tissue applications has been obtained. This marketing program will require significant effort and expenses in order to establish a market presence in the United States. For ophthalmic and medical applications, 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 ophthalmic market for the gLase 210 has been impacted by reimbursement pricing pressures, the continued need for publication of long term follow-up data, and increased educational 6 requirements on the part of the practitioner regarding follow-up requirements and patient monitoring. The Company markets its ophthalmic products through distributors. The establishment of a successful distributor network requires providing the distributors with sales instruments (brochures, clinical data, research papers, educational videos). Such marketing efforts are expected to include presentations at conventions and trade shows, customer training by Company personnel and sponsorship of teaching seminars, clinical presentations, and research by others. The Company also hires additional marketing and sales consultants from time to time to assist in the introduction of its products. There can be no assurance the Company can effectively market its existing and planned new products. ENGINEERING AND DEVELOPMENT The Company's success will depend substantially upon its ability to develop, produce and market innovative new products. For the years ended December 31, 1994, 1995 and 1996, the Company expended $1,561,000, $1,218,000 and $1,326,000, respectively, on engineering and development relating to dental and ophthalmic lasers and MicroPrep(R) as well as research on a variety of medical and dental applications. 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 and dental 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 dental and ophthalmic lasers and MicroPrep(R) systems 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. Engineering and development, prototype production, and all manufacturing, assembly and testing activities take place at its Fremont, California facility. Although all the parts and components used by the Company are available from multiple sources, several are currently being purchased from only one source to obtain volume discounts. Lack of availability of certain components could require minor redesign of the products resulting in production delays. In late 1993, the Company realigned its production structure through a reduction in production manpower to more accurately reflect short-term demand as well as the realignment of responsibilities. The Company's dental laser systems, ophthalmic laser systems, and the MicroPrep(R) products 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. 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 7 in the amount of $5,000,000 with an umbrella policy for an additional $5,000,000, such coverage is limited, and there can be no assurance 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 ultimately prevail. PATENTS AND LICENSES Pursuant to agreements with ADT, the Company assisted ADT and its founders in the preparation of several patent applications, which have been filed in the United States Patent and Trademark Office and in certain countries in Europe. From these applications, several patents have been issued and have been assigned to ADT. Pursuant to the terms of its settlement with ADT in February 1993, the Company obtained a royalty bearing non-exclusive, worldwide license under ADT's patents and patent applications covering the manufacture, sale or use of dental laser products. There can be no assurance any additional patents will be issued or any such patents will afford protection or benefit to the Company. The Company has two issued patents on its gLase 210 ophthalmic product. In the acquisition of Laser Biotech, the Company acquired a United States patent and pending United States and foreign patent applications previously licensed to Laser Biotech by Dr. Bruce Sand, its founder. The issued patent covers a method for using a laser to shrink collagen in the body. Since the acquisition, two more patents filed by Dr. Sand have been allowed, and have been assigned to the Company. In the Emmetropix acquisition, the Company acquired three United States patent applications as well as foreign patent applications previously licensed to Emmetropix, which the Company believes will be useful in developing its laser thermal keratoplasty product. In addition, the Company has filed a patent application covering the corneal shaping system it developed to make use of the LTK procedure. COMPETITION The medical and dental laser and equipment industries are generally subject to intense competition and are characterized by rapid technological change. The Company's products will compete with conventional treatment methods, as well as with products marketed by other medical and dental laser equipment manufacturers, most of which have significantly greater financial resources than the Company. While the Company believes its compact products, which can be used in the doctor's office, offer better treatment characteristics than currently available systems and offer comparable treatment at lower cost, there can be no assurance the Company will be successful in marketing its dental and ophthalmic products. Dentistry Since 1990, the Company's dental laser systems have been marketed in the United States for soft tissue applications and overseas for both hard and soft tissue applications. Soft tissue applications include gingivectomies, gum contouring and minor surgical cuts such as frenectomies. The Company believes its system, which employs a lightweight contact probe, offers advantages over traditional surgical methods in that it allows the dentist to perform such procedures with minimal bleeding and without anesthesia in most cases. The Company currently competes with ADT among others with respect to its dental laser systems. In recent periods, competition in the dental laser industry has increased significantly, as various dental laser systems have been introduced into the market, primarily for soft tissue applications. These include pulsed and continuous wave Nd:YAG, carbon dioxide and argon lasers. The introduction of these systems has to some extent generated confusion and delays among end-users, who must sort through various claims and complex technologies prior to purchasing a dental laser system. There are several other competitors marketing dental laser systems for soft tissue applications including ADT. The Company's products also compete with established methods of treating caries, primarily the dentist's drill, certain chemical solutions and with CO2 laser systems currently marketed for other dental procedures. There are no laser systems currently marketed in the United States for hard tissue applications and the Company believes the market for its dental laser systems may be minimal until FDA clearance to market for such application can be obtained. 8 The Company's products will be required to compete with respect to price, ease of use and rapid effective treatment. There can be no assurance other companies will not introduce new products that compete with the Company. The Company currently markets the MicroPrep(R), an abrasive-action cavity preparation unit that competes with ADT's KCP 2000. Ophthalmology Use of the holmium laser for LTK will compete with or supplement existing treatments for refractive disorders, including eyeglasses, contact lenses, other refractive surgeries (such as radial keratotomy) and other technologies currently under development, such as corneal implants and surgery involving other laser techniques. The industry is characterized by extensive research and rapid technological change. Newer technologies could be developed with better performance for refractive surgery than LTK. The significant competitive factors in the industry will include price, convenience, success relative to vision correction, acceptance of new technologies, patient satisfaction and ability to receive regulatory approval. Aside from using eyeglasses and contact lenses, refractive errors are currently being treated by a surgical approach called Radial Keratotomy ("RK"), photo refractive keratectomy ("PRK") and LASIK which treat nearsightedness (myopia). Currently, the dominant laser approach for the treatment of myopic refractive disorders is the use of the excimer laser. In the United States, VISX, Incorporated ("VISX") and Summit Technology, Inc. ("Summit") are the leading manufacturers of excimer refractive surgical systems. The Company believes the LTK process for the treatment of hyperoptic refractive disorders offers several distinct advantages over the use of excimer lasers, including ease of use and less invasiveness. Both VISX and Summit have significantly greater financial resources than the Company. In October 1995, both Summit and VISX announced that the FDA had approved their PMA applications to commercially market and sell their excimer laser systems in the U.S. for correctional myopic refractive disorders. In 1997, VISX received approval to treat astigmatism. It is unclear what effect these developments will have on the Company's business. The Company believes the potential use of the process of shrinking collagen is more attractive than competitive methods because it can address certain refractive errors with minimal damage to the cornea. There can be no assurance, however, the method can be reduced to practice using a reliable laser system or the Company will receive regulatory approvals or successfully market such a product. BACKLOG On December 31, 1996 the Company had a backlog of approximately $200,000. 9 WARRANTY AND SERVICE The Company provides a limited warranty on its dental 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 in the United States. The Company's laser products include microprocessors and software that perform self checks upon startup and during operation. In addition, the systems feature software that allows service personnel to perform diagnostic checks in the field. The Company currently provides support services by telephone to customers with operational and service problems and makes necessary repairs at its plant or at the laser site. To date, actual costs incurred related to warranty work have been minimal. The Company provides similar warranties and support services to end-users concerning its direct sales of the gLase ophthalmic laser systems; however, in the case of sales by the distributors, all product service will be provided by the distributor. EMPLOYEES At December 31, 1996 the Company had 42 full-time employees (including its executive officers); 13 in manufacturing, 5 in engineering and development, 18 in marketing, sales and regulatory, and 6 in administration. The Company is primarily dependent upon its engineering and development employees and consultants for the development and improvement of current and proposed products. The Company's future success is partially dependent upon its ability to attract and retain highly qualified scientific and management personnel. EXPORT SALES In 1996, approximately 47% of the Company's revenues were international as compared to approximately 69% in 1995 and 68% in 1994. CAUTIONARY STATEMENTS-RISK FACTORS In the interest of providing the Company's shareholders and potential investors with certain Company information, including management's assessment of the Company's future potential, certain statements set forth herein contain or are based on projections of revenue, income, earnings per share and other financial items or relate to management's future plans and objectives or to the Company's future economic performance. Such statements are "forward-looking statements" within the meaning of Section 27A(I) of the Securities Act of 1933, as amended, and in Section 21E(I) of the Securities Exchange Act of 1934, as amended. Although any forward-looking statements contained herein or otherwise expressed by or on behalf of the Company are, to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Accordingly, shareholders and potential investors are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those projected or predicted. In addition, forward-looking statements are based on management's knowledge and judgment as of the date hereof, and the Company does not intend to update any forward-looking statements to reflect events occurring or circumstances existing hereafter. In particular, the Company believes the following facts could impact forward-looking statements made herein or in future written or oral releases and by hindsight, prove such statements to be overly optimistic and unachievable. History of Losses; Profitability Uncertain; Cash Flow Deficits Since 1992, the Company has incurred substantial losses which have depleted its working capital and reduced its stockholders' equity. Losses have been incurred in both segments of the Company's business, dental and ophthalmic. The Company's management believes that the Dental Business will operate at a loss 10 during 1997. In addition, the Company's ophthalmic business will continue to be a significant consumer of cash as the revenues from this business are not expected to be sufficient to cover its operating costs unless and until FDA approval is obtained to permit domestic sale of the Sunrise Corneal Shaping System, which approval is not expected until 1999 at the earliest. The negative cash flows of the Company have been funded during 1995 and 1996 by the sale of additional equity. At December 31, 1996, cash and cash equivalents of the Company was approximately $650,000, and at March 21, 1997, after consummation of the 1997 Notes Placement (approximate net proceeds of $3,743,740), cash and cash equivalents of the Company was approximately $2,150,000. The Company anticipates that it will be required to raise additional working capital to fund its activities for 1997 and beyond. Any additional equity financing may be dilutive to the Company's shareholders. No assurance can be given that additional financing will be available or that, if available, it will be available on terms favorable to the Company and its stockholders. If funds are not available to satisfy the Company's short-term and long-term operating requirement, the Company may be required to reduce substantially, or eliminate, certain business, limit or suspend its operations in their entirety or, under certain circumstances, be forced to seek protection from creditors under the Bankruptcy Act. Continuing Losses Expected The Company expects to report operating losses during 1997 and beyond. The losses will come primarily from the expenses of the FDA approval process and underlying clinical studies related to the Sunrise Corneal Shaping System. The Company will not have any domestic revenues from this product line unless and until FDA approval is obtained and the international revenues will not be sufficient to cover the cost of the approval process. The Company anticipates the sale of the assets of its Dental Business during 1997, of which there can be no assurance, will fund continuing clinical studies for the Sunrise Corneal Shaping System. Even if the Dental Business is retained and can operate profitably, consolidated operating losses would be anticipated at least during 1997. Going Concern Report The Company's independent auditors have included an explanatory paragraph in its report covering the Company's financial statements for the year ended December 31, 1996, which paragraph emphasizes substantial doubt as to the Company's ability to continue as a going concern, based primarily on the recurring operating losses that have been incurred by the Company. If the company is unable to achieve future profitability or obtain other financing, the Company may be required to reduce substantially, or eliminate, certain business, limit or suspend its operations in their entirety or, under certain circumstances, be forced to seek protection from creditors under the Bankruptcy Act. Loss of Dental Revenues The Company's revenues are substantially derived from the sale of its dental laser and air abrasive products. In 1996, these sales represented 98% of the Company's revenues. If the proposed sale of the Dental Assets is consummated, a portion of the purchase price will be paid in cash which the Company can use to fund its ophthalmic activities; however, by selling the Dental Assets, the Company will lose a significant source of continued revenue. No Assurance of Proposed Dental Sale If the proposed sale transaction is not consummated, the Company may seek to sell the Dental Assets to another purchaser. There can be no assurance that another such potential purchaser can be found, or that such potential purchaser would be interested in the Dental Assets on terms similar to those contained in the current proposed sale of dental assets. In any event, the Company would be required to fund any continuing losses of the Dental Business, and may have to terminate such Dental Business in its entirety, without receiving any 11 payment. In addition, management would be required to continue to spend a significant amount of time dealing with the Dental Business. Effects of FDA Approval Requirements and Government Regulation on Marketability of the Company's Systems The Company's activities are subject to extensive regulation by the FDA and similar health authorities in certain foreign countries. The Sunrise Corneal Shaping System is regulated as a Class III medical device by the FDA under the FDC Act. Class III medical devices require a PMA by the FDA prior to commercial sale in the U.S. The PMA approval process (and underlying clinical studies) is lengthy and uncertain and requires substantial commitments of the Company's financial resources and management's time and effort. Delays in obtaining or failure to obtain required regulatory approvals or clearances in the U.S. and other countries would postpone or prevent the marketing of the Sunrise Corneal Shaping System and other devices and would impair the Company's ability to generate funds from operations, which in turn would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance the Company will be able to obtain in a timely manner, if at all, required premarket approval in the United States or Japan for intended uses of the Sunrise Corneal Shaping System, or for any other devices for which the Company may seek approvals or clearances. The Company has been issued an IDE by the FDA to permit it to generate data necessary to support a PMA application for the use and marketing of the Company's holmium laser corneal shaping product in LTK application. The FDA has advised the Company the initial Phase IIa clinical trials conducted by the Company did not produce enough statistically significant data to enable the FDA to determine that the treatment algorithms employed in such clinical trials were predictable or effective for the treatment of hyperopia. On September 5, 1996, the FDA authorized the Company to treat an additional 100 subjects at five United States locations in a continuation of Phase IIa clinical trials using a treatment algorithm developed by the Company in the course of the initial Phase IIa clinical trials and in the course of studies conducted by ophthalmologists in Mexico, Great Britain and Canada. The continued clinical trial is limited to the treatment of forty subjects for the +1 diopter treatment group and sixty subjects for the +2 diopter treatment group. The FDA will grant a PMA with respect to a particular procedure performed with the Sunrise Corneal Shaping System only if and when it is satisfied the use of the device for that procedure is safe and effective treatment for the condition indicated. In granting a PMA, the FDA may restrict the types of patients who may be treated thereby limiting the market acceptance of the Sunrise Corneal Shaping System. Even if FDA approval is obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, in addition to possible criminal and/or civil proceedings. Modifications to a device that is the subject of an approved PMA, its labeling, or manufacturing process may require approval by the FDA of PMA supplements or new PMA's. Supplements to a PMA often require the submission of the same type of information required for an initial PMA, except the supplement is generally limited to information needed to support the proposed change from the product covered by the original PMA. There can be no assurance the Sunrise Corneal Shaping System will be shown to be safe and effective, or that it will be approved or cleared by the FDA or foreign regulatory bodies, for the intended uses for which it is being investigated. Modifications could also be required if the Company is unable to reach a satisfactory licensing arrangement with the University of Miami on a jointly developed component of the delivery system (See "Patent Concerns"). Any products manufactured or distributed by the Company will be subject to pervasive and continuing regulation by the FDA. The FDC Act also requires the Company to manufacture its products in registered establishments, in accordance with the FDA's Good Manufacturing Practices ("GMP") regulations, and to list its devices with the FDA. Such manufacturing facilities are subject to periodic requirements with respect to manufacturing and quality assurance activities. The FDA has proposed changes to the GMP regulations which will likely increase the cost of compliance with GMP requirements. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. In addition, the introduction of the Company's products in foreign countries may require obtaining individual foreign regulatory clearances in numerous countries. These products have been sold in 12 approximately 15 foreign countries. Sales of the Sunrise Corneal Shaping Systems are restricted in several countries in addition to the United States, including Japan, Canada, Taiwan and Mexico. There can be no assurance the Company will be able to obtain regulatory clearances for its products in the United States or foreign markets. Uncertain Market Acceptance of the Corneal Shaping System Although the Company has other ophthalmic laser products, the Company has and intends to concentrate its efforts primarily on the development of a holmium laser corneal shaping product for the correction of hyperopia and will be dependent upon the successful development of that system to generate increased revenues. Use of the Sunrise Corneal Shaping System for laser thermal keratoplasty has not yet been introduced commercially in the United States, and there can be no assurance that if approved by the FDA, such system will be accepted by either the ophthalmic community or the general population 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. The acceptance of LTK may be affected adversely by its cost, concerns relating to its safety and efficacy, the lack of third party reimbursement for LTK, general resistance to use of laser products on the eye, the effectiveness of alternative methods of correcting refractive vision disorders, the lack of long-term follow-up data and the possibility of unknown side effects. Promotional efforts by suppliers of products or procedures which are alternatives to the Sunrise Corneal Shaping System, including eyeglasses and contact lenses, may also adversely affect the market acceptance of LTK. The Company's failure to achieve broad market acceptance of LTK will have a material adverse effect on the Company's business, financial condition and results of operations. Safety and Efficacy Concerns; Lack of Long-Term Follow-Up The Company has developed only limited clinical data to date on the safety and efficacy of the Sunrise Corneal Shaping System in correcting farsightedness, and related long-term safety and efficacy data. The FDA has not yet determined whether the Sunrise Corneal Shaping System will prove to be safe or effective for the predictable and reliable treatment of farsightedness or other common vision problems. Potential complications and side effects from the use of the Company's Sunrise Corneal Shaping System include post-operative discomfort, decreases in contrast sensitivity, temporary increases in intraocular pressure in reaction to post-procedure medication, modest fluctuations in refractive capabilities during healing, unintended over or under-corrections, regression of effect, and induced astigmatism. There can be no assurance that long-term safety and efficacy data when collected will be consistent with the clinical trial results previously obtained or will demonstrate that the LTK Corneal Shaping System can be used safely and successfully to treat hyperopia in a broad segment of the population on a long-term basis. Limited Trading Market; Application of the Penny Stock Rules On July 8, 1995, the company's common stock was delisted from The Nasdaq Stock Market because the Company was unable to maintain the requisite standards for continuing listing. Accordingly, trading of the Company's common stock is now conducted on an electronic bulletin board established for securities that do not meet the Nasdaq listing requirements. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Company's common stock. While the Company intends to pursue being relisted on The Nasdaq Stock Market, the Company's securities are now subject to the Commission's "penny stock rules" that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with a spouse). For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser's written consent to the transaction prior to sale. Consequently, the Company's delisting may affect the ability of broker-dealers to sell the Company's securities. There can be no assurance that the Company will be successful in being relisted on The Nasdaq Stock Market in the near future, if at all. 13 The Commission has adopted regulations that define "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a disclosure schedule relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations of the securities and, if the broker-dealer is the sole market-maker, the monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. As a result of these regulations, an investor may find it difficult to dispose of the Company's common stock. Competition Vision Correction Market The vision correction industry is subject to intense competition. Patients with hyperopia (farsightedness) can achieve vision correction with eyeglasses, contact lenses and radial keratotomy, as well as with other technologies and surgical techniques currently under development, such as corneal implants and surgery using different types of lasers. Most of the Company's competitors have substantially greater product development capabilities and financial and marketing resources 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 success of any competing alternative to LTK for treating hyperopia would have a material adverse effect on the Company's business, financial condition and results of operations. The significant competitive factors in the industry include price, convenience, success relative to vision correction, acceptance of new technologies, patient satisfaction and government approval. The excimer laser is the dominant laser used for the treatment of refractive disorders, although it is not currently used to treat hyperopia. In the United States, VISX and Summit are the leading manufacturers of excimer refractive surgical systems. While the Company believes the LTK process offers several distinct advantages over the use of excimer lasers for treating hyperopia, including ease of use and decreased invasiveness, both VISX and Summit have significantly greater financial resources than the Company and have received FDA approval for their respective excimer laser products for treating myopia. Although the VISX and Summit excimer laser products are not currently approved for treating hyperopia in the United States, any alternative treatment offered by VISX or Summit will have a competitive advantage because of the name recognition being created by the current promotion of excimer laser product for correcting refractive errors using lasers. Dental Products Market The Company's dental products include laser systems for soft tissue applications such as gingivectomies and gum contouring and the Sunrise MicroPrep(R) System for cavity preparation. The Company's sale of dental laser systems has decreased significantly in the past few years as a result of increased competition as well as a decrease in the size of the total market. The Sunrise MicroPrep(R) System, introduced in 1994, has experienced increased sales levels as a result of growing market acceptance of this new alternative to standard drilling technique. The Company's primary competitor in the dental market is American Dental Technologies, its former distributor and the holder of basic air abrasion patents (for which the Company has a license). ADT offers product competitive with the Company's laser and air abrasive products. The Company's dental products compete with respect to price, ease of use, rapid, effective treatment and breadth of application. In addition, the Company's dental products compete with conventional dentist drills and conventional soft tissue surgery. Patent Concerns Although the Company believes it holds all of the U.S. process patents for the use of holmium lasers in cornea shaping, foreign process patents and U.S. and foreign apparatus patents for shaping the cornea with holmium lasers have been issued to others. If patents held by others were considered valid and interpreted broadly in an adversarial proceeding, they could be deemed to cover one or more aspects of the Company's holmium laser corneal shaping systems or use of such systems to perform LTK or other procedures. There can 14 be no assurance the Company and Laser Biotech will not be subject to one or more claims for patent infringement, or that the Company and Laser Biotech would prevail in any such action or that its patents will afford protection against competitors with similarly technology. In addition, the Company has attempted to negotiate with the University of Miami to reach agreement regarding the non-exclusive use of a component of the delivery system used in the Sunrise Corneal Shaping System which was jointly developed by the Company and the University. The Company believes that it will be able to make reasonable arrangements with the University. If, however, the Company is unable to conclude negotiations with the University successfully, the University may seek to prohibit the manufacture, sale and use of the delivery system presently configured in the Sunrise Corneal Shaping System. If the Company is forced to redesign the Sunrise Corneal Shaping System, such redesign efforts could be time consuming, expensive and prolong FDA review. In the event the Sunrise Corneal Shaping System is adjudged to infringe a patent in a particular market, the Company and its customers may be enjoined from making, selling, and using such system in such market or be required to obtain a royalty-bearing license, if available on acceptable terms. Alternatively, in the event a license is not offered or available, the Company might be required to redesign those aspects of the Sunrise Corneal Shaping System held to infringe so as to avoid infringement. Any redesign could delay reintroduction of the Company's products into certain markets, or may be so significant as to be impractical. If redesign efforts were impractical, the Company could be prevented from manufacturing and selling the infringing products, which would have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 2. FACILITIES The Company leases 26,000 square feet for all its business activities including executive offices as well as engineering and development, manufacturing, assembly and testing activities in Fremont, California at a rental of approximately $26,000 per month, including expenses. The lease expires in January 1998. ITEM 3. LEGAL PROCEEDINGS Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS Not Applicable 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Market Information As of December 31, 1996, there were 715 holders of record of the Company's common stock. Price information for the Company's common stock may be obtained from the OTC Bulletin Board. The table below sets forth the reported high and low bid quotations of the Company's common stock as reported on the OTC Bulletin Board for the periods indicated. Prices for Common Stock Quarter Ended Low Bid(1) High Ask(1) ------------- ---------- ----------- March 31, 1995 $0.69 $1.97 June 30, 1995 $0.56 $1.25 September 30, 1995 $0.50 $2.37 December 31, 1995 $0.94 $2.44 March 31, 1996 $1.34 $1.44 June 30, 1996 $1.13 $2.31 September 30, 1996 $0.88 $2.00 December 31, 1996 $0.81 $2.13 March 31, 1997 $0.75 $1.72 - ---------- (1) Bid and ask prices are quoted on the OTC Bulletin Board in increments of 1/32. Certain of the bid and ask prices set forth in this table have been rounded to the nearest cent. On March 31, 1997, the closing price of the Company's common stock as reported on the OTC Bulletin Board was $1 3/16 (approximately $1.19) per share. 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. Dividends In the past three years, the Company has not declared or paid any cash dividend on the common stock. Sunrise 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 The Company did not sell any unregistered securities during the fourth quarter of 1996. 16 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data derived from the audited financial statements for the years ended December 31, 1992, 1993, 1994, 1995 and 1996.
Year Ended December 31, (In thousands, except per share amounts) ------------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Net revenues $ 8,550 $ 11,860 $ 7,578 $ 5,294 $ 5,654 Gross profit 3,604 5,009 1,340 1,637 1,638 Purchase of in-process 8,466 -- -- -- -- technology Operating costs and expenses 16,941 11,461 8,257 5,824 7,658 Income (loss) from operations (13,337) (6,452) (6,917) (4,187) (6,020) Income tax expense (benefit) (1,612) 232 -- -- -- Net income (loss) (11,640) (6,624) (6,910) (4,130) (5,968) Net income (loss) per share (1.44) (0.74) (0.68) (0.28) (0.23) Shares used in calculation of 8,111 8,955 10,129 14,935 26,414 net income (loss) per share Total assets 10,339 5,511 3,822 6,689 3,741 Long term obligations 79 18 -- -- -- Total stockholders' equity 9,038 2,708 1,357 4,745 1,272 Working capital 7,877 1,965 1,101 4,541 1,073
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company has incurred substantial losses in the past five years which have seriously depleted its working capital. Sales of its existing dental products at current levels will not be sufficient to sustain both the existing business and the continued development and regulatory licensing of additional products including the LTK system. Historically, the Company has been able to raise additional working capital for all aspects of its business through the private placement of its common stock. These private placements raised approximately $15,546,000 in gross proceeds (approximately $15,296,000 in net proceeds) between 1994 and 1996 in new equity for the Company. Pursuant to the 1997 Notes Placement, consisting of two-year convertible notes and warrants, the Company raised approximately $3,743,740 in net procees. On March 12, 1997 the Company announced that it had entered into an agreement for the sale of the Dental Assets to Lares, a privately held company located in Chico, California, pursuant to which Lares will pay the Company a total of $5.5 million, consisting of $4.0 million in cash and $1.5 million in notes payable over four years. The transaction is subject to stockholder approval. Since its inception, the Company has generated revenues from the manufacture and sale of laser systems for applications in dental and medical fields. In 1994, the Company introduced an air abrasive cavity 17 preparation system for the dental market. After an initial period of commercial success, laser product sales have decreased steadily from a high of approximately $20 million in 1991 to approximately $2 million in 1996. During 1996, the FDA Dental Advisory Panel voted to reject the Company's application for the utilization of its dental laser products for hard tissue application, which further limits the potential market for these products. The Company does not anticipate significant increases in revenues from existing laser products in 1997. In 1992, the Company acquired patented technology covering the use of a holmium laser to reshape the cornea, which the Company believes will be useful in the treatment of hyperopia, presbyopia and over correction from photo refractive keratectomy (previously defined as "PRK"). The Company filed its PMA Application with the FDA in 1992 and commenced Phase I clinical trials in that year. The FDA approval process is expected to continue through at least 1999 with the cost of clinical studies increasing as the number of sites and patients increases during the period. Although the Company has had limited sales of its Corneal Shaping System outside the United States, significant revenues cannot be expected unless and until FDA approval is obtained to market the system in the United States. The following table sets forth certain operations data as a percentage of net revenue for the periods indicated. Year Ended December 31, 1996 1995 1994 ---- ---- ---- Net Revenues 100% 100% 100% Cost of revenues 71 69 82 ---------------------- Gross profits 29 31 18 ---------------------- Other costs and expenses: Engineering and development 24 23 20 Sales, marketing and regulatory 64 43 50 General and Administration 48 44 39 ---------------------- Total other costs and expenses 135 110 109 ---------------------- Loss from operations (106) (79) (91) Interest income, net of expense 1 1 -- ---------------------- Loss before taxes on income (105) (78) (91) Income tax expense (benefit) -- -- -- ---------------------- Net Loss (105%) (78%) (91%) ====================== Revenues The Company's revenues have historically been comprised primarily of sales related to its dental products (98% in 1996, 76% in 1995 and 79% in 1994). Revenues fell from $7,578,000 in 1994 to $5,294,000 in 1995, a decrease of approximately 31%. The decrease is attributable to reduced demand for the Company's dental laser products, which was partially offset by sales of the Company's dental air abrasive products, first shipped in mid-1994. The Company had achieved significant sales of dental laser products in Germany in 1994. These sales levels in Germany were not achieved in later periods. During 1995, the Company terminated its relationship with its exclusive distributor in Germany. Sales of the Company's ophthalmic products, primarily non-U.S. sales of the Corneal Shaping System, were also lower in 1995 than 1994. Non-dental sales 18 represented 20% of revenue in 1994 and 22% in 1995. Revenues increased from $5,294,000 in 1995 to $5,655,000 in 1996, an increase of approximately 7%. Sales of dental laser systems during 1996 increased slightly from prior levels. Sales of ophthalmic products were insignificant in 1996 as the Company concentrated its limited resources on its FDA clinical studies rather than overseas marketing. Significant increases in sales of the Company's air abrasive products during 1996 more than offset the decrease in sales of its ophthalmic products. The introduction of the MicroPrep Associate(R) in the first quarter of 1996 provided the impetus for the increase in sales of the air abrasive product line. Gross Profit Gross profit margins were 18%, 31% and 29% in 1994, 1995 and 1996 respectively. The 1995 improvement in gross profit, when compared to 1994, is attributed to introduction of the cost-reduced MicroPrep(R) Director, increased pricing though direct distribution and improved manufacturing efficiencies. Gross profit margins decreased in 1996 to 29% primarily as a result of increased sales of dental products through distributors and the decrease in sales of Corneal Shaping Systems which carry a higher gross margin than dental products. Engineering and Development Engineering and development expenses were $1,561,000, $1,218,000 and $1,326,000 for the years ended 1994, 1995 and 1996, respectively. Engineering and development expenses decreased by $343,000 in 1995, due primarily to completion of development of the MicroPrep(R) product. Engineering and development increased by $108,000 in 1996 compared to 1995 due primarily to development costs associated with the CureStar curing system, a dental product introduced in the first quarter of 1997. Sales, Marketing and Regulatory Sales, Marketing and Regulatory expenses were $3,763,000, $2,277,000 and $3,632,000 for the years ended 1994, 1995 and 1996 respectively. The Company currently markets its ophthalmic lasers and dental products through a small direct sales organization working with dealers, distributors and manufacturer's representatives in the United States. Distribution for all products internationally is handled through distributors. The Company had thirteen direct sales employees at the end of 1995, and three at the end of 1996. Sales, Marketing and Regulatory expenses decreased to $2,277,000 in 1995, approximately a 40% reduction from the 1994 level. This reduction is principally due to the lower international sales and marketing costs, including commissions, as a result of decreased revenues in Germany. Sales, Marketing and Regulatory expenses increased in 1996 over 1995 by 60% due primarily to incremental costs associated with the development of a direct sales force late in 1995, the launch of the MicroPrep Associate(R) in the first quarter of 1996 and costs associated with the expansion of the Phase IIa FDA ophthalmic clinical studies (see "Business") and FDA review of the Company's PMA submitted for use of its dental lasers for hard tissue applications. General and Administrative General and administrative expenses were $2,933,000, $2,329,000 and $2,700,000 for the years ended 1994, 1995 and 1996, respectively. The Company's general and administrative expenses consist primarily of product liability and officer and director liability insurance premiums; accounting, legal and other fees related to financial transactions, patent 19 and general corporate matters, and litigation as well as provisions for the Company's allowance for bad debts. General and Administrative expenses decreased to $2,329,000 in 1995, approximately a 20% reduction from the 1994 level, due primarily to reduction in legal and accounting fees associated with litigation. General and administrative expenses in 1996 increased compared to 1995 primarily as a result of costs associated with the proposed acquisition of EyeSys Technologies and the development of a new management team for the ophthalmic business. Income taxes At December 31, 1996 and 1995, all deferred tax assets computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", have been fully offset by a valuation allowance. As of December 31, 1996, the Company had federal net operating loss carry-forwards of approximately $25,000,000. The ownership provisions of the Internal Revenue Code of 1986 would limit the utilization of the carry-forwards should there be a substantial change in the Company's ownership. Net loss The Company reported losses of $6,910,000, $4,130,000 and $6,020,000 in 1994, 1995 and 1996, respectively. The net loss in 1994 was due principally to a severe drop in laser sales in both the domestic and international market place and a decrease in foreign sales of dental lasers. Somewhat offsetting these reductions were the initial sales of the MicroPrep(R) and across-the-board reductions in operating expenses. The net loss in 1995 was due principally to the continued low level of sales, excess manufacturing capacity and the Company's need to maintain the basic sales, marketing, regulatory and corporate infrastructure. Although across-the-board operating expense reductions totaled $2,433,000 in 1995 when compared to 1994, the reductions do not offset the low level of sales volume. The net loss in 1996 was due primarily to increased selling, marketing and product development costs required to grow the business. A new sales, marketing, and regulatory team was hired to focus on sales of the Corneal Shaping System outside the United States and FDA clinical trials were expanded, along with expansion of clinical research, to further advance the technology. Liquidity and Capital Resources As of December 31, 1996 the Company had $647,000 in cash and cash equivalents. The Company's operating activities used $5,297,000 in cash during 1996. This was funded from the reduction of cash and $2.2 million net proceeds received from a common stock private placement in August, 1996. Working capital amounted to $4,541,000 at December 31, 1995 and decreased to $1,073,000 at December 31, 1996. The overall reduction in working capital is consistent with the current year loss and fund raising activity. The Company's current operations continue to be cash flow negative, further straining the Company's working capital resources. The level of current product sales is not sufficient to provide enough cash to pursue the Dental Business and support ongoing development and regulatory approval of the LTK system. Management's plans include selling the Dental Assets and field of use rights related to its Dental Business. If successful 20 in selling the Dental Assets, the Company will focus on further developing and seeking regulatory approval of its ophthalmic related products. Such approval may take several years. Although dental related sales have represented the majority of historical sales (98% in 1996, 76% in 1995 and 79% in 1994), management's strategic plan is to use the proceeds from the sale of the Dental Assets and the 1997 Notes Placement to further develop the ophthalmic products, specifically the Sunrise Corneal Shaping System. There can be no assurance that the Company will successfully consummate the sale of the dental assets, which is subject to stockholder approval. There can also be no assurance that the Corneal Shaping System will receive regulatory approval and the Company will be successful in developing, manufacturing, and marketing the Corneal Shaping System or other ophthalmic related products. In February and March 1997 the Company completed private placements of 5% convertible notes due 1999 (convertible into common stock) and warrants to purchase common stock, for aggregate net proceeds of approximately $3.7 million. Management believes the net proceeds from the 1997 Notes Placement and cash from the expected sale of the Dental Assets will provide sufficient funds for the Company's planned operations for 1997. Should the sale of the Dental Assets not be successfully completed, the Company may need to seek additional debt or equity financing. There can be no assurance that such financing, if necessary, will be available, in which case management may need to curtail or suspend certain or all operations. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated balance sheets at December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flow for each of the three years in the period ended December 31, 1996 and the notes thereto appear as noted in the index listed under Item 14(a). ITEM 9: CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section entitled "Directors And Executive Officers" in the Registrant's Proxy Statement to be filed not later than April 30, 1997 ("Proxy Statement") is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership of Certain Beneficial Owner's and Management" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following documents are filed as part of this report: Page in this Annual Report on Form 10-K --------- Report of Ernst & Young LLP, Independent Auditors 25 Consolidated Balance Sheets - December 31, 1995 and 1996 26 Consolidated Statements of Operations* 27 Consolidated Statement of Stockholders' Equity* 28 Consolidated Statements of Cash Flows* 29 Notes to Consolidated Financial Statements 30 *For the years ended December 31, 1996, 1995, 1994 2. Financial Statement Schedules The following financial statement schedule is filed as part of this report: Schedule II - Valuation and qualifying accounts 38 All other schedules have been omitted as they are not required, not applicable, or the required information is included in the financial statements or notes thereto. 3. Exhibits Exhibit Description - ------- ----------- 2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 2.1 Asset Purchase Agreement dated as of March 26, 1997, by and among Sunrise and Lares Research, a California corporation 3 Charter Documents 3.1 Certificate of Incorporation, as amended (1) 3.2 Bylaws (1) 4 Instruments Defining the Rights of Security Holders 4.1 Form of 5% Convertible Notes due 1999 (6) 4.2 Form of Security Agreement relating to 5% Convertible Notes due 1999 (6) 4.3 Form of Registration Rights Agreement (6) 4.4 Form of Warrant issued to Pennsylvania Merchant Group (4) 10 Material Contracts 10.1 Lease Agreement with Bayside Spinnaker Partners III, as lessor, for the lease of facilities at 47257 Fremont Boulevard, Fremont, California, dated July 16, 1991 (2) 10.2 Patent License Agreement between Sunrise and Patlex Corporation dated January 1, 1990 (3) 10.3 Agreement between Sunrise and the University of Miami, Department of Ophthalmology, dated October 28, 1991 (2) 10.4 Joint Development and Exclusive Manufacturing Agreement dated April 17, 1993 between Sunrise and Danville Engineering, Inc. (1) 10.5 Settlement Agreement between Sunrise and American Dental Laser, Inc., dated February 4, 1993 (confidential treatment has previously been granted for portions of this exhibit) (4) 10.6 License Agreement between Sunrise and American Dental Laser, Inc., dated February 4, 1993 (confidential treatment has previously been granted for portions of this exhibit) (4) 10.7 Settlement Agreement with between Sunrise and American Dental Technologies, dated July 30, 1996 *10.8 Form of Indemnification Agreement between Sunrise and each of its officers and directors (3) 23 *10.9 1988 Stock Option Plan, as amended (5) *10.10 Employment Agreement entered into between Sunrise and Joseph W. Shaffer, dated April 5, 1989 (5) 10.11 Form of U.S. Note and Warrant Purchase Agreement relating to the Regulation D private placement of 5% convertible notes due 1999 and warrants in February and March 1997 10.12 Form of Offshore Note and Warrant Purchase Agreement relating to the Regulation S private placement of 5% convertible notes due 1999 and warrants in March 1997 11 Statement regarding Computation of Per Share Loss 11.1 Statement regarding computation of per share loss for the years ended December 31, 1996, 1995 and 1994 21 Subsidiaries of Registrant 21.1 Subsidiaries of Sunrise 22 Power of Attorney (included on the signature pages to this Form 10-K) 23 Consents of Experts 23.1 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule - ---------- * 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, 1994 (File No. 0-17816) (2) Incorporated by reference from the registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-17816) (3) Incorporated by reference from the registrant's Registration Statement on Form S-1, as amended (File No. 33-36768) (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 Registration Statement on Form S-18, as amended (File No. 33-27029-LA) (6) Incorporated by reference from the registrant's Current Report on Form 8-K dated March 12, 1997 (File No. 0-17816) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1996. 24 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Sunrise Technologies International, Inc. We have audited the accompanying consolidated balance sheets of Sunrise Technologies International, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Technologies International, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that Sunrise Technologies International, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP ----------------------- Ernst & Young LLP Palo Alto, California March 10, 1997 25 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. Consolidated Balance Sheets December 31, 1996 1995 ----------------------- (In thousands) ----------------------- Assets Current assets: Cash and cash equivalents $ 647 $ 3,514 Accounts receivable, net of allowance of $ 140,000 and $25,000 in 1996 and 1995 472 1,048 Inventories 2,135 1,666 Prepaid expenses 288 257 ----------------------- Total current assets 3,542 6,485 Property and equipment, net 199 204 ----------------------- Total assets $ 3,741 $ 6,689 ======================= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 1,586 $ 1,097 Accrued payroll and related expenses 209 181 Accrued warranty 199 324 Other accrued expenses 475 342 ----------------------- Total current liabilities 2,469 1,944 Commitments and contingencies Stockholders' equity: Preferred Stock, $0.001 par value; 2,000,000 shares authorized, none issued or outstanding -- -- Common stock, $0.001 par value; 40,000,000 shares authorized, 27,868,613 and 25,279,716 shares issued and outstanding at December 31, 1996 and 1995, respectively 28 25 Additional paid-in-capital 31,688 29,196 Accumulated deficit (30,444) (24,476) ----------------------- Total stockholders' equity 1,272 4,745 ----------------------- Total liabilities and stockholders' equity $ 3,741 $ 6,689 ======================= See accompanying notes. 26 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. Consolidated Statements of Operations Years ended December 31, 1996 1995 1994 --------------------------------- (In thousands, except per share amounts) Net revenues $ 5,654 $ 5,294 $ 7,578 Cost of revenues 4,016 3,657 6,238 --------------------------------- Gross profit 1,638 1,637 1,340 --------------------------------- Other costs and expenses: Engineering and development 1,326 1,218 1,561 Sales, marketing and regulatory 3,632 2,277 3,763 General and administrative 2,700 2,329 2,933 --------------------------------- Total other costs and expenses 7,658 5,824 8,257 --------------------------------- Loss from operations (6,020) (4,187) (6,917) Interest income, net of expense 52 57 7 --------------------------------- Net loss $ (5,968) $ (4,130) $ (6,910) ================================= Net loss per share $ (0.23) $ (0.28) $ (0.68) ================================= Shares used in calculation of net loss per share 26,414 14,935 10,129 ================================= See accompanying notes. 27 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. Consolidated Statement of Stockholders' Equity Three Years ended December 31, 1996
Common Stock Additional Total ----------------------- Paid-In Treasury Accumulated Stockholders' Shares Amount Capital Stock Deficit Equity --------------------------------------------------------------------------- (In thousands, except share amounts) Balance at December 31, 1993 9,008,293 $ 9 $16,135 $ -- $(13,436) $ 2,708 Sale of common stock, net of offering costs 1,250,000 1 5,507 -- -- 5,508 Exercise of warrants and options 200,993 -- 670 -- -- 670 Treasury stock acquired through sale of surgical laser business -- -- -- (619) -- (619) Net loss -- -- -- -- (6,910) (6,910) --------------------------------------------------------------------------- Balance at December 31, 1994 10,459,286 10 22,312 (619) (20,346) 1,357 Sale of common stock, net of offering costs 15,100,000 15 7,528 -- -- 7,543 Cancellation of treasury stock (275,000) -- (619) 619 -- -- Other (4,570) -- (25) -- -- (25) Net Loss -- -- -- -- (4,130) (4,130) --------------------------------------------------------------------------- Balance at December 31, 1995 25,279,716 25 29,196 -- (24,476) 4,745 Sale of common stock, net of offering costs 2,333,412 3 2,242 -- -- 2,245 Exercise of warrants and options 243,252 -- 243 -- -- 243 Other 12,233 -- 7 -- -- 7 Net Loss -- -- -- -- (5,968) (5,968) --------------------------------------------------------------------------- Balance at December 31, 1996 27,868,613 $ 28 $31,688 $ -- $(30,444) $ 1,272 =========================================================================== See accompanying notes.
28 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. Consolidated Statements of Cash Flows Increase (decrease) in cash and cash equivalents Years ended December 31, 1996 1995 1994 ------------------------------- (In thousands) Cash flows from operating activities Net $(5,968) $(4,130) $(6,910) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 438 102 469 Provision for doubtful accounts 115 25 -- Changes in assets and liabilities: Accounts receivable 461 (303) 777 Inventories (837) 289 (68) Prepaid expenses (31) 25 (69) Accounts payable 489 (278) (1,091) Accrued payroll and related expenses 28 31 68 Accrued warranty (125) -- 181 Other accrued expenses 133 (256) 571 ------------------------------- Total adjustments 671 (365) 838 ------------------------------- Net cash used in operating activities (5,297) (4,495) (6,072) Cash flows from investing activities Purchase of property and equipment (65) (50) (22) ------------------------------- Net cash used in investing activities (65) (50) (22) ------------------------------- Cash flows from financing activities Payment on capital lease obligations -- (18) (61) Issuance of common stock, net of offering costs 2,495 7,518 6,178 ------------------------------- Net cash provided by financing activities 2,495 7,500 6,117 ------------------------------- Net increase (decrease) in cash and equivalents (2,867) 2,955 23 Cash and cash equivalents at beginning of period 3,514 559 536 ------------------------------- Cash and cash equivalents at end of period $ 647 $ 3,514 $ 559 =============================== See accompanying notes. 29 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 1. Organization and Summary of Significant Accounting Policies Organization and Nature of Business Sunrise Technologies International, Inc. (the "Company") develops, manufactures and markets laser systems and other products for applications in ophthalmology and dentistry. The Company was organized as a California corporation in March 1987 and was reincorporated in Delaware in June 1993 as Sunrise Technologies International, Inc. The Company continues to do business under the name Sunrise Technologies, Inc. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all material intercompany balances and transactions. Certain reclassifications have been made to prior year amounts in order to conform to the current presentation. The Company has incurred significant losses for the last several years and at December 31, 1996 has an accumulated deficit of $30,444,000. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company's ability to continue as a going concern is dependent upon performing profitably or obtaining further financing. Management's plans include selling assets and field of use rights related to its dental operations. If successful in selling the dental assets the company will focus on further developing and seeking regulatory approval of its ophthalmic related products. Such approval may take several years. Although dental related sales have represented the majority of historical sales (98% in 1996, 76% in 1995 and 79% in 1994), management's strategic plan is to use the proceeds from the sale of the dental assets and debenture offering in March of 1997 to further develop the ophthalmic products, specifically the Sunrise Corneal Shaping System. There can be no assurance that the Company will successfully consummate the sale of the dental assets, which is subject to stockholder approval. There can also be no assurance that the Corneal Shaping System will receive regulatory approval and the Company will be successful in developing, manufacturing, and marketing the Corneal Shaping System or other ophthalmic related products. In March 1997 the Company completed a private placement consisting of two-year convertible notes and warrants resulting in net proceeds of approximately $3.7 million. Management believes the net proceeds from the convertible debenture offering and cash from the expected sale of the dental assets will provide sufficient funds for the Company's planned operations for 1997. Should the sale of the dental assets not be successfully completed the Company may need to seek additional debt or equity financing. There can be no assurance that such financing, if necessary, will be available, in which case management may need to curtail or suspend certain or all operations. Industry Segment and Concentration of Risk The Company, which operates in a single industry segment, designs, manufactures, markets and services medical laser and air abrasive systems. The Company sells its products to customers in the medical industries globally. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. One customer accounted for 16%, 21% and 57% of revenues in 1996, 1995 and 1994 respectively. Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash investments and trade receivables. The Company invests its excess cash in deposits with major banks, in U.S. Treasury and U.S. Agency obligations. 30 Concentration of Other Risks The Company's operating results each quarter are subject to various uncertainties as discussed in the Company's Annual Report on Form 10-K for 1996, including uncertainties related to the composition, timing and size of orders from the shipments to major customers, variations in product mix and variations in product cost and competitive pressures. Inventories: Most components used in the Company's air abrasive and laser systems are purchased from outside sources. Certain components in the air abrasive systems are currently purchased from a single supplier. The failure of such supplier to meet its commitment on schedule could have a material adverse effect on the Company. If the sole source supplier were to go out of business or otherwise become unable to meet its supply commitments, the process of locating and qualifying alternate sources could require up to several months during which time the Company's production could be delayed. Such delays could adversely affect the Company's business and financial results. International Operations: Sunrise's international business is an important contributor to the Company's net revenues and gross profits. Substantially all of Sunrise's international sales are denominated in the U.S. dollar and an increase in the value of the U.S. dollar relative to foreign currencies could make products sold internationally less competitive. The Company does not have any overseas offices. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash consists of cash on deposit with banks and highly liquid investments with a maturity from the date of purchase of 90 days or less. As of December 31, 1996 and 1995, the Company did not hold any investments in debt or equity securities. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory at December 31, consists of: 1996 1995 -------------------------------- (In thousands) Raw materials $1,180 $909 Work-in-process 299 237 Finished goods 656 520 -------------------------------- $2,135 $1,666 ================================ Property and Equipment Property and equipment is stated at cost and depreciated using the straight-line method for financial 31 reporting over estimated useful lives of two to five years. Assets under capitalized leases are amortized over the shorter of the term of the lease or their useful lives, and such amortization is included with depreciation expense. Property and equipment at December 31, consists of: 1996 1995 ------------------------------ (In thousands) Machinery and equipment $1,644 $1,412 Computer Equipment 611 599 Furniture and fixtures 207 207 Leasehold improvements 392 167 ------------------------------ 2,854 2,385 Less accumulated depreciation and (2,655) (2,181) amortization ------------------------------ $199 $204 ============================== Net Loss Per Share Net loss per share for the years ended December 31, 1996, 1995 and 1994 is based solely on weighted average shares of common stock outstanding during the period. Common equivalent shares have not been considered in the computation since their inclusion would have an anti-dilutive effect. Revenue Recognition Revenues are recognized at time of shipment. A provision for the estimated future cost of warranty is made at the time a sale is recorded. Export Sales The Company had export sales by region as follows: 1996 1995 1994 ----------------------------------------------- (In thousands) Europe $1,036 $1,948 $4,291 Pacific Rim 1,602 1,192 139 Canada ---- 248 393 Other ---- 282 363 ----------------------------------------------- Total $2,638 $3,670 $5,186 ================================================ 32 2. Taxes on Income As of December 31, 1996, the Company had federal and state net operating loss carryforwards of approximately $24,600,000 and $11,000,000, respectively. The federal net operating loss carryforwards will expire at various dates beginning on 2007 through 2011. The state net operating loss carryforwards will expire at various dates through 2001. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company's deferred tax assets as of December 31 are as follows: 1996 1995 --------------------------------- (In thousands) Deferred tax assets: Net operating loss carry-forwards $9,000 $7,175 Research credits (expire 2007-2011) 600 642 Other 600 949 --------------------------------- Total deferred tax assets 10,200 8,766 Valuation allowance for deferred tax assets (10,200) (8,766) --------------------------------- Net deferred tax assets $ ---- $ ---- ================================= Because of the Company's lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $1,928,000 during the year ended December 31, 1995. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. 3. Commitments and Contingencies Leases The Company leases certain of its facilities and equipment under a non-cancelable operating lease. Rent expense was $299,000, $281,000 and $279,000 in 1996, 1995 and 1994, respectively. Future minimum lease payments under the lease are $255,000 in 1997 and $21,000 in 1998. Litigation Settlements In July 1996, the Company settled all of its outstanding litigation with ADT. The material terms of the settlement are as follows: (a) The Company waived its rights to collect a judgment for $940,000 obtained against ADT in a prior case, which had been subject to an appeal by ADT. (b) The Company obtained a non-exclusive license to certain ADT patents covering air abrasion systems used in dental applications. (c) The Company will pay ADT a royalty of 7% on all air abrasion products shipped after December 31, 1996. 33 (d) If the Company sells its dental air abrasion assets before July 1998, it must pay to ADT a transfer fee on the amount received for the air abrasion assets. 4. Stockholders' Equity Common Stock As of December 31, 1996, there remains 38,340 outstanding warrants to purchase common stock which were issued in connection with the acquisition of Laser Biotech, Inc. in April 1992. The exercise prices of these warrants range from $3.70 to $9.26 per share. In conjunction with a 1992 private placement, the placement agent received a warrant to purchase 25,000 shares of common stock for $8.05 per share. The warrant is exercisable at any time prior to August 28, 1997. In February 1994, the Company completed a private placement of 1,250,000 shares of common stock. In connection with the private placement, the placement agent received a warrant to purchase 62,500 shares of common stock. The exercise price for these warrants is $6.00 per share and they are exercisable at any time before February 8, 1999. In June 1995, the Company completed a private placement of 2,100,000 shares of common stock. In September 1995, the Company completed a private placement of 13,000,000 shares of common stock. In connection with the private placement, the placement agent received a warrant to purchase 675,000 shares of common stock. The exercise price for these warrants is $0.55 per share and they are exercisable at any time before September 6, 2000. In August 1996, the Company completed a private placement of 2,334,000 shares of common stock. In connection with the private placement, the placement agent received a warrant to purchase 116,721 shares of common stock. The exercise price for these warrants is $1.06 per share and they are exercisable at any time between August 7, 1997 and August 7, 2001. As of December 31, 1996, there were warrants outstanding to purchase 917,561 shares of common stock. Stock Option Plan The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation is recognized. In 1988, the Company adopted the 1988 Stock Option Plan (the "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 the fair market value at the date of grant. Non-statutory options must be at least 85 percent of fair market value at the date of grant. Options granted generally provide that 25 percent of the shares subject thereto become exercisable one year after the date of grant and 1/36 of the remaining shares subject to the option become exercisable each month thereafter. The Plan expires in 1998. 34 The following table summarizes the Company's stock option activity and related information for the three years ended December 31, 1996:
Outstanding Options ------------------------------------------------------------ Shares Available For Share Grant Shares Price Balance, December 31, 1993 415,350 771,900 $0.75 - $8.50 Shares reserved 440,000 ---- ---- Granted (1,168,214) 1,168,214 $2.00 Exercised ---- (189,561) $0.75 - $5.63 Canceled 582,339 (582,339) $1.25 - $8.50 ------------------------------------------------------------ Balance, December 31, 1994 269,475 1,168,214 $0.75 - $2.00 Shares reserved 1,550,000 ---- ---- Granted (1,633,331) 1,633,331 $0.97 - $2.50 Exercised ---- ---- ---- Canceled 1,497,381 (1,497,381) $1.00 ------------------------------------------------------------ Balance, December 31, 1995 1,683,525 1,304,164 $0.75 - $2.50 Shares reserved ---- ---- ---- Granted (1,816,000) 1,816,000 $1.11* Exercised ---- (243,252) $1.00* Canceled 389,474 (389,474) $1.44* ------------------------------------------------------------ Balance, December 31, 1996 256,999 2,487,438 $1.03* ============================================================ * Represents the weighted average exercise price for the applicable options.
The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding and Exercisable ------------------------------------------------------- Weighted Average Weighted Number Remaining Average Outstanding Contractual Exercise Life Price (Years) $0.75 - $1.00 748,604 4.0 $1.00 $1.01 - $1.25 1,695,834 3.8 $1.05 $1.26 - $1.50 38,000 1.0 $1.49 $1.51 - $1.75 5,000 1.0 $1.63 ------------------------------------------------------- 2,487,438 3.8 $1.03 ======================================================= As of December 31, 1996 and 1995, options to purchase 680,248 and 472,840 shares respectively were 35 exercisable. In 1995, 1,058,331 options to purchase shares were reissued at $1.00 per share under an option exchange program. During 1994 options outstanding were canceled and reissued under an option exchange program. Pro forma information regarding net loss and net loss per share is required by FAS 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.7% and 5.6%; no dividend yield; volatility factors of the expected market price of the Company's common stock of 0.955; and expected life of the options of 4.8 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: For the Years Ending December 31, 1996 1995 -------------------------------------- (In thousands, except per share amounts) Pro forma net loss $6,390 $4,220 Pro forma net loss per share $0.24 $0.28 The weighted average grant date fair value of options granted during 1996 and 1995 were $0.74 and $0.89 respectively. Because FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until fiscal 1997. The effects on pro forma disclosures of applying FAS 123 are not likely to be representative of the effects on pro forma disclosures in future years. Employee Stock Purchase Plan In June 1992, the Company adopted the 1992 Employee Stock Purchase Plan under which 200,000 shares have been reserved for issuance. Eligible employees may purchase common stock at 85 percent of the lower of the closing price of the stock on the offering date or the exercise date determined by the Board of Directors. Purchases are limited to 10 percent of each employee's compensation. There were 40,656 and 34,689 shares issued under the plan as of December 31, 1996 and 1995, respectively. 36 5. Supplemental Statement of Cash Flows Information 1996 1995 1994 -------------------------------------- (In thousands) Cash received during the year for: Interest 52 ---- ---- 6. Events Subsequent to Date of Auditor's Report (Unaudited) On March 25, 1997, the Company signed an agreement to sell its dental assets to Lares Research. Consideration for the sale will be $4.0 million in cash on completion, $1.0 million in an 8% interest bearing note receivable three years from the date of closing and $0.5 million in an 8% interest bearing promissory note four years from the date of closing. This transaction is subject to stockholder approval and other conditions. 37 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at Charged to Balance at Beginning Costs and End of Period Expenses Deductions Other(A) of Period --------------------------------------------------------------------- (In thousands) Year ended December 31, 1994 Reserves and allowances deducted from assets accounts: Allowance for uncollectible accounts $981 $ ---- $ ---- $(531) $450 Allowance for inventory $886 $ ---- $ ---- $(373) $513 Year ended December 31, 1995 Reserves and allowances deducted from assets accounts: Allowance for uncollectible accounts $450 $25 $(450) $---- $25 Allowance for inventory $513 $250 $(295) $---- $468 Year ended December 31, 1996 Reserves and allowances deducted from assets accounts: Allowance for uncollectible accounts $25 $115 ---- $---- $140 Allowance for inventory $468 $---- $(118) $---- $350 (A) Amounts relate to valuation allowance assigned to disposed assets.
38 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 10, 1997 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. By: /s/ David W. Light ---------------------------- Chairman and Chief Executive Officer POWER OF ATTORNEY Each of the officers and directors of Sunrise Technologies International, Inc. whose signature appears below hereby constitutes and appoints David W. Light and Joseph W. Shaffer, and each of them, their true and lawful attorneys-in-fact and agents, with full power and substitution, each with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this Report on Form 10-K, and to perform any acts necessary to be done in order to file such amendment, and each of the undersigned does hereby ratify and confirm all that such attorneys-in-fact and agents, or their or his substitutes, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ David W. Light David W. Light April 9, 1997 - ----------------------------------------- Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Clara R. Munley Clara R. Munley April 9, 1997 - ----------------------------------------- Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ C. Russell Trenary, III C. Russell Trenary, III April 9, 1997 - ----------------------------------------- President, Chief Operating Officer and Director /s/ Joseph W. Shaffer Joseph W. Shaffer April 9, 1997 - ----------------------------------------- Vice President and Director /s/ Joseph D.Koenig Joseph D. Koenig April 9, 1997 - ----------------------------------------- Director
39 EX-2.1 2 ASSET PURCHASE AGREEMENT Exhibit 2.1 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is executed on March 25, 1997 between Sunrise Technologies International, Inc., a Delaware corporation ("seller"), having its principal place of business at 47257 Fremont Blvd., Fremont, California 94538, and Lares Research, a California corporation ("buyer"), having its principal place of business at 295 Lockheed Avenue, Chico, California 95973. RECITALS A. Seller is engaged in the business of developing, manufacturing, distributing and selling high-technology dental lasers, abrasive tooth cutting systems, and composite curing systems (the "Dental Business"). Seller is also engaged in an ophthalmic business, and intends to continue to conduct its ophthalmic business. B. Seller and buyer have entered into a Letter of Intent dated November 14, 1996, which was agreed to by seller on November 18, 1996, and amended by letter dated February 24, 1997, stating the intent of seller to sell the Dental Business and the intent of buyer to purchase the Dental Business, subject to the negotiation and execution of a definitive agreement between the parties. C. Seller and buyer desire to enter into this agreement to set forth the definitive agreement of seller and buyer for the sale of the Dental Business to buyer. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and warranties contained in this Agreement, the parties agree as follows: ARTICLE 1 PURCHASE AND SALE OF ASSETS 1.1 Agreement for Purchase and Sale. Subject to the terms and conditions of this Agreement, seller hereby agrees to sell, assign, transfer and deliver to buyer, and buyer agrees to purchase from seller free and clear of all liens or encumbrances, all of the assets, properties, and business of seller, whether tangible, intangible, real, personal or mixed, and wherever located, that are held for use in the operation of and are a part of seller's Dental Business, excluding only the assets described in section 1.2, below (the "assets"), which assets include but are not necessarily limited to the following: A. All of the seller's supplies, materials, equipment, machinery, tools, instruments, furniture, fixtures, and other tangible personal property (the "tangible property") held for use by seller in the Dental Business. A listing of the items of tangible property having an original cost greater than $1,000.00 shall be prepared, approved by buyer and signed by the parties, and attached to this agreement as Exhibit 1.1A prior to the closing. B. All of seller's inventories (the "inventory") of parts, work in process, and finished goods used and produced in the business of the Dental Business. Seller and buyer agree that a physical inventory will be taken jointly immediately prior to the closing and the actual inventory purchased by the buyer shall be based thereon. A listing of the inventory being purchased shall be prepared, approved by buyer and signed by the parties, and attached to this agreement as Exhibit 1.1B prior to the closing. C. All outstanding inventory purchase and product sales orders, together with any deposits or prepayments received by seller on account thereof. A listing of the inventory purchase and product sales orders, deposits and prepayments shall be prepared by seller, approved by buyer and signed by the parties, and attached to this agreement as Exhibit 1.1C prior to the closing. D. All of seller's claims and rights under leases, contracts, trade secrets, patents, patent applications, trademarks, service marks, trade names, copyrights, inventions, formulas, knowhow, confidential proprietary technical information, licenses, royalty rights, deposits, rights and claims to refunds and adjustments of any kind, computer programs, software or firmware, data processing information, and any other intellectual property, that are held for use by seller in the Dental Business. Included in the foregoing shall be all information, documents, design files, files, notes, and records of every kind and nature prepared or maintained in connection with the research and development activities of seller's Dental Business, including but not limited to those concerning the original development of existing products, enhancements or changes made to products of the Dental Business (whenever made), enhancements or changes proposed to be made or being considered to be made to existing products, or the development of new products. A partial listing of these claims and rights shall be prepared by seller, approved by buyer and signed by the parties, and attached to this agreement as Exhibit 1.1D signed by the parties prior to the closing. E. Contact information, including address and telephone numbers, for vendors, customers, and others used by seller in the Dental Business, and any yellow pages and trade journal advertising, web site files and web site links, and all other advertising relating to the Dental Business. F. All of seller's goodwill in the Dental Business, including all of the seller's files (in any format, including paper and electronic), documents, lists and records relating to the customers of and vendors to the Dental Business (the "customer lists"). G. A Covenant Not to Compete pursuant to paragraph 4.1 of this agreement. 1.2 Excluded Assets. There shall be excluded from the assets sold hereunder: A. Except for the deposits and prepayments described in paragraph 1.1C of this agreement, all cash, cash items, accounts receivable, investments, stock and other securities of seller; B. All of seller's general financial records, provided that buyer shall have the right to obtain copies of the financial records which buyer shall reasonably require with respect to the continuing conduct of the business of the Dental Business and with respect to filings with governmental and taxing authorities concerning the assets; C. All of seller's property, files and records used in connection with seller's ophthalmic business or not relating to the Dental Business. Buyer acknowledges that certain of seller's trade secrets, inventions, formulas, knowhow and confidential proprietary technical information have applications to and are used by seller in seller's ophthalmic business (collectively referred to as "proprietary ophthalmic -2- information"), and seller retains such proprietary ophthalmic information for all uses, other than in Dental Business applications, including, without limitation, such rights and proprietary information as it may have with respect to the neodymium yag and other lasers; D. The real property used in the business of the Dental Business, subject to the provisions of paragraphs 4.7 and 9.9, hereof; and E. The assets and rights described on Exhibit 1.2 to this agreement. ARTICLE 2 CONSIDERATION FOR ASSETS As full consideration for the transfer of the assets to buyer, buyer agrees to pay and deliver to seller at the closing the following: 2.1 Cash Portion. The sum of Four Million Dollars ($4,000,000) in cash (the "cash portion"). Upon execution of this agreement, buyer agrees to deposit the sum of Two Hundred Fifty Thousand Dollars ($250,000) (the "deposit") with Mid Valley Title & Escrow Company, 601 Main Street, Chico, California 95928 (the "escrow company") which sum, together with the remaining cash portion, will be paid to Seller at the closing. The deposit shall be refunded to buyer in the event the purchase and sale of the assets does not close as a result of failure of any of the conditions precedent to the obligations of buyer contained in Sections 9.1 through 9.6, Section 9.7B, and Section 9.8, hereof. Seller and buyer agree to execute such instructions as shall be required by the escrow company as a condition to receipt and holding of the deposit. 2.2 Promissory Note. Buyer's promissory note, dated as of the closing date, in the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) in the form of Exhibit 2.2A attached hereto and incorporated herein by this reference. The promissory note shall be secured by a Security Agreement in substantially the form of Exhibit 2.2B attached hereto and incorporated herein by this reference and a Deed of Trust in standard form. Seller agrees to execute a subordination agreement in favor of Bank of America NT&SA (the "bank") subordinating seller's rights under the Security Agreement and Deed of Trust to rights conferred upon the bank under its financing documents with buyer. Prior to the closing, Buyer agrees to enter into such revisions to the form of promissory note, security agreement and deed of trust as may be reasonably requested by seller as a result of restrictions which may be placed upon seller under the terms of the subordination agreement requested by the bank to the extent that the restrictions are substantially different from those contained in the bank's standard "Business Loan Subordination Agreement", or upon buyer under the bank's financing agreements with buyer. 2.3 Allocation of Purchase Price. The purchase price shall be allocated as follows: A. $2,750,000 to the laser products portion of the Dental Business. B. $2,200,000 to the air abrasive products portion of the Dental Business. C. $550,000 to the CureStar composite curing lamp portion of the Dental Business. -3- ARTICLE 3 LIABILITIES 3.1 No Assumption of Liabilities. Except as stated in paragraphs 3.3 and 5.3, it is expressly agreed and understood that buyer shall not assume and in no event shall buyer be deemed to have assumed or agreed to pay or perform, and seller shall at all times remain solely responsible for, any debts, contracts, commitments, obligations or liabilities of seller of any kind or nature whatsoever, including but not limited to those of the Dental Business or connected in any way to the assets arising or accruing prior to the closing , and specifically including those arising out of or connected in any way to claims based on products liability theories of recovery. 3.2 Payment of Seller's Liabilities. Prior to or at the close of escrow, all of Seller's liabilities incurred in Seller's operation of the Dental Business shall be adequately provided for to buyer's reasonable satisfaction. 3.3 Assumption of Contracts. Buyer agrees to assume all of seller's obligations on those contracts, licenses, or other agreements listed on Exhibit 3.3 attached hereto and incorporated herein by this reference, including, without limitation, all outstanding inventory purchase and product sales orders, as described in Exhibit 1.1C, but only to the extent of obligations that are executory or arise and accrue thereunder from and after the closing date, and all unsatisfied warranty obligations of seller related to Dental Business products. ARTICLE 4 OTHER AGREEMENTS 4.1 Covenant Not to Compete and Non-Disclosure Agreement. A. During the period commencing on the closing date and ending on the date which is five (5) years after the closing date, except as otherwise approved in advance and in writing by buyer, seller agrees not to, directly or indirectly, for seller's own account, or through, on behalf of, or in conjunction with any person, firm, corporation, business or other legal entity, (i) own, maintain, operate, control, have any interest in, perform consulting services for or otherwise engage in any business or enterprise which sells or leases products or provides services in competition with or similar to or the same as the products sold or leased by or services provided by the seller as part of the Dental Business as of the closing date within any territory or geographic area throughout the world in which seller through its Dental Business may be doing business, or (ii) induce or attempt to persuade any employee, agent or customer of the Dental Business to terminate his or her employment, agency or business relationship with buyer in order to enter into any such relationship on behalf of any competing business. Nothing herein shall be construed to restrict Seller's use of its proprietary ophthalmic information and laser products in ophthalmic or any other applications other than in the Dental Business. B. Seller further agrees not to divulge, communicate, use to the detriment of the buyer or for the benefit of any other person or persons, or misuse in any way, any confidential information or trade secrets of the seller that is part of the assets being purchased hereby, including personnel information, -4- secret processes, know-how, customer lists, formulas or other technical data, except as may be required by law, provided however, that this prohibition, subject to the agreement of seller contained in paragraph 4.1A, shall not apply to any information which, through no improper action of seller, is publicly available or generally known in the industry. C. To the extent necessary to satisfy the laws of any state, including the state of California, seller agrees that any geographical, temporal or other restriction set forth in this paragraph 4.1 can and should, if necessary, be judicially modified to the extent necessary to make it enforceable and enforced as modified. D. It is agreed between the parties that buyer would be irreparably damaged by reason of any violation of the provisions of this paragraph 4.1, and that any remedy at law for a breach of such provision would be inadequate. Buyer shall therefore be entitled to seek and obtain injunctive or other equitable relief (including, but not limited to, a temporary restraining order, a temporary injunction or a permanent injunction) against seller, seller's agents, assigns or successors of a breach or threatened breach of such provisions and without the necessity of proving actual monetary loss. It is expressly understood among the parties that this injunctive or other equitable relief shall not be the buyer's exclusive remedy for any breach of this paragraph 4.1 and subject to the provisions of Section 11, the buyer shall be entitled to seek any other relief or remedy which it may have by contract, statute, law or otherwise for any breach hereof, and it is agreed the buyer shall also be entitled to recover its attorneys' fees and costs in any successful action or suit against seller relating to any such breach. E. Seller warrants and represents that it: (i) is familiar with covenants not to compete; (ii) has discussed the provisions of the covenant not to compete contained herein with its attorney and has concluded that such provisions (including, without limitation, the right to equitable relief and the length of time and size of area provided for herein) are fair, reasonable, and just under the circumstances; and (iii) is fully aware of the obligations, limitations and liabilities included in the covenant not to compete contained in this agreement. 4.2 Employees. A. Prior to the closing, buyer agrees to coordinate in advance with seller's chief executive officer as to all communications or contacts for any purpose with seller's employees. Buyer wishes to have the opportunity to have certain employees of buyer observe seller's manufacturing processes prior to the closing. Seller will allow buyer's employee's to have such access if so requested by buyer at such times and with such frequency, subject to such conditions and with regard to such operations and processes as seller and its employees may determine; provided, that the presence of buyer's employees do not, in the sole judgment and discretion of seller's chief executive officer, interfere with seller's employees or seller's normal business operations. B. Immediately preceding the closing, seller shall, at its sole expense and responsibility, terminate, effective as of the closing, employment of any employees of seller providing services in connection with the Dental Business upon receipt of written notice from buyer that buyer has made an offer of employment to such employees, which offer has been accepted. Seller shall have no obligation to terminate the employment of any other of Seller's employees. Buyer shall have no responsibility for any wages, benefits and other payments or obligations due or becoming due (including any benefits which have accrued, but which have not been paid) employees of seller or former employees arising out of their employment prior to the closing or the termination of their employment by seller including, without limitation, any liability for any injuries of such employees relating to any period prior to closing. -5- Employment of the same persons by buyer shall not cause nor be deemed to cause buyer to assume or be responsible for any of such obligations or liabilities of seller. It is the intent of this paragraph to define the duties and obligations only as between the parties hereto. Accordingly, nothing contained herein shall be deemed to create any third party beneficiary rights to others. C. With respect to any person who accepts regular employment with buyer prior to the closing, during the five (5) year period following the closing Seller agrees not to directly or indirectly solicit the personal services of any such person, and during the one (1) year period following the closing Seller agrees not to hire, or otherwise directly or indirectly make use of the personal services of, any such person. D. Seller agrees to make available to buyer at seller's business premises those employees who worked in the Dental Business prior to the closing but remain as employees of seller, upon written request from buyer, on up to a full time basis for a six (6) month transition period after the closing. In addition, after the transition period, seller shall make available to buyer at either seller's premises or such other locations may be requested by buyer such employees of seller for one (1) year after the Closing Date, if reasonably requested by buyer from time to time in connection with buyer's conduct of the Dental Business; provided that such services to buyer shall not unreasonably interfere with seller's normal business operations. In the event of a conflict, the requirements of seller shall have priority over those of buyer. E. For any services rendered by seller's employees during the transition period or in the one year period after the closing, seller shall be reimbursed for all travel, lodging and other out-of-pocket expenses incurred by seller or its employees, and shall be paid for each of its employees providing services to buyer the product of the following: (number of hours spent by employee on services to buyer) x (employee's hourly rate of pay from seller) x (1.25) within thirty (30) days after the services have been provided. If any affected employees are compensated on a basis other than hourly, seller shall calculate an equivalent hourly rate of pay, assuming a 40-hour work week and a 52-week work year. Buyer acknowledges that seller is providing the services of its employees as an accommodation and agrees that seller and its employees shall have no liability with respect to any services rendered, and buyer further agrees to indemnify and hold harmless seller and its employees from any damages, costs, losses, liability or expense arising as a result of such accommodation. 4.3 Risk of Loss. The risk of loss to any of the assets being purchased shall remain with seller until the closing. Buyer shall have the option to either cancel this Agreement without further obligation or to negotiate a pro rata reduction in the purchase price of the assets in the event of any material loss, destruction, or damage to the assets by reason of fire, other casualty, or other cause prior to such time. 4.4 Time. Time is of the essence in connection with the performance of the covenants, agreements and obligations arising under this agreement. 4.5 Use of Sunrise Name. Seller hereby grants buyer the right to use the name "Sunrise Technologies" and "Sunrise" (the "Sunrise names") as follows: -6- A. Buyer may distribute any and all supplies of brochures and other marketing and promotional materials concerning the Dental Business, sell any item or items of inventory, containing the Sunrise names, and use any packaging materials containing the Sunrise names that exist as of the closing in the ordinary course of business, provided that buyer agrees to place a notice on the materials to the effect that buyer is now the owner of the Dental Business and will be selling, distributing, and warranting the products. The form of notice shall be approved in advance by Sunrise, which approval shall not be unreasonably withheld, and seller agrees to promptly review and respond to buyer's notice proposal. B. Buyer may use the "Sunrise" name for a period of one (1) year after the Closing Date in new marketing materials and advertising to indicate that the Dental Business products being sold by buyer were formerly manufactured, marketed and sold by seller. The form of use of the "Sunrise" name shall be approved in advance by Sunrise, which approval shall not be unreasonably withheld, and seller agrees to promptly review and respond to buyer's proposals for use. C. Buyer agrees to indemnify and hold harmless seller and seller's successors and assigns from and against any and all loss and expense (as those terms are defined in paragraph 11.1, below) in connection with or arising from any claim relating to the use of the Sunrise names. 4.6 Access to Records. Subject to Section 1.2B, Buyer acknowledges that buyer will receive, and seller agrees to deliver to buyer at the closing all documents, books, papers, files and other records or data relating to the operation of the Dental Business, and Seller shall not be obligated to retain any of such materials except as required by law or as is reasonably prudent for tax and SEC requirements. For a period of six (6) years following the closing date seller shall make available to buyer or buyer's representatives and official designees, during normal business hours for any proper purpose, such books, papers, files or other records or data of or relating to the operation of the business of the Dental Business of seller prior to the closing date as seller may have in its possession or under its control, if any, and permit buyer to make copies and extracts therefrom at buyer's expense. For a period of six (6) years after the closing date, seller agrees not to dispose of all or part of such records or data in its possession without giving buyer less than forty-five (45) days' advance written notice of seller's intention to make such disposal. 4.7 Lease of Premises. Seller holds a lease for the premises from which seller operates (the "premises") through January 31, 1998 for approximately 25,000 sq. ft. From the Closing Date, through such period of time as buyer may have equipment or materials located at the premises, or any employees working for buyer from the premises, the base rent and the additional rent payable to the landlord under the lease shall be allocated as follows: seller shall be responsible for base rent and additional rent for 8,000 sq. ft., buyer shall be responsible for base rent and additional rent for 12,000 sq. ft., and seller and buyer shall share equally base rent and additional rent for the remaining portion of the premises. As of the first day of the month following buyer's vacation of the premises, seller shall be responsible for base rent and additional rent for 8,000 sq. ft., and seller and buyer shall share equally base rent and additional rent for the remaining portion of the premises until such time as the lease is terminated or assigned, provided that buyer shall not be responsible for any share of the cost of utilities paid directly by the tenant provided to the premises after buyer has vacated the premises. Seller and buyer shall use their respective best efforts (without the expenditure of money) to find a new tenant for the premises for any time period after buyer has given seller notice that it intends to vacate the premises. Any amount received from any subtenant(s) shall be applied -7- on a pro-rata basis to reduce the obligations of the parties under this paragraph. Seller has obtained the consent of the landlord to buyer's use of the premises as described in this Section. 4.8 Insurance Coverage After Closing. Seller agrees to maintain, for a period of five (5) years after the closing, the products liability insurance coverage in existence at the time of execution of this agreement, or substantially similar coverage, and to name buyer as an additional insured under said insurance coverage. Seller agrees to give buyer at least 60 days' advance notice of a decision to terminate said insurance coverage, and shall instruct the insurance carrier to provide buyer at least 30 days' advance notice of a cancellation or lapse of said coverage. Said insurance coverage shall provide for the option to purchase at least 5 years of extended reporting ("tail coverage"). As additional insured, buyer shall be entitled to purchase, and seller hereby expressly authorizes buyer to so acquire if seller does not purchase, the tail coverage at any time said tail coverage may be purchased. If buyer exercises the option to purchase the tail coverage, buyer shall be responsible for the premium cost of the tail coverage for any period beyond the above-referenced 5 year period, and seller agrees to pay the premium cost of the tail coverage for the portion of the tail coverage that applies to said 5 year period. ARTICLE 5 THE CLOSING 5.1 Closing Date. The closing of the purchase and sale of the assets (the "closing") shall be consummated at 10:00 A.M., local time, at the seller's principal place of business, on or before the later of (i) thirty (30) days after the effective date of this agreement or (ii) three (3) business days after receipt of approval of the sale by seller's shareholders as required by paragraph 10.4, hereof, or at such other time and place or on such other date as may be agreed upon by seller and buyer in writing (the "closing date"), but in no event later than May 15, 1997. Possession of the assets shall be transferred to buyer as of 12:01 a.m. on the date of closing. 5.2 Closing Date Deliveries. A. Subject to satisfaction or waiver of the conditions set forth herein, on the closing date seller shall deliver to buyer (i) duly executed instruments of transfer and assignment in form and substance reasonably satisfactory to buyer sufficient to vest in buyer good and valid title to all of seller's right, title and interest in and to the assets, (ii) such other documents as reasonably may be necessary to enable buyer to deal with, utilize, sell and/or collect on the assets which are the subject of this Agreement, (iii) originals or copies, as appropriate, of the materials reviewed by buyer in buyer's due diligence inspections, and (iv) each of the other instruments and documents required to be delivered by seller hereunder. B. Subject to satisfaction or waiver of the conditions set forth herein, on the closing date buyer shall deliver to seller (i) the $250,000 deposit held in escrow by certified check or by wire transfer of immediately available funds from the escrow company and $3,750,000 by wire transfer of immediately available funds, together constituting the cash portion, (ii) buyer's duly executed promissory note as described in paragraph 2.2, (iii) buyer's duly executed Security Agreement and Deed of Trust as described in paragraph 2.2, and (iv) each of the other instruments and documents required to be delivered by buyer hereunder. 5.3 Prorations. All state and local real and personal property taxes, rent, utilities and -8- telephone services, and any other ongoing services utilized by the seller in the Dental Business and specifically assumed in writing by buyer, if any, shall be prorated between seller and buyer as of the date of closing. Buyer will not be responsible for any business, occupation, withholding, or similar tax, or for any taxes of any kind related to any period before the closing date. Any and all sales taxes arising because of the sale of tangible property pursuant to this Agreement shall be paid by the seller. Seller shall pay all fees associated with the transfer of the ADL licenses to use patents. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to buyer to enter into this agreement and to consummate the transactions contemplated hereby, seller hereby represents and warrants to buyer and agrees as follows: 6.1 Organization of Seller. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the state of Delaware, is qualified to do business in and in good standing under the laws of the state of California, and neither the nature of its properties nor the conduct of its business requires seller to be qualified to transact business as a foreign corporation in any other state or jurisdiction in which the failure to be so qualified and in good standing would be materially adverse to the seller. 6.2 Corporate Power. The seller has full power and authority to own or lease and operate its properties and to conduct its business as now being conducted. 6.3 Authority of the Seller. A. The seller has full power and authority to execute and deliver this agreement and each of the agreements and instruments contemplated hereby to be executed and delivered by seller and to perform all acts which are necessary or desirable to be performed by it to carry out the terms, conditions and provisions thereof. B. Subject to obtaining the consent described in Section 10.4C, the execution, delivery and performance of this agreement and each of the agreements and instruments contemplated hereby to be executed and delivered by seller have been duly authorized and approved by all necessary corporate action of the seller and no further corporate action on the part of the seller is necessary to authorize such execution, delivery and performance. Subject to obtaining the consent described in Section 10.4C, this agreement has been duly executed and delivered by seller and constitutes, and each of the agreements and instruments contemplated hereby to be executed and delivered by the seller will when duly executed and delivered constitute, the legal, valid and binding obligation of the seller, enforceable against the seller in accordance with its terms, subject only (i) to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and (ii) to general principles of equity. C. Upon acquiring the consents identified herein, neither the execution and delivery by seller of this agreement nor the execution and delivery by seller of any of the other agreements or instruments contemplated hereby to be executed and delivered by the seller nor the consummation of any of the transactions contemplated hereby or thereby nor compliance by seller with or fulfillment of the terms, -9- conditions and provisions hereof or thereof will (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default under, the charter or bylaws of seller, any note, agreement, conditional sales contract, indenture, mortgage, deed of trust, guarantee, lease, license, permit, judgment, order, or other material agreement, commitment or arrangement to which seller is a party or to which seller or seller's assets or any real property owned or leased by seller are bound or affected and which is material to the business and properties of the Dental Business, or any law, statute, rule or regulation to which seller is subject, or (ii) require the approval, consent, authorization of exemption by, or filing with any person not a party to this Agreement or any court, governmental authority or regulatory or self-regulatory body. 6.4 Financial Statements. Schedule 6.4 hereto contains the audited statement of financial condition of the seller as of December 31, 1996 (such statement of financial condition being herein called the "Seller's Audited Balance Sheet") and the related statements of retained earnings, operations and cash flows for the twelve month period then ended, together with appropriate notes to such financial statements, certified by Ernst & Young, Certified Public Accountants. Such statements of financial condition, retained earnings, operation and cash flows (and the Closing Unaudited Financial Statement described in paragraph 8.5 and its related statements of retained earnings, operations and cash flows) have been prepared in conformity with generally accepted accounting principles consistently applied (including, without limitation, provision for deferred tax liability, and except for the absence of notes to the Closing Unaudited Financial Statements and subject to normal year-end adjustments which are not material) and present fairly the financial position of the company and the Dental Business, respectively, and the results of operations as of their respective dates and for the respective periods covered thereby. 6.5 Absence of Changes. Except as disclosed in Schedule 6.5, since December 31, 1996: A. There has not been any material adverse change in the assets, properties, liabilities, business or condition (financial or otherwise) of the Dental Business and no fact or condition exists or is contemplated or threatened which might reasonably be expected to cause such a change in the future. B. The seller has conducted the business of the Dental Business only in the usual, regular and ordinary course and consistent with past practice. Without limiting the generality of the foregoing, since December 31, 1996, except as contemplated by this agreement the seller has not (i) sold, leased, transferred or otherwise disposed of or mortgaged, pledged, or imposed or suffered to be imposed any lien on any of the assets of the Dental Business reflected on the Seller's Audited Balance Sheet or any assets of the Dental Business acquired by the seller after December 31, 1996, other than property sold or otherwise disposed of for fair value in the ordinary course of the seller's business consistent with past practice; (ii) canceled or agreed to cancel any debts owed to or claims held by the seller associated with the business of the Dental Business other than in the ordinary course of the seller's business consistent with past practice; (iii) entered into any material contract or other agreement or any amendment or termination thereof with respect to the Dental Business; (iv) made any change in the accounting policies, methods or practices followed by the seller with respect to the Dental Business; or (v) entered into or become committed to enter into any other transaction concerning the business of the Dental Business except in the ordinary course of business. 6.6 Absence of Undisclosed Liabilities. The seller is not subject to any liability with respect to or in any manner affecting the Dental -10- Business whether absolute, contingent, accrued or otherwise, which is not shown or which is in excess of the amount shown or reserved for in the Seller's Audited Balance Sheet, other than liabilities of the same nature and scope as those which are set forth or reserved for in the Seller's Audited Balance Sheet and the notes thereto incurred in the ordinary course of business after the date of the Seller's Audited Balance. 6.7 Tax Returns. Except as disclosed in Schedule 6.7, seller has filed all federal, state and local income, excise, withholding, payroll, property, sales, use, franchise and other tax returns required to be prepared or filed by or on behalf of the seller in accordance with applicable law, and has paid all taxes, interest, assessments, deficiencies and penalties due and payable to any taxing authority. Except as disclosed in Schedule 6.7, there are no current audits pending and no current disputes as to seller's liability for taxes of any nature. All federal, state and local income, excise, withholding, payroll, property, sales, use, franchise and other tax returns required to be filed by or on behalf of the seller on or prior to the closing date will be true, correct and complete and duly and timely filed in accordance with applicable law. 6.8 Assets. The listing of assets in paragraph 1.1 and in the exhibits described therein is a complete and accurate list of seller's assets being sold hereunder. The assets constitute all the assets necessary or appropriate to conduct the Dental Business as conducted by seller as of the date of execution of this agreement and are, to the best knowledge of seller, in good condition and repair (subject to normal wear and tear) and are suitable for the uses for which intended. To the best knowledge of seller, all such assets and their uses conform in all material respects to all applicable laws, regulations, rules, ordinances, codes, licenses, franchises and permits (including, without limitation, building, zoning, environmental and occupational safety and health requirements), and no written notice of any violation of any of such matters relating to such assets and their use has been received by the seller. 6.9 Title to Assets; Condition. A. Seller has, and will have at the closing, good, valid and indefeasible title to all the assets. All the assets are free and clear of restrictions on or conditions to transfer or assignment and are free and clear, or will be free and clear at the closing, of mortgages, liens, pledges, charges, encumbrances, claims and other covenants, conditions or restrictions. Seller is not a party to, and the assets are not bound by, any agreement that is materially adverse to the assets. There are no liabilities or obligations with respect to the assets, either accrued, absolute, direct, contingent or otherwise, which would affect the value of the assets. Except for the licenses described on Exhibit 1.1D, none of the assets is leased or subject to any other agreement or right inconsistent with full ownership of the assets. B. Except as described on Schedule 6.9B, to the knowledge of seller, subject to the reserve for obsolescence shown on seller's Audited Balance Sheet, the inventories of the seller consist of merchandise of a quality and quantity usable and saleable in the ordinary course of the conduct of the Dental Business and are valued at the lower of cost (on a FIFO basis) or market in accordance with generally accepted accounting principles consistently applied. The term "saleable" shall include use of inventory to perform warranty or non-warranty service or repair of products sold by seller in the conduct of the Dental Business, whether or not seller receives additional consideration for the service or repair. C. The customer accounts receivable of the seller have arisen from bona fide transactions in the ordinary course of business of the Dental Business. -11- D. EXCEPT AS SET FORTH IN THIS AGREEMENT, THERE ARE NO OTHER WARRANTIES OF SELLER, EXPRESS OR IMPLIED, WITH RESPECT TO THE ASSETS OR INVENTORIES. 6.10 Litigation. A. The seller has complied in all material respects with all laws, regulations, rules or ordinances of, and with all judgments, writs, decrees, injunctions or orders of, any foreign, federal, state, county, municipal or other government or governmental department, commission, board, bureau, agency or instrumentality which are applicable to the Dental Business or the assets, except for such failures to comply as in the aggregate would not have a material adverse effect on the seller. B. Except for workers compensation claims, there are no lawsuits, actions, claims, suits, proceedings or investigations, legal, equitable, administrative, through arbitration or otherwise, pending or, to the best knowledge of seller, threatened against seller, its officers or directors or affecting the assets or operations of seller's Dental Business, and (ii) there is no action, suit or proceeding pending or, to the best knowledge of seller, threatened against seller which questions the legality or propriety of the transactions contemplated by this agreement or the agreements contemplated hereby. 6.11 Permits. A. The seller owns, holds or possesses all material governmental, regulatory, and/or private licenses, registrations, franchises, permits, privileges, immunities, approvals and other authorizations which are necessary to entitle it to own or lease, operate and use its properties and assets related to the Dental Business and to carry on and conduct its Dental Business as currently conducted (herein collectively called "Permits"). Schedule 6.11 hereto sets forth a list and brief description of each Permit owned, held or possessed by the seller and used in the Dental Business. Seller is not aware of any non-material licenses, permits, or other authorizations that are needed to carry on and conduct the Dental Business. B. Seller has delivered, or will deliver prior to closing, to buyer complete and correct copies of all Permits owned, held or possessed by the seller and used in the Dental Business. The seller has fulfilled and performed its obligations under each of the Permits which, if failed to be performed, could have a material adverse effect on the seller. No written notice of cancellation, of default or of any dispute concerning, any such Permit has been received by the seller, or is known to seller. Except as set forth on Schedule 6.11, each of the Permits owned, held or possessed by the seller will continue in full force and effect after the consummation of the transactions contemplated by this agreement and will accrue to the benefit of and be owned, held or possessed by buyer without (i) the occurrence of any breach, default or forfeiture of rights thereunder, (ii) the consent, approval, or act of, or the making of any filing with, any governmental body, regulatory commission or other party, or (iii) the payment of any transfer or consent fee. 6.12 Environmental Matters. A. The seller does not own any real property. Schedule 6.12A sets forth a list and brief description of each lease or other agreement (including a description of premises and its rental term and location) under which the seller is lessee of, or holds or operates or has an interest in, any real property not owned by the seller that is used in the operation of the Dental Business. The seller has the right to quiet enjoyment of all such real property described in such Schedule for the full term of each such lease or -12- similar agreement (and any related renewal option relating thereto). To the best knowledge of seller, neither the whole nor any part of any real property owned, leased, used or occupied by the seller is subject to any suit for condemnation or other taking by any public authority, and no such condemnation or other taking is threatened or, to the best knowledge of seller, contemplated. B. The seller is operating in material compliance with all environmental Permits and seller has not received any notice from any governmental or regulatory authority of violation of any environmental, health or safety laws or environmental Permits. C. To the best knowledge of seller, neither the real property identified on Schedule 6.12A nor any other real property now or previously owned, leased, used or occupied by seller is the subject of any investigation by any governmental or regulatory authority evaluating whether any remedial action is needed to respond to a release of any hazardous or toxic substance or waste, including but not limited to medical or biological wastes, petroleum or petroleum-based substance or waste, onto, at or beneath the real property. D. Schedule 6.12D lists any materials known to seller that are located at the seller's premises that might be considered, under applicable law, a hazardous or toxic substance or waste. Except as disclosed on Schedule 6.12D, there is not now, nor was there at any time during the seller's tenure on any real property owned or leased by the seller: 1. Any treatment, storage, recycling or disposal of any hazardous waste requiring a permit under 40 C.F.R. Part 264 or 256, or any state equivalent; 2. Any underground storage tanks used for the seller's operations or liability for which is assumed under the applicable lease executed by the seller; 3. Any asbestos-containing building or insulating materials; or 4. Any seller-owned or operated electrical transformers or other equipment containing polychlorinated biphenyls. 6.13 Employees and Related Agreements; ERISA. A. Except as set forth in Schedule 6.13A, with respect to the Dental Business, the seller is not a party to or subject to or bound by any written or, to the best knowledge of seller, oral: (i) employee collective bargaining agreement, employment agreement, consulting, advisory, agency, or service agreement, deferred compensation agreement, confidentiality agreement or covenant not to compete; (ii) employees, pension, profit-sharing, stock option, bonus, incentive, stock purchase, welfare, life insurance, hospital or medical benefit plan or any other employee benefit agreement or plan; or (iii) any contract or agreement with any officer, director or employee of the seller (other than employment agreements). B. Seller has heretofore delivered to buyer a list of all employees and commissioned salespersons of the seller providing any services in connection with the business of the Dental Business, which is current as of March 1, 1997, setting forth the total annual compensation (salary and other benefits) payable as of such date to each of such employees or commissioned salespersons. 6.14 Contracts. A. Except as set forth in Schedule 6.14, the seller, in connection with the operation of the -13- Dental Business, is not a party to or bound by, and the assets are not subject to: (i) any sales, agency, royalty, commission or franchise agreement; (ii) any letter of credit or guarantee of the obligations of others; (iii) any loan agreement or other instrument relating to indebtedness of the seller or any instrument or arrangement creating liens on any property of the seller; (iv) any contract, agreement, commitment, arrangement or understanding not elsewhere specifically disclosed pursuant to this agreement involving the payment or receipt by the seller of more than $10,000 per year or $25,000 over the term thereof; other than purchase orders or agreements for the purchase of inventory, supplies or equipment entered into in the ordinary course of business described on Exhibit 1.1C or (v) any other contract, agreement or commitment, written or, to the best knowledge of seller, oral, which is material to the seller or the business of the Dental Business that is not terminable on no more than 30 days notice and involves at least $2,000, whether or not made in the ordinary course of business. B. Except as set forth in Schedule 6.14, each of the contracts, agreements and commitments listed in any schedule hereto to which the seller is a party and which buyer has agreed to assume as set forth on Exhibit 3.3 hereto (collectively the "Contracts") constitutes a valid and binding obligation of the seller and, to the best knowledge of seller, the other parties thereto and is in full force and effect and will continue in full force and effect to the exclusive benefit of buyer following the consummation of the transactions contemplated by this agreement and the agreements contemplated hereby, and in each case without (i) breaching the terms thereof or resulting in the forfeiture or impairment of any material rights thereunder, or (ii) the approval, consent or act of any other party, or any foreign, federal, state or local court, governmental authority or regulatory body. The seller has performed in all material respects its obligations under each of the Contracts which, if failed to be performed, could have a material adverse effect on the seller, and, to the best knowledge of seller, no other party to any of the Contracts has materially breached or defaulted thereunder. Complete and correct copies of each of the Contracts have heretofore been delivered to buyer by seller. C. Seller has disclosed to buyer all material contracts, agreements, arrangements or understandings known to seller that are necessary to the operation of the Dental Business in the manner in which it has been conducted by seller. 6.15 Insurance and Claims. A. Schedule 6.15A sets forth a list and brief description (including nature of coverage, deductibles, premiums) of all policies of insurance maintained, owned or held by the seller on the date hereof with respect to its properties, operations, assets, business, employees or otherwise related to the Dental Business. Seller shall keep such insurance or comparable insurance in full force and effect through the closing date. The seller has complied with each of such insurance policies in all material respects and has not failed to give any notice or present any claim thereunder in a due and timely manner which failure could have a material adverse effect on the Dental Business. B. There have been no claims for products liability damages or injuries made with respect to products sold by the Dental Business since October 12, 1994 and, to the best knowledge of seller, from its inception through October 12, 1994. For purposes of this paragraph, the term "claim" shall include claims that have been made to seller or seller's agents or insurance carriers either in writing or, to the best knowledge of seller, orally, as well as claims that seller is aware might or could be made. 6.16 Trademarks, Patents, Etc. Seller does not hold any patents nor has it filed any patent applications in connection with the -14- operation of the Dental Business except as described in Exhibit 1.1D. All trademarks, trade names, service marks, copyrights, inventions, patent applications, software, firmware, formulas, knowhow, confidential proprietary technical information and trade secrets (the "intellectual property") owned by the seller and used in the Dental Business, all registered names under which the seller is doing business in the Dental Business, and all licenses, agreements or arrangements, undertakings or commitments, written or, to the best knowledge of seller, oral, under which the seller has the right to use any of the foregoing, and any patents or patent rights used, in connection with the operation of the Dental Business are briefly described in Exhibit 1.1D, and are valid, binding and enforceable in accordance with their terms. Except for the settled litigation with ADL, no claims have been made or, to the best knowledge of seller, threatened, and no proceedings have been instituted or are pending or, to the best knowledge of seller, threatened against seller which challenge the validity of the ownership or use by the seller as part of the business of the Dental Business of any such intellectual property or rights. Except as described in Exhibit 1.1D, Seller has not licensed anyone to use any of the foregoing or any other of its proprietary rights or intellectual property that are used in the business of the Dental Business, seller has no knowledge of the infringing use of any of such trademarks, trade names, service marks, copyrights, patents or patent rights, or other proprietary rights by any other person, and seller has no knowledge that seller's use of seller's proprietary rights and intellectual property or sale of Dental Division products either violates any patent, trademark or other rights of any other person or infringes upon the intellectual rights of any other person. 6.17 Disclosure. None of the representations or warranties made by seller in this Agreement, none of the information relating to seller contained in the schedules hereto, and none of the other information provided by seller's president or documents, certificates, schedules or memoranda furnished by seller or any of its representatives to buyer or any of its representatives in connection with this Agreement or with the transaction herein contemplated is false or misleading in any material respect, contains any untrue statement of material fact or omits any material facts required to be stated to make the statement therein, taken as a whole, not misleading. To the best knowledge of seller, there is no material fact which adversely affects the properties, business or prospects of the Dental Business of seller in any material respect which has not been set forth or referred to in this agreement or the schedules to this agreement. 6.18 Finder. Seller has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this agreement. 6.19 Knowledge. When used in this Article 6, "knowledge" or "known" means information actually known by any of the following: David W. Light, Cathy Caserza, Clara R. Munley, Joseph W. Shaffer and C. Russell Trenary. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF BUYER As an inducement to seller to enter into this agreement and to consummate the transactions contemplated hereby, buyer hereby represents and warrants to seller and agrees as follows: -15- 7.1 Organization of Buyer. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the state of California and neither the nature of its properties nor the conduct of its business requires buyer to be qualified to transact business as a foreign corporation in any other state or jurisdiction in which the failure to be so qualified and in good standing would be materially adverse to the buyer. 7.2 Corporate Power. The buyer has full power and authority to own or lease and operate its properties and to conduct its business as now being conducted. 7.3 Authority of the Buyer. A. The buyer has full power and authority to execute and deliver this agreement and each of the agreements and instruments contemplated hereby to be executed and delivered by buyer and to perform all acts which are necessary or desirable to be performed by it to carry out the terms, conditions and provisions thereof. B. The execution, delivery and performance of this agreement and each of the agreements and instruments contemplated hereby to be executed and delivered by buyer have been duly authorized and approved by all necessary corporate action of the buyer and no further corporate action on the part of the buyer is necessary to authorize such execution, delivery and performance. This agreement has been duly executed and delivered by buyer and constitutes, and each of the agreements and instruments contemplated hereby to be executed and delivered by the buyer will when duly executed and delivered constitute, the legal, valid and binding obligation of the buyer, enforceable against the buyer in accordance with its terms, subject only (i) to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and (ii) to general principles of equity. C. Upon acquiring the consents identified herein, neither the execution and delivery of this agreement nor the execution and delivery by buyer of any of the other agreements or instruments contemplated hereby to be executed and delivered by the buyer nor the consummation of any of the transactions contemplated hereby or thereby nor compliance by buyer with or fulfillment of the terms, conditions and provisions hereof or thereof will, (i) conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default under, the charter or bylaws of buyer, any note, agreement, conditional sales contract, indenture, mortgage, deed of trust, guarantee, lease, license, permit, judgment, order, or other material agreement, commitment or arrangement to which buyer is a party or to which buyer or buyer's assets or any real property owned or leased by buyer are bound or affected and which is material to the business and properties of the buyer, or any law, statute, rule or regulation to which buyer is subject, or (ii) require the approval, consent, authorization of exemption by, or filing with any person not a party to this Agreement or any court, governmental authority or regulatory or self-regulatory body. 7.4 Financial Statements. Schedule 7.4 hereto contains the unaudited statement of financial condition of the buyer as of October 31, 1996 (such statement of financial condition being herein called the "Buyer's 1996 Balance Sheet") and the related statements of retained earnings, operations and cash flows for the twelve month period then ended, together with appropriate notes to such financial statements, reviewed by Matson & Isom Accountancy Corporation, Certified Public Accountants. Schedule 7.4 also contains the internally -16- generated unaudited statement of financial condition of buyer as of December 31, 1996 (such statement of financial condition being herein called the "Buyer's Unaudited Balance Sheet") and the related statements of retained earnings, operations and cash flows for the two month period then ended. Such statements of financial condition, retained earnings, operation and cash flows have been prepared in conformity with generally accepted accounting principles consistently applied (except for the absence of notes thereto and subject to normal year-end adjustments which are not material) and present fairly the financial position of the buyer, and the results of operations as of their respective dates and for the respective periods covered thereby. 7.5 Absence of Changes. Since the date of the Buyer's Unaudited Balance Sheet: A. There has not been any material adverse change in the assets, properties, liabilities, business or condition (financial or otherwise) of buyer and no fact or condition exists or is contemplated or threatened which might reasonably be expected to cause such a change in the future. B. The buyer has conducted buyer's business only in the usual, regular and ordinary course and consistent with past practice. Without limiting the generality of the foregoing, since the date of the Buyer's Unaudited Balance Sheet, except as contemplated by this agreement the buyer has not (i) sold, leased, transferred or otherwise disposed of or mortgaged, pledged, or imposed or suffered to be imposed any lien on any of the assets reflected on the Buyer's Unaudited Balance Sheet or any of buyer's assets after the date of the Buyer's Unaudited Balance Sheet, other than property sold or otherwise disposed of for fair value in the ordinary course of the buyer's business consistent with past practice; (ii) canceled or agreed to cancel any debts owed to or claims held by the buyer associated with buyer's business other than in the ordinary course of the buyer's business consistent with past practice; (iii) entered into any material contract or other agreement or any amendment or termination thereof; (iv) made any change in the accounting policies, methods or practices followed by the buyer; or (v) entered into or become committed to enter into any other transaction concerning buyer's business except in the ordinary course of business. 7.6 Absence of Undisclosed Liabilities. The buyer is not subject to any liability, whether absolute, contingent, accrued or otherwise, which is not shown or which is in excess of the amount shown or reserved for in the Buyer's 1996 Balance Sheet or the Buyer's Unaudited Balance Sheet, other than liabilities of the same nature and scope as those which are set forth or reserved for in the Buyer's 1996 Balance Sheet and the notes thereto or the Buyer's Unaudited Balance Sheet incurred in the ordinary course of business after the dates of the Buyer's 1996 Balance Sheet and the Buyer's Unaudited Balance Sheet, respectively. 7.7 Litigation. A. The buyer has compiled in all material respects with all laws, regulations, rules or ordinances of, and with all judgments, writs, decrees, injunctions or orders of, any foreign, federal, state, county, municipal or other government or governmental department, commission, board, bureau, agency or instrumentality which are applicable to it or its properties, operations or business except for such failures to comply as in the aggregate would not have a material adverse effect on the buyer. B. Except as set forth on Schedule 7.7, (i) there are no lawsuits, actions, claims, suits, proceedings or investigations, legal, equitable, administrative, through arbitration or otherwise, pending or, -17- to the best knowledge of buyer, threatened against buyer, its officers or directors or affecting the properties, operations or business of the buyer, and (ii) there is no action, suit or proceeding pending or, to the best knowledge of buyer, threatened against buyer which questions the legality or propriety of the transactions contemplated by this agreement or the agreements contemplated hereby. 7.8 Finder. Except for a letter agreement with Robert Oliver, buyer has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this agreement. 7.9 Disclosure. None of the representations or warranties made by buyer in this Agreement, none of the information relating to buyer contained in the schedules hereto, and none of the other information provided by buyer's president or documents, certificates, schedules or memoranda furnished by buyer or any if its representatives to seller or any if its representatives in connection with this Agreement or with the transaction herein contemplated is false or misleading in any material respect, contains any untrue statement of material fact or omits any material facts required to be stated to make the statement therein, taken as a whole, not misleading. To the best knowledge of buyer, there is no material fact which adversely affects the properties, business or prospects of the business of buyer in any material respect which has not been set forth or referred to in this agreement or the schedules to this agreement. 7.10 Knowledge. When used in this Article 7, "knowledge" or "known" means information actually known by Craig Lares. ARTICLE 8 ACTIONS PRIOR TO THE CLOSING DATE The parties hereto hereby covenant and agree to take the following actions between the date hereof and the closing date: 8.1 Access to the Seller and Buyer. Seller agrees to cooperate with the buyer and buyer agrees to cooperate with seller in the performance of a legal, business and financial due diligence audit. The parties agree to grant to each other and their authorized representatives (including without limitation its independent public accountants, attorneys and bank representatives) access during normal business hours to and the right to inspect and copy the books and records of the parties and to consult with the directors, officers, employees, attorneys, auditors and accountants of the parties concerning customary due diligence matters. Such inspections may include, for example, review of books and records of account, tax records, records of corporation proceedings, contracts, trademarks, governmental consents, and other business activities and matters relating to the transactions contemplated by this agreement. The parties agree to provide such information and copies of documents as may be reasonably requested by the parties in connection with the audit. All confidential information acquired by the other party pursuant to this paragraph shall be held in the strictest of confidence by the other party and shall not be revealed or disclosed to any third party or parties except -18- as may be required by law. Any such investigation shall be conducted in such a manner as not to interfere unduly with the business or operations of the other party. 8.2 Preserve Accuracy of Representations and Warranties. Each of the seller and the buyer shall refrain from taking any action which would render any representation or warranty contained in Article 6 or 7 of this agreement inaccurate as of the closing date. Seller and buyer agree to promptly notify the other of such representation or warranty becoming untrue. 8.3 Operations Prior to the Closing Date. Except as contemplated by this agreement, seller and buyer shall operate and carry on their respective businesses in the usual, regular and ordinary manner, substantially as presently operated and with a view to the maintenance and preservation of the assets and going concern value existing as of the date hereof. Consistent with the foregoing, except as contemplated by this agreement or with the prior written consent of the other party, each party (as to seller, with respect to the Dental Business) agrees not to: (i) change, alter or make any employment contracts or arrangements with any management personnel; (ii) create, assume, or acquire property subject to any lien, mortgage or other encumbrance except in the ordinary course of business; (iii) compromise any debt or claim except for adjustments made with respect to contracts for the purchase of supplies and materials or for the sale of products in the ordinary course of business, which in the aggregate are not material; (iv) other than in the ordinary course of business, enter into any transaction, incur any indebtedness or other obligation, or, without the prior written consent of the other party, sell any assets; (v) alter, amend or enter into any licensing or other contractual arrangement with respect to intellectual property; (vi) make any material changes in its existing business practices affecting the amount of inventory in the Dental Business, including but not limited to changes, whether or not material, to historical terms of sales of inventory; or (vii) make any other material change in the business or operation of the Dental Business or enter into any material agreement. Buyer agrees not to unreasonably withhold approval of non-cancelable agreements with a term less than one year, and normal purchase orders for materials, supplies, etc., shall not require buyer's approval. Seller shall be entitled to continue to distribute and sell inventory in the ordinary course of business, subject to the provisions of paragraph 9.5, below, concerning the book value of seller's inventory on the closing date. Seller agrees to replace, consistent with past practice, any products consigned to its sales personnel that are sold by said sales personnel in the ordinary course of business. Seller agrees that segregation of inventory to seller's ophthalmic business has been completed, and no additional inventory will be transferred to the seller's ophthalmic business. 8.4 Satisfaction of Conditions. Seller shall use its best efforts to cause the conditions set forth in paragraphs 9.3, 9.4, 9.5, 9.6, 9.8, and 9.10 to be satisfied as soon as possible and buyer agrees to use its best efforts to cause the conditions set forth in paragraphs 10.3, 10.4, 10.5, 10.6, and 10.7 to be satisfied as soon as possible. 8.5 Subsequent Financial Statements. Prior to the closing, seller (with respect to the Dental Business) and buyer shall deliver to each other, not later than twenty-five (25) days after the end of each monthly period and in the form customarily prepared by each party, each party's internally generated statement of financial condition as of the last day of the previous month and the related statement of retained earnings, operations and cash flows for the monthly period then ended and for the period from the beginning of the fiscal year to the end of such -19- monthly period (the "additional unaudited financial statements"). Seller agrees to deliver to buyer prior to the closing an additional unaudited financial statement (the "Closing Unaudited Financial Statement") as of a date not more than thirty (30) days prior to the closing date, which statement shall also be certified as to its accuracy and completeness by the chief executive officer and the chief financial officer of seller. 8.6 Maintenance of Insurance. Seller agrees to continue to carry all existing insurance on the business and operations of the Dental Business, and the assets and properties covered by this Agreement to the date of closing, subject to variations in amounts resulting from the ordinary operations of the Dental Business. 8.7 Consents to Assignments of Agreements. Seller agrees to use seller's best efforts (without the payment of money unless required by the terms of the Contract) to obtain promptly the consent to the transfer of the assets to buyer under any Contract listed in Exhibit 3.3 requiring the consent of any party to effectuate such transfer. 8.8 Regulatory Consents. Seller shall use seller's best efforts (without the payment of any transfer or consent fee) to obtain promptly the consent to the transfer of the assets to buyer under each material permit held by seller requiring the consent of the issuer of the permit to effectuate such transfer. 8.9 Acquisition Financing. Buyer shall use its best efforts to finalize financing in the amount of not more than $4,000,000 from Bank of America NT&SA (the "bank") and Joseph P. Lares on terms and conditions acceptable to buyer, which financing is necessary for buyer to close the purchase, as soon as possible after the execution of this agreement, and agrees to use its best efforts to finalize the financing from the bank and Joseph P. Lares on or before April 4, 1997, in order to facilitate seller's plan to hold its shareholders meeting on April 30, 1997, but without any adverse consequences whatsoever should said April 4 date not be accomplished. ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATION OF BUYER The obligations of buyer to be performed under this agreement on the closing date shall, at the sole option of buyer, be subject to the satisfaction, on or prior to the closing date, of the following conditions in all material respects: 9.1 No Misrepresentation or Breach of Covenants, Representations and Warranties. There shall have been no breach by seller in the performance of any of seller's covenants and agreements contained in this agreement and seller shall have performed all obligations required to be performed by seller under this agreement prior to or on the closing date; each of the representations and warranties of seller contained in this agreement, other than the representations contained in paragraphs 6.1, 6.5A, 6.8, 6.9, 6.10A, 6.11, 6.12, 6.14, 6.15, and 6.17, shall be true and correct in all material respects on the closing date as though made on the closing date, and each of the representations and warranties of seller -20- contained in paragraphs 6.1, 6.5A, 6.8, 6.9, 6.10A, 6.11, 6.12, 6.14, 6.15, and 6.17 shall be true and correct in all respects on the closing date as though made on the closing date; and there shall have been delivered to buyer a certificate to such effect, dated the closing date, signed by the chief executive officer of seller. 9.2 Opinion of Counsel for Seller. Buyer shall have received from Thelen, Marrin, Johnson & Bridges LLP, as counsel for seller, an opinion, dated the closing date, in form and substance reasonably satisfactory to buyer and its counsel. 9.3 Corporate Action. Seller shall have taken all corporate action necessary to execute and deliver all papers and documents and to do and perform all acts which are necessary or desirable to carry out the terms, conditions and provisions of this agreement and the agreements contemplated hereby, including the requisite approval of the Board of Directors of seller, and the approval of a majority of the shareholders of seller, and seller shall furnish buyer with certified copies of resolutions adopted by the Board of Directors of seller, in form and substance reasonably satisfactory to counsel for buyer, in connection with such action. 9.4 Approvals. A. All governmental, regulatory and self-regulatory approvals, actions, consents, authorizations, declarations, filings, registrations and waiting periods which are necessary to consummate the transactions contemplated by this agreement, including those which are specified in any schedule hereto, and those which are referred to in paragraph 8.8, shall have been made, obtained or satisfied and be in full force and effect, and any such approvals, actions, consents and authorizations, declarations, filings and registrations shall be in form and substance reasonably satisfactory to buyer and its counsel. B. All consents, authorizations and approvals to the transactions contemplated by this agreement that are required by the terms of those Contracts referred to in Exhibit 3.3, shall have been obtained and be in full force and effect, and such consents, authorizations and approvals shall be in form and substance reasonably satisfactory to buyer and its counsel. C. Buyer shall, using its best efforts, have negotiated a new representation agreement with Helmuth Mayer which supersedes the existing Consulting Agreement with seller on terms and conditions satisfactory to buyer and seller. 9.5 No Change in Business. Between the date hereof and the closing date, there shall have been (i) no material adverse change in the properties, the business or the operations, liabilities, profits, prospects or condition (financial or otherwise) of the Dental Business of seller ; (ii) no material adverse foreign, federal or state legislative or regulatory change affecting the business of the Dental Business or its products; (iii) no material damage to the assets regardless of insurance coverage for such damage; or (iv) no lawsuits, claims or proceedings filed or, to the best knowledge of seller, threatened against or affecting the seller or any of its properties or business which, if adversely determined, might have a material adverse effect on the assets, the business of the Dental Business, or the operations, liabilities, profits, prospects or condition (financial or otherwise) of the Dental Business of the seller; and there shall have been delivered to buyer a certificate or certificates to such effect, dated the closing date and signed by the chief executive officer of seller. On the date of -21- closing, the book value of seller's inventory (as defined in paragraph 1.1B, net of seller's reserve for obsolete inventory) shall not be less than eighty percent (80%) of the book value of seller's inventory, net of seller's reserve for obsolete inventory, as of December 31, 1996. 9.6 No Restraint or Litigation. No order, decree or ruling of any court shall have been entered, and no action or proceeding before any court or governmental or regulatory authority or agency shall be pending, to restrain, prohibit, challenge, invalidate or otherwise adversely affect any of the transactions contemplated by this agreement or the agreements contemplated hereby. 9.7 Buyer's Financing. A. Buyer shall have obtained the financing described in paragraph 8.9, above, and bank shall have approved this agreement. B. Seller shall have executed a subordination agreement in such form as shall be required by Bank of America NT & SA. 9.8 Products Liability Coverage. Buyer shall have been named as an additional insured on the products liability insurance policies of seller covering claims arising from the sale of products by seller prior to the date of closing. 9.9 Lease of Business Premises. If buyer desires to make use of the business premises currently used by seller for the Dental Business, buyer shall have entered into a sublease of the premises based on the terms of the existing lease agreement for a portion of the business premises currently used by seller for the Dental Business. In any event, buyer shall be responsible for the payments described in Section 4.7, hereof. Seller agrees to cooperate with buyer in facilitating buyer's lease of the premises and obtaining the consent of the landlord to buyer's sublease. 9.10 Approval of Counsel. All matters, proceedings, instruments and documents required to carry out this agreement or the agreements contemplated hereby or incidental thereto and all other relevant legal matters shall be reasonably satisfactory to counsel for buyer. ARTICLE 10 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of seller to be performed under this agreement on the closing date shall, at the sole option of seller, be subject to the satisfaction, on or prior to the closing date, of the following conditions in all material respects: 10.1 No Misrepresentation or Breach of Covenants, Representations and Warranties. -22- There shall have been no breach by buyer in the performance of any of buyer's covenants and agreements contained in this agreement and buyer shall have performed all obligations required to be performed by buyer under this agreement prior to or on the closing date; each of the representations and warranties of buyer contained in this agreement, other than the representations contained in paragraphs 7.1, 7.5A, 7.7A, and 7.9 shall be true and correct in all material respects on the closing date as though made on the closing date, and each of the representations and warranties of buyer contained in paragraphs 7.1, 7.5A, 7.7A, and 7.9 shall be true and correct in all respects on the closing date as though made on the closing date; and there shall have been delivered to seller a certificate to such effect, dated the closing date, signed by the chief executive officer of buyer. 10.2 Opinion of Counsel for Buyer. Seller shall have received from Richard S. Matson, attorney at law, as counsel for buyer, an opinion, dated the closing date, in form and substance reasonably satisfactory to seller and its counsel. 10.3 Corporate Action. Buyer shall have taken all corporate action necessary to execute and deliver all papers and documents and to do and perform all acts which are necessary or desirable to carry out the terms, conditions and provisions of this agreement and the agreements contemplated hereby, including the requisite approval of the Board of Directors of buyer, and buyer shall furnish seller with certified copies of resolutions adopted by the Board of Directors of buyer, in form and substance reasonably satisfactory to counsel for buyer, in connection with such action. 10.4 Approvals. A. All governmental, regulatory and self-regulatory approvals, actions, consents, authorizations, declarations, filings, registrations and waiting periods which are necessary to consummate the transactions contemplated by this agreement, including those which are specified in any schedule hereto, shall have been made, obtained or satisfied and be in full force and effect, and any such approvals, actions, consents and authorizations, declarations, filings and registrations shall be in form and substance reasonably satisfactory to seller and its counsel. B. All consents, authorizations and approvals to the transactions contemplated by this agreement that are required by the terms of any contracts or otherwise from third shall have been obtained and be in full force and effect, and such consents, authorizations and approvals shall be in form and substance reasonably satisfactory to seller and its counsel. C. At least a majority of the holders of the issued and outstanding shares of seller shall have voted to approve the sale of the assets of the Dental Business on terms no less favorable to seller than those set forth herein. D. Buyer shall, using its best efforts, have negotiated a new representation agreement with Helmuth Mayer which supersedes the existing Consulting Agreement with seller on terms and conditions satisfactory to buyer and seller. 10.5 No Restraint or Litigation. No order, decree or ruling of any court shall have been entered, and no action or proceeding before -23- any court or governmental or regulatory authority or agency shall be pending, to restrain, prohibit, challenge, invalidate or otherwise adversely affect any of the transactions contemplated by this agreement or the agreements contemplated hereby. 10.6 Approval of Counsel. All matters, proceedings, instruments and documents required to carry out this agreement or the agreements contemplated hereby or incidental thereto and all other relevant legal matters shall be reasonably satisfactory to counsel for seller. 10.7 No Change in Business. Between the date hereof and the closing date, there shall have been (i) no material adverse change in the properties, the business or the operations, liabilities, profits, prospects or condition (financial or otherwise) of the buyer's business; (ii) no material adverse foreign, federal or state legislative or regulatory change affecting the business of the buyer or its products; (iii) no material damage to the assets regardless of insurance coverage for such damage; or (iv) no lawsuits, claims or proceedings filed or, to the best knowledge of buyer, threatened against or affecting the buyer or any of its properties or business which, if adversely determined, might have a material adverse effect on the assets, the buyer's business, or the operations, liabilities, profits, prospects or condition (financial or otherwise) of the buyer's business; and there shall have been delivered to buyer a certificate or certificates to such effect, dated the closing date and signed by the chief executive officer of buyer. ARTICLE 11 INDEMNIFICATION 11.1 Indemnification of Buyer. A. Seller agrees to indemnify and hold harmless buyer and buyer's successors and assigns from and against any and all (i) liabilities, losses, claims, taxes, fines, penalties, damages and expenses, direct or indirect ("losses") and (ii) reasonable attorneys' and accountants' fees and expenses, court costs and all other reasonable out-of-pocket expenses ("expenses") incurred by buyer in connection with or arising from: 1. any damage or deficiency resulting from the non-performance of any agreement to be performed by seller under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished to buyer under this Agreement; 2. any breach of any of the representations, warranties, covenants or agreements made by seller in this Agreement or in any ancillary document; 3. any attempt (whether or not successful) by any person to cause or require buyer to pay or discharge any debt, obligation, liability or commitment of seller the existence of which would constitute a breach of any representation, warranty, covenant or agreement made by seller in this Agreement or in any ancillary documents; 4. any action, suit, proceeding, compromise, settlement, assessment or judgment (including reasonable attorneys' fees) arising out of or incident to any of the matters indemnified against in -24- this paragraph 11.1; or 5. the operation of the Dental Business and/or the ownership or use of the assets prior to the closing, including but not limited to the liabilities described in paragraph 3.1, above. B. If buyer believes that any person indemnified under paragraph 11.1A has suffered or incurred any loss or incurred any expense as to which it is entitled to indemnification under paragraph 11.1A, buyer shall so notify seller promptly in writing, describing such loss or expense, the amount thereof, if known, and the method of computation of such loss or expense, all with reasonable particularity and containing a reference to the provisions of this agreement, or any agreement or instrument contemplated hereby, or any certificate delivered pursuant hereto or thereto, in respect of which such loss or expense shall have occurred; and if any action at law or suit in equity is instituted by or against a third party with respect to which any such indemnified person intends to claim any loss or expense under paragraph 11.1A, such indemnified person shall promptly notify the indemnifying party of such action or suit; provided that failure to give such notice shall not abrogate or diminish any of seller's obligations under paragraph 11.1A if seller has or receives timely actual knowledge of the existence of any such claim by any other means or except to the extent such failure prejudices seller's ability to defend such claim. C. If, by reason of the claims of any third party relating to any of the matters subject to indemnification under this paragraph 11.1, a lien, attachment, garnishment or execution is placed on any of the property or assets of buyer, seller will take whatever action is necessary to obtain the prompt release of such lien, attachment, garnishment or execution. D. The foregoing indemnities shall be in addition to any equitable relief which the buyer might otherwise be entitled to obtain against the indemnifying party. E. Notwithstanding any other provision of this agreement, the indemnification obligations of seller under this agreement, and with respect to the transactions contemplated by this agreement, shall not apply to the first Fifty Thousand Dollars ($50,000.00) of losses or expenses incurred by buyer, in the aggregate, but this limitation shall not apply to the seller's indemnity obligations for losses or expenses described in subparagraph A(3) of this paragraph, and the indemnity obligations under subparagraph A(4) of this paragraph to the extent related to losses or expenses described in subparagraph A(3) of this paragraph. F. Seller may, by written notice given to buyer within fifteen (15) days of the final determination of the amount of any indemnity obligation to buyer under this paragraph, satisfy all or a portion of its indemnity obligation to Buyer by an offset against the accrued but unpaid interest, if any, and then against the unpaid principal balance, if any, then due under the promissory note described in paragraph 2.2, above. Any amount of the indemnity obligation not satisfied by this offset shall be promptly paid in cash. 11.2 Indemnification of Seller. A. Buyer agrees to indemnify and hold harmless seller and seller's successors and assigns from and against any and all (i) liabilities, losses, claims, taxes, liabilities, fines, penalties, damages and expenses, direct or indirect ("losses") and (ii) reasonable attorneys' and accountants' fees and expenses, court costs and all other reasonable out-of-pocket expenses ("expenses") incurred by seller in connection with or arising from: -25- 1. any damage or deficiency resulting from the non-performance of any agreement to be performed by buyer under this Agreement or from any material misrepresentation in or omission from any certificate or other instrument furnished to seller under this Agreement; 2. any breach of any of the representations, warranties, covenants or agreements made by buyer in this Agreement or in any ancillary document; 3. any attempt (whether or not successful) by any person to cause or require seller to pay or discharge any debt, obligation, liability or commitment of buyer the existence of which would constitute a breach of any representation, warranty, covenant or agreement made by buyer in this Agreement or in any ancillary documents; 4. any action, suit, proceeding, compromise, settlement, assessment or judgment (including reasonable attorneys' fees) arising out of or incident to any of the matters indemnified against in this paragraph 11.2; or 5. the operation of the Dental Business and/or the ownership or use of the assets after the closing, including but not limited to the obligations assumed by buyer pursuant to paragraph 3.3. B. If seller believes that any person indemnified under paragraph 11.2A has suffered or incurred any loss or incurred any expense as to which it is entitled to indemnification under paragraph 11.2A, seller shall so notify buyer promptly in writing, describing such loss or expense, the amount thereof, if known, and the method of computation of such loss or expense, all with reasonable particularity and containing a reference to the provisions of this agreement, or any agreement or instrument contemplated hereby, or any certificate delivered pursuant hereto or thereto, in respect of which such loss or expense shall have occurred; and if any action at law or suit in equity is instituted by or against a third party with respect to which any such indemnified person intends to claim any loss or expense under paragraph 11.2A, such indemnified person shall promptly notify the indemnifying party of such action or suit; provided that failure to give such notice shall not abrogate or diminish any of buyer's obligations under paragraph 11.2A if buyer has or receives timely actual knowledge of the existence of any such claim by any other means or except to the extent such failure prejudices buyer's ability to defend such claim. C. If, by reason of the claims of any third party relating to any of the matters subject to indemnification under this paragraph 11.2, a lien, attachment, garnishment or execution is placed on any of the property or assets of seller, buyer will take whatever action is necessary to obtain the prompt release of such lien, attachment, garnishment or execution. D. The foregoing indemnities shall be in addition to any equitable relief which the seller might otherwise be entitled to obtain against the indemnifying party. E. Notwithstanding any other provision of this agreement, the indemnification obligations of buyer under this agreement, and with respect to the transactions contemplated by this agreement, shall not apply to the first Fifty Thousand Dollars ($50,000.00) of losses or expenses incurred by seller, in the aggregate, but this limitation shall not apply to the buyer's indemnity obligations for losses or expenses described in subparagraph A(3) of this paragraph, and the indemnity obligations under subparagraph A(4) of this paragraph to the extent related to losses or expenses described in subparagraph A(3) of this paragraph. -26- 11.3 Third Party Claims The indemnifying party under this Article 11 shall have the right to conduct and control, through counsel of its choosing, any third party claim, action or suit and may compromise or settle the same. So long as the indemnifying party is contesting any such action or suit in good faith, the indemnified persons shall not pay or settle any such action or suit. Notwithstanding the foregoing, the indemnified persons shall have the right to pay or settle any such action or suit, provided that (i) in such event the indemnified persons shall waive any right to indemnity therefor and no amount in respect thereof shall be claimed as loss or expense under this Article 11 and (b) the terms of any such settlement do not involve any agreement by the indemnified persons that affects the indemnifying party. ARTICLE 12 TERMINATION 12.1 Termination. Anything contained in this agreement to the contrary notwithstanding, this agreement may be terminated and the transactions contemplated herein abandoned at any time prior to the closing: (a) by the mutual consent of the buyer and the seller; (b) by buyer in the event of any material breach by seller of any of seller's agreements, representations, or warranties contained herein; (c) by seller in the event of any material breach by buyer of any of buyer's agreements, representations, or warranties contained herein; (d) by seller or buyer if the transactions contemplated herein have not closed by the date specified in paragraph 5.1 except if the closing has not occurred as a result of the fault of the party desiring to terminate this agreement. 12.2 Effect of Termination. In the event that this agreement shall be terminated pursuant to paragraph 12.1, all further obligations of the parties under this agreement shall be terminated without further liability of any party to any other party except for paragraphs 8.1, 13.3, and 13.13 hereof which shall continue after such termination, provided that nothing herein shall relieve any party from liability for its willful breach of this agreement. ARTICLE 13 GENERAL PROVISIONS 13.1 Survival of Representations, etc. All representations, warranties, and other agreements contained in this agreement shall survive the consummation of the transactions contemplated by this agreement; provided, however, that the representations and warranties contained in Articles 6 and 7 shall terminate on the last day of the thirtieth (30th) month after the closing date. Except as otherwise provided herein and except for claims for indemnification for the breach or inaccuracy of any representation or warranty asserted in accordance with Article 11, hereof, prior to such last day of the thirtieth (30th) month but not concluded prior thereto, no claim shall be made for the breach or the inaccuracy of any representation or warranty contained in Articles 6 and 7 or under any certificate delivered with respect thereto under this agreement after the date on which such representation and warranty terminates as set forth in this paragraph. -27- 13.2 Waivers. No delay or omission by any party hereto in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 13.3 Expenses All costs and expenses incurred by the respective parties in connection with the negotiation, execution and delivery of this agreement and related agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. 13.4 Notices. All notices, requests, claims, demands and other communications which are required to be or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person, by cable, telegram, telex, facsimile or by registered or certified first-class mail, return receipt requested, postage prepaid, to the party to which the same is so given or made. A. If to seller, to: David W. Light, Chief Executive Officer Sunrise Technologies, Inc. 47257 Fremont Boulevard Fremont, California 94538 with a copy to: Nancy L. Murray, Esq. Thelen, Marrin, Johnson & Bridges LLP 2 Embarcadero Center, Suite 2100 San Francisco, California 94111-3995 B. If to buyer: Craig J. Lares, President Lares Research 295 Lockheed Avenue Chico, California 95973 -28- with a copy to: Richard S. Matson, Esq. Richard S. Matson Law Office P. O. Box 4141 Chico, CA 95927-4141 Any party may by notice given in accordance with this paragraph to the other parties designate another address or person for receipt of notices hereunder. 13.5 Entire Agreement. This Agreement (including the Exhibits and Schedules hereto) constitutes the entire agreement among the parties and supersedes all prior oral and written agreements and understandings among the parties hereto with respect to the subject matter hereof, including specifically, but not by way of limitation, a "Letter of Intent" dated November 14, 1996, and a letter dated February 24, 1997. The parties hereto acknowledge and agree that no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this agreement. 13.6 Headings and Gender. The paragraph and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretations of this Agreement. Reference to any one gender shall be deemed to include the other. 13.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall, when executed, be deemed to be an original and all of which shall be deemed to be one and the same instrument. 13.8 Severability. Any provision in this agreement or any agreement or instrument delivered pursuant hereto which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and thereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. The parties shall endeavor in good faith negotiations to replace any prohibited or unenforceable provision with a valid provision or provisions, the effect of which shall reflect the bargain manifested in the prohibited or unenforceable provision. 13.9 Governing Law. This Agreement shall be construed as to both validity and performance and enforced in accordance with and governed by the laws of the State of California applicable to agreements made and to be performed in California. -29- 13.10 Assignment; Parties in Interest. This Agreement may not be assigned by any party hereto without the prior written consent of all the other parties, provided that buyer may assign its rights and duties under this agreement to an entity formed or to be formed for the purpose of operating the Dental Business. Subject to the foregoing, this agreement shall inure to the benefit of and be binding upon permitted successors and assigns of seller and buyer. 13.11 Modification. The provisions of this Agreement may be amended, modified, changed or waived only by a writing signed by all the parties hereto. 13.12 Further Assurances. Each party hereto agrees to do such further acts and things, and to execute and deliver such additional agreements and instruments, as any party may reasonably request in connection with the performance, administration or enforcement of this agreement or the agreements related hereto. 13.13 Publicity. Except for disclosure (if any) required by law to which any party is subject, the timing and content of any announcements, press releases and public statement concerning the acquisition contemplated hereby shall be by mutual agreement of the parties. -30- EXECUTION IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SELLER: BUYER: Sunrise Technologies International, Inc., Lares Research, a Delaware corporation a California corporation By: By: ----------------------------------- -------------------------- David W. Light, Chief Executive Officer Craig J. Lares, President -31- EX-10.7 3 SETTLEMENT AGREEMENT Exhibit 10.7 SETTLEMENT AGREEMENT THIS AGREEMENT is made effective this 30th day of July, 1996, by and between American Dental Technologies (hereinafter, "ADT"), a Delaware corporation, having offices at 28411 Northwestern Highway, Suite 1100, Southfield, Michigan 48034-5541, and Sunrise Technologies International, Inc. (hereinafter, "SUNRISE"), a Delaware corporation, having offices at 47257 Fremont Boulevard, Fremont, California. WITNESSETH: WHEREAS, ADT and SUNRISE are presently engaged in the following litigation: (a) Appellate Action No. A072262, entitled "Sunrise Technologies International, Inc., Plaintiff/Cross-Defendant and Respondent v. American Dental Technologies, Inc., f/k/a American Dental Laser, Inc., Defendant/Cross-Claimant and Appellant," now pending in the Court of Appeal of the State of California, First Appellate District, Division Four, as appealed from the lower court Civil Action No. H-172132-2, entitled, "Sunrise Technologies International, Inc. et al. v. American Dental Technologies," which was litigated in the Superior Court for the County of Alameda - Southern Division (collectively hereinafter, "State Court Action"); and (b) Civil Action No. C94-1512 (EFL), entitled "Sunrise Technologies International, Inc. and Danville Manufacturing v. American Dental Technologies, Inc.," now pending in the United States District Court for the Northern District of California, Civil Action No. C94-1513 (EFL), entitled, "Sunrise Technologies International, Inc. and Danville Manufacturing v. American Dental Technologies, Inc.," now pending in the United States District Court for the Northern District of California; and Civil Action No. C95-2048-EFL, entitled "American Dental Technologies, Inc. v. Sunrise Technologies International, Inc. et al." (collectively hereinafter, "Federal Court Actions"); WHEREAS, a judgment was entered against ADT in the lower court proceedings of the State Court Action in the sum of $940,178.00, plus taxable costs and interest, ADT having posted a cash deposit with the state court pending an appeal in the State Court Action in the sum of $1,410,267.00; WHEREAS, ADT and SUNRISE desire to settle and terminate the foregoing litigation and as part of such settlement SUNRISE desires to obtain certain patent licenses from ADT; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, ADT and SUNRISE agree as follows: State Court Action 1. SUNRISE shall relinquish and forgive the judgment in the State Court Action in its full amount of $940,178.00, plus costs, interest and attorney fees. SUNRISE shall release ADT, its officers, agents, affiliates, and attorneys from any and all claims and counterclaims arising prior to the effective date of this Agreement which were made or which could have been made arising out of the subject matter of the State Court Action, including all such claims for damages, costs, interest and attorney fees. SUNRISE will execute all documents necessary to dismiss the State Court Action with prejudice and to release the full amount of the cash deposit (plus interest) posted on appeal by ADT immediately upon execution of this Agreement, each party to bear its own costs and attorney fees. SUNRISE represents and warrants that it has made no assignment or hypothecation of any judgment or claims, including but not limited to claims for attorney fees, arising out of the State Court Action to any creditor, attorney or other third party and agrees to indemnify and hold ADT harmless from any such third party claim. As used in this Agreement, "affiliates" shall mean any corporation of which fifty percent (51%) or more of the voting stock is owned or controlled by a party to this Agreement. 2. ADT shall release SUNRISE, its officers, agents, affiliates and attorneys from any and all claims and counterclaims arising prior to the effective date of this Agreement which were made or which could have been made arising out of the subject matter of the State Court Action, including all such claims for damages, costs, interest and attorney fees. ADT will execute all documents necessary to dismiss the State Court Action with prejudice immediately upon execution of this Agreement, each party to bear its own costs and attorney fees. ADT represents and warrants that it has made no assignment or hypothecation of any claims, including but not limited to claims for attorney fees, arising out of the State Court Action to any creditor, attorney or other third party and agrees to indemnify and hold SUNRISE harmless from any such third party claim. Federal Court Actions 3. ADT shall release SUNRISE, its officers, agents, affiliates and attorneys from any and all claims and counterclaims arising prior to the effective date of this Agreement which were made or which could have been made arising out of the subject matter of the Federal Court Actions, including all such claims for damages, costs, interest and attorney fees. ADT further releases SUNRISE with respect to SUNRISE's past Senior model and current MicroPrep Associate and Director models, as described and identified in the depositions of Mark Fernwood and Joseph Shaffer in the Federal Court Actions, from any and all claims of infringement under patents issuing on any pending or presently contemplated patent applications owned or controlled by ADT which relate to air abrasive equipment or apparatus, other than such patents or applications covering air abrasive dental systems or methods of treatment as otherwise provided herein. ADT will execute all documents necessary to dismiss SUNRISE from the Federal Court Actions with prejudice immediately upon execution of this Agreement, each party to bear its own costs and attorney fees. In no event, however, shall this paragraph 3 be interpreted to constitute a release of any liability or damages, directly or indirectly, arising out of ADT's claims against Danville Manufacturing or a dismissal of any of the claims in the Federal Court Actions against Danville Manufacturing. Notwithstanding, upon execution of this Agreement, ADT will offer to dismiss without prejudice all pending litigation by ADT against Danville Manufacturing in return for a dismissal without prejudice by Danville Manufacturing of all pending litigation by Danville Manufacturing against ADT, each party to bear its own costs and attorneys fees. ADT represents and warrants that it has made no assignment or hypothecation of any claims, including but not limited to claims for attorney fees, arising out of the Federal Court Actions to any creditor, 2 attorney or other third party and agrees to indemnify and hold SUNRISE harmless from any such third party claim. 4. SUNRISE shall release ADT, its officers, agents, affiliates and attorneys from any and all claims and counterclaims arising prior to the effective date of this Agreement which were made or which could have been made arising out of the subject matter of the Federal Court Actions, including all such claims for declaratory judgment, damages, costs, interest and attorney fees. SUNRISE will execute all documents necessary to dismiss its claims in the Federal Court Actions against ADT with prejudice immediately upon execution of this Agreement, each party to bear its own costs and attorneys fees. SUNRISE represents and warrants that it has made no assignment or hypothecation of any claims, including but not limited to claims for attorney fees, arising out of the State Court Action to any creditor, attorney or third party and agrees to indemnify and hold ADT harmless from any such third party claim. 5. The dismissals submitted to the Court pursuant to paragraphs 3 and 4 of this Agreement shall include (i) a stipulation by SUNRISE that the patents asserted in Civil Action No. C95-2048 (EFL), to wit, U.S. Patent No. 5,330,354, U.S. Patent No. 5,350,299 and U.S. Patent No. 5,525,058 and the patent asserted in Civil Action No. C94-1513 (ELF), to wit, U.S. Patent No. 5,275,561, are acknowledged by SUNRISE to be valid; (ii) an order commensurate in scope with the stipulation of section (i) of this paragraph 5; (iii) a stipulation by ADT that the patents asserted in Civil Action No. C94-1512 (EFL), to wit, U.S. Patent No. 4,893,440, U.S. Patent No. 4,733,503, U.S. Patent No. 4,708,534 and U.S. Patent No. 4,635,897, and any non-dental air abrasive patents or patent applications presently owned by ADT are not infringed by SUNRISE's past Senior model and current MicroPrep Associate and Director models as described and identified in the depositions of Mark Fernwood and Joseph Shaffer in the Federal Court Actions; and (iv) an order commensurate in scope with the stipulation of section (iii) of this paragraph 5. Patent License 6. ADT hereby grants to SUNRISE a nonexclusive license under U.S. Patent No. 5,275,561, U.S. Patent No. 5,330,354, U.S. Patent No. 5,350,299 and U.S. Patent No. 5,525,058, and any foreign counterparts, reexaminations, reissues, continuations or continuations-in-part based on the disclosures of the patents of this paragraph 6, for the life of such patents, to make, use, lease and sell SUNRISE's current MicroPrep Associate and Director models as described and identified in the depositions of Mark Fernwood and Joseph Shaffer in the Federal Court Actions, and future models to the extent such future models do not infringe any non-dental patents or patent applications (for example, on helical powder feed mechanisms) of ADT, throughout the world, but excluding those territories (Japan, China, including Hong Kong, Taiwan, North Korea, South Korea, India, Pakistan, Australia, New Zealand, Singapore, Thailand, Malaysia and Indonesia) presently covered by agreements between ADT and Denics Co., Ltd., a/k/a Dental Innovative Corporation, a Japanese corporation. The license granted in this paragraph 6 is non-transferable by assignment, sublicense or other means of transfer except as provided in paragraphs 7 and 8 of this Agreement, provided, further, that the period in which SUNRISE is licensed under this Agreement, SUNRISE shall have the right to have the products of this paragraph 6 manufactured by a third party solely for SUNRISE. The license granted in 3 this paragraph 6 is subject to the payments provided in paragraph 9 of this Agreement. ADT represents and warrants that other than the patents licensed in this paragraph 6, ADT does not presently own or hold licensable rights in any other patents or patent applications covering the products of this paragraph 6. 7. The license granted in paragraph 6 of this Agreement is non-transferable for a period of eighteen (18) months from the effective date of this Agreement and SUNRISE shall make no such transfer or promise to transfer within such eighteen (18) month period, except as provided in paragraph 8 of this Agreement. After the expiration of such eighteen (18) month period, SUNRISE shall have the right to transfer the license of paragraph 6 of this Agreement upon the following terms and conditions: the transferee shall assume all obligations of SUNRISE under this Agreement, including the obligation to make the payments required by paragraph 9 of this Agreement; provided, however, that no such transfer of the license after such eighteen (18) month period has expired, but before the expiration of twenty-four (24) months after the effective date of this Agreement, shall be made conditioned on the subsequent sale or transfer of all of SUNRISE's dental air abrasive products business. 8. SUNRISE may at any time transfer the license of paragraph 6 of this Agreement if such transfer is made with the transfer of all of SUNRISE's dental air abrasive products business (for the purposes of this Agreement, the phrase "transfer of all of SUNRISE's dental air abrasive products business" shall mean any such transfer by asset sale or exchange or by stock transfer or exchange, and shall further include any merger by or into, or consolidation with, SUNRISE); provided, however, that, if such transfer occurs within two (2) years of the effective date of this Agreement, then SUNRISE shall pay to ADT, in cash, a transfer fee equal to ten percent (10%) of the gross consideration for the transfer of the license and the dental air abrasive products business received by SUNRISE, regardless of the form of the consideration (provided that, in the event of a merger, such gross consideration shall be based on the fair market value of the shares thereupon issued by SUNRISE or thereupon issued to SUNRISE and/or its shareholders) and the transferee or surviving entity shall assume all obligations of SUNRISE under this Agreement, including the obligation to make the payments required by paragraph 9 of this Agreement. In the event such transfer of all of SUNRISE's dental air abrasive products business shall occur more than two (2) years after the effective date of this Agreement, then SUNRISE's only obligation upon transfer shall be to require such transferee or continuing entity to assume all obligations of SUNRISE under this Agreement, including the obligation to make the payments required by paragraph 9 of this Agreement. Payments 9. Beginning on January 1, 1997, SUNRISE, or its permitted successor or assignee, shall pay to ADT the sum of seven percent (7%) on the net sales price (defined as gross sales price less freight, duties and taxes) on all air abrasive products manufactured, sold or leased by SUNRISE, or its permitted successor or assignee, which are manufactured (by or on behalf of SUNRISE), sold or leased in a county in which ADT, presently or in the future, owns or controls patents or patent applications on any dental air abrasive products or methods of treatment, until the expiration of all such patents/patent applications. In the event that SUNRISE, or its permitted successor or assignee, manufactures or has manufactured on its behalf, and sells or leases (i.e., 4 manufactures and sells or manufactures and leases), air abrasive products wholly within a country where ADT holds no such patents or patent applications or where all such patents have expired, then no such payments shall be required. The payments required under this paragraph 9 of this Agreement shall accrue when the subject products are delivered, invoiced or paid for, whichever occurs first. All payments shall be made in U.S. dollars. In no event shall a payment by SUNRISE under this paragraph 9 be required for products that are both made and sold prior to January 1, 1997. 10. SUNRISE, and any permitted successor or assignee, shall (i) make the payments required in paragraph 9 of this Agreement on February 15th, May 15th, June 15th and November 15th for the preceding accounting quarter, with the first payment to be made on May 15, 1997. SUNRISE shall keep accurate books and records reflecting transactions made under this Agreement and shall make reports at the time of such payments fully supporting the calculation of payments made, including the number of units sold or leased and the sales price used to determine payments. ADT shall have the right to inspect such books and records through an independent certified accountant, not to exceed one such audit per year. Termination 11. ADT may terminate the license granted by paragraph 6 of this Agreement only in the event of a material breach of this Agreement by SUNRISE, and then only if, upon receiving notice of such breach SUNRISE fails to cure such breach within thirty (30) days of such notice; such right of termination shall not be in lieu of other remedies such as specific performance. Patent Marking 12. SUNRISE shall apply statutory notice to its MicroPrep air abrasive units sold in the United States substantially as follows: "This unit and its use is protected by one or more of the following U.S. Patents: 5,275,561, 5,330,354, 5,350,299 and 5,525,058." Notice 13. All notices required to be given under this Agreement shall be given in writing and shall be sent by regular mail, postage prepaid, certified mail or by recognized overnight express mail service to the parties at the addresses below. If to ADT, to: Anthony D. Fiorillo President and Chief Executive Officer American Dental Technologies, Inc. 28411 Northwestern Highway, Suite 1100 Southfield, Michigan 48034-5541 Tel.: (810) 353-5300 Fax: (810) 353-0663 5 With a copy to: Dykema Gossett PLLC 1577 North Woodward Avenue, Suite 300 Bloomfield Hills, Michigan 48304 Attention: Robert L. Kelly, Esq. Tel.: (810) 540-0849 Fax: (810) 540-0763 If to SUNRISE, to: David W. Light President and Chief Executive Officer Sunrise Technologies International 47257 Fremont Boulevard Fremont, California Tel.: Fax: With a copy to: Daniel Johnson, Esq. Cooley Godward Castro Huddleson & Tatum Five Palo Alto Square, 4th Floor Palo Alto, California 94306 Tel.: (415) 843-5000 Fax: (415) 857-0663 14. A notice sent pursuant to paragraph 13 of this Agreement shall be deemed given on the date it is mailed, unless the intended recipient can establish that such notice was not timely received. Jurisdiction 15. The Court in the Federal Court Actions shall retain jurisdiction of the parties and this Agreement for purposes of resolving any dispute which may arise hereunder. Governing Law 16. This Agreement is made in the County of Oakland, State of Michigan, and shall be governed by the laws of the State of Michigan without regard to its conflict of laws principles. Warranties 17. Both parties represent that their undersigned representatives have the full power and authority to enter into this Agreement. ADT represents and warrants that it has the right and power to grant the license of paragraph 6 of this Agreement, but makes no other warranties whatsoever regarding the patents so licensed. 6 Relationship of Parties 18. This Agreement is not intended by the parties to, and shall not, constitute or create a joint venture, partnership or other business organization and neither party shall be nor shall act as an agent of the other party. Neither party shall use the other party's name in any marketing efforts. Severabilitv 19. The invalidity of any provision of this Agreement shall not affect the validity of any other provision of this Agreement. Complete Agreement 20. This Agreement constitutes the entire agreement of the parties regarding this subject matter and supercedes any and all prior or contemporaneous oral or written agreements, understandings, negotiations or discussions among the parties regarding this subject matter. Any amendments or other modifications to this Agreement must be made in writing and must be duly executed by an authorized representative or agent of each party. Counterparts 21. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original, and all such counterparts shall constitute but one instrument. Permitted Successors and Assigns 22. This Agreement, and all provisions herein, shall bind the parties and their permitted successors and permitted assigns. The parties have executed this Agreement as effective the date first written above by their duly authorized agents. AMERICAN DENTAL SUNRISE TECHNOLOGIES TECHNOLOGIES, INC. INTERNATIONAL, INC. - ------------------------------------ --------------------------------------- By: Anthony D. Fiorillo By: David W. Light President and Chief Executive President and Chief Executive Officer Officer Date: __________________________ Date:________________________________ EX-10.11 4 U.S. NOTE AND WARRANT PURCHASE AGREEMENT Exhibit 10.11 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. U.S. NOTE AND WARRANT PURCHASE AGREEMENT This agreement (this "Agreement") is made as of the Closing Date (as hereinafter defined) by and between Sunrise Technologies International, Inc., a Delaware corporation (the "Company"), with its principal office at 47257 Fremont Boulevard, Fremont, CA 94538, Pennsylvania Merchant Group Ltd (the "Placement Agent") and each of the purchasers who are signatories hereto and any other purchasers who are made a party to this Agreement pursuant to Section 1.1(c) (individually, a "Purchaser" and collectively, the "Purchasers"). RECITALS The Company has engaged the Placement Agent as exclusive agent of the Company in connection with the placement and sale (the "Offering") of $1,500,000 Convertible Subordinated Notes (the "Notes") with Warrants. The Notes will be convertible into shares of the Company's $.001 par value common stock ("Common Stock") commencing on the Closing Date (as hereinafter defined) at an initial conversion price (the "Conversion Price") of $0.875 per share of Common Stock. The Notes are Redeemable at the Company's option, in whole but not in part, at any time on or after March 31, 1997, at a price equal to the principal of the Notes then outstanding plus accrued and unpaid interest to the date of redemption (the "Redemption Date"). Holders of the Notes will receive not more than 60 nor fewer days than 30 days' notice prior to the Redemption Date, during such time they may exercise their conversion rights. Each Purchaser will receive one warrant to purchase Common Stock substantially in the form attached (the "Warrants") for each $1.75 in Notes purchased by such Purchaser. Each Warrant entitles the holder to purchase one share of Common Stock for $1.00 during the five year period commencing on the initial Closing Date (as hereinafter defined). The Notes and Warrants will be sold by the Company to Purchasers pursuant to Regulations D and S under the Securities Act of 1933, as amended (the "Act") (individually the "Regulation D Purchasers" and "Regulation S Purchasers"). Regulation D Purchasers will purchase Notes and Warrants pursuant to this Agreement and Regulation S Purchasers will purchase Notes and Warrants pursuant to an Offshore Note and Warrant Purchase Agreement of even date herewith (the "Offshore Agreement"). Offers and sales of Notes and Warrants will only be made pursuant to the Confidential Private Offering Memorandum dated February 5, 1997 (together with all amendments, supplements, exhibits and attachments thereto, the "Offering Materials"). AGREEMENT In consideration of the mutual promises, representations, warranties and conditions set forth in this Agreement, the Company, each Purchaser (severally and not jointly) and the Placement Agent, intending to be legally, bound agree as follows: -1- 1. PURCHASE AND SALE OF NOTES AND WARRANTS. 1.1 Issue of Notes and Warrants. (a) The Company has authorized the issuance and sale of up to $1,500,000 Notes, up to 1,714,286 shares of Common Stock (the "Conversion Shares") pursuant to the conversion of the Notes, up to 857,143 Warrants, and up to 857,143 additional shares of Common Stock (the "Warrant Shares") pursuant to the exercise of the Warrants, pursuant to the provisions of this Agreement and an Offshore Agreement made as of the Closing Date. (b) In reliance upon the Purchaser's representations and warranties contained in Section 4 hereof and upon the Placement Agent's representations and warranties contained in Section 6 hereof, and subject to the terms and conditions set forth herein, the Company hereby agrees to sell to each Purchaser the aggregate amount of Notes set forth below such Purchaser's signature on the subscription page bearing such Purchaser's name. (c) In reliance upon the representations and warranties of the Company contained herein, and subject to the terms and conditions set forth herein, each Purchaser hereby agrees to purchase the amount of Notes and Warrants set forth on the subscription page bearing such Purchaser's name at the purchase price set forth above. Each Purchaser shall severally, and not jointly, be liable for only the amount of Notes and Warrants that appear on the subscription page hereof that relates to such Purchaser. (d) The Company's agreement with each of the Purchasers is a separate agreement, and the sale of the Notes and Warrants to each of the Purchasers is a separate sale. 2. CLOSING DATE: DELIVERY. 2.1 Closing. (a) The initial closing of the sale and purchase of the Notes under this Agreement (the "Closing"), together with the initial closing of the sale and purchase of Notes under the Offshore Agreement, shall be held at 10:00 a.m. (Pacific Standard Time) on or before February 20, 1997 (the "Closing Date"), at the offices of Thelen, Marrin, Johnson & Bridges, San Jose CA, or at such other time and place as the Company and the Placement Agent may agree. There is no minimum amount of notes and Warrants required for an initial closing. (b) From time to time prior to and following the Closing Date, the Company may, but shall not be obligated to, offer and sell the balance of the Notes and Warrants authorized but not sold as of the Closing Date herein to other purchasers (the "Other Purchasers") at one or more subsequent closings to be held no later than February 20, 1997 unless otherwise extended by the Company and the Placement Agent. By executing this Agreement, the Purchasers hereunder agree to the inclusion of such Other Purchasers as parties to this Agreement and the Registration Rights Agreement referenced in Section 7.1(d) herein (the "Registration Rights Agreement"), and it shall be a condition to each subsequent closing that the Other Purchasers, if any, shall become parties to this Agreement and the Registration Rights Agreement, subject to the terms hereof and thereof. If such a subsequent closing is held, the terms "Closing" -2- and "Closing Date", as used herein, shall be deemed to apply to the initial closing and each such subsequent closing. 2.2 Delivery. At the Closing, subject to the terms and conditions hereof, the Company shall deliver to each Purchaser the Notes subscribed for by such Purchaser, dated as of the Closing Date, and Warrants, against payment of the purchase price therefor by wire transfer, unless other means of payment shall have been agreed upon by such Purchaser and the Company and the Placement Agent, on the other hand. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Subject to and except as disclosed by the Company in the Private Placement Materials, the Company hereby represents and warrants to each Purchaser as of the date hereof as follows, and all such representations and warranties shall be true and correct as of the Closing Date as if then made and shall survive the Closing: 3.1 Organization. The Company and Laser Biotech, Inc. as its subsidiary (the "Subsidiary") is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Company and the Subsidiary has all requisite power and authority to own or lease its properties and to conduct its business as now conducted. The Company holds all licenses and permits required for the conduct of its business as now conducted, which, if not obtained, would have a material adverse effect on the business, financial condition or results of operations of the Company taken as a whole. The Company and the Subsidiary is qualified as a foreign or domestic corporation and is in good standing in all states where the conduct of its business or its ownership or leasing of property requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, financial condition or results of operations of the Company taken as a whole. The Company has previously delivered a true and complete copy of its Certificate of Incorporation ("Certificate") and Bylaws to the Placement Agent. 3.2 Capitalization. The authorized, issued and outstanding capital stock of the Company on September 30, 1996 is as set forth in the Report on Form 10-Q (September 30, 1996) which is included in the Private Placement Materials (Tab A). Since September 30, 1996, there has been no material change in the capitalization of the Company, except as has been described in the Private Placement Materials. All of the issued and outstanding shares of Common Stock have been duly authorized, validly issued and are fully paid and nonassessable. Except as stated in the Private Placement Materials and except for rights granted under the Company's stock plans, there are no existing subscriptions, options, warrants, calls, commitments, agreements, conversion or other rights of any character (contingent or otherwise) to purchase or otherwise acquire from the Company at any time, or upon the happening of any stated event, any shares of the capital stock of the Company. 3.3 Authority. The Company has all requisite corporate power and authority to enter into this Agreement, the Warrants, the Registration Rights Agreement, and the warrant to purchase up to 85,714 shares of Common Stock issued to the Placement Agent (the "Placement Agent Warrant"), and to consummate the transactions contemplated hereby and thereby. The -3- execution and delivery of this Agreement, the Warrant Agreement, the Registration Rights Agreement and the Placement Agent Warrant and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of the Company, and upon their execution and delivery by the Company, such documents will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the indemnification and contribution provisions of the Registration Rights Agreement may be limited by principles of public policy, and subject as to enforceability to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditor's rights from time to time in effect and subject to general equity principles. 3.4 Securities Filings. The Company has filed with the Securities and Exchange Commission (the "SEC") the documents set forth in the Private Placement Materials included herein under Tab A (the "SEC Filings"). The Company has filed with the SEC all reports and all other filings required to be filed with the SEC under the rules and regulations of the SEC. (a) The SEC Filings, when filed, conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the SEC thereunder as of their respective filing dates and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The documents or portions thereof that were incorporated by reference in the SEC Filings pursuant to the requirements of the Exchange Act, when such incorporated documents or portions were first filed with the SEC, conformed in all material respects with any applicable requirements of the Exchange Act and the rules and regulations of the SEC thereunder. (b) The consolidated financial statements of the Company included in the SEC Filings fairly presented in all material respects the financial position and results of operations of the Company and the Subsidiary at their respective dates and for the respective periods to which they apply; and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as otherwise stated therein. (c) Notwithstanding any provision therein to the contrary, it is understood by the Company and the Purchasers that the Company is not representing or warranting any statement in the SEC Filings relating to future, anticipated or possible circumstances, occurrences or developments. 3.5 Issuance of the Notes. The Notes, when issued against payment therefor pursuant to the terms of this Agreement, will be duly and validly authorized and issued, fully paid and nonassessable. 3.6 No Conflict with Law or Documents. The execution, delivery and consummation of this Agreement, the Warrants and the Registration Rights Agreement and the transactions contemplated hereby and thereby will not (a) conflict with any provisions of the Articles or Bylaws of the Company or of the Subsidiary; (b) result in any violation of or default or -4- loss of a benefit under, or permit the acceleration of any obligation under (in each case, upon the giving of notice, the passage of time, or both) any mortgage, indenture, lease, agreement or other instrument, permit, franchise, license, judgment, order, decree, law, ordinance, rule or regulation applicable to the Company, the Subsidiary or their respective properties. 3.7 Consents, Approvals and Private Offering. Except for any filings required under federal and applicable state securities laws, all of which shall have been made as of the Closing Date to the extent required as of such time, no consent, approval, order or authorization of, or resignation, declaration or filing with, any federal, state, local or foreign governmental authority is required to be made or obtained by the Company in connection with the execution and delivery of this Agreement, the Registration Rights Agreement and the consummation of the transactions contemplated hereby and thereby. 3.8 Absence of Certain Developments. Except as described in the Private Placement, since September 30, 1996, the Company has not (a) incurred or become subject to any material liabilities (absolute or contingent) except current liabilities incurred, and liabilities under contracts entered into, in the ordinary course of business, consistent with past practices; (b) mortgaged, pledged or subjected to any lien, charge or other encumbrance any of its assets, tangible or intangible; (c) sold, assigned or transferred any of its assets or canceled any debts or obligations except in the ordinary course of business, consistent with past practices; (d) suffered any extraordinary losses, or waived any rights of substantial value; (e) entered into any material transaction other than in the ordinary course of business, consistent with past practices; or (f) otherwise had any change in its condition, financial or otherwise, except as shown on or reflected in the consolidated balance sheet as of September 30, 1996 that is included in the Company's Report on Form 10-Q for the quarter ended September 30, 1996, except for changes in the ordinary course of business, consistent with past practices, none of which individually or in the aggregate has been materially adverse, and excepted further that the Company continues to incur additional substantial losses of the nature set forth in and/or otherwise contemplated by the Private Placement Materials. Except as described in the SEC Filings, neither the Company nor the Subsidiary has entered into any agreement since September 30, 1996 of the type that would be required under the SEC's rules and regulations to be filed as an exhibit to a Report on Form 10-K. 3.9 Litigation. Except as described in the Private Placement Materials, to the Company's knowledge, there are no actions, suits, proceedings or investigations pending against or affecting the Company or the Subsidiary that in the aggregate could reasonably be anticipated to result in any material adverse effect on the Company. 3.10 Registration Rights. Except for shares issued or issuable in connection with the Company's existing stock option plans and those disclosed in the Private Placement Materials the Company has not granted any rights to have any of the Company's securities registered under the Act. 3.11 Disclosure. The Private Placement Materials taken as a whole do not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. -5- 3.12 Security Interest. In order to secure the Company's obligations under the Notes and perfect the Purchasers' security interests in all of the Company's pending and issued opthalmic patents, the Company has made all the necessary filings and has not granted a security interest in such patents to any other party. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents, warrants and covenants with the Company as follows: 4.1 Legal Power. Purchaser has the requisite corporate, partnership, trust or fiduciary power, as appropriate, and is authorized, if Purchaser is a corporation, partnership or trust, to enter into this Agreement and the Registration Rights Agreement, to purchase the Notes and Warrants hereunder, and to carry out and perform its obligations under the terms of this Agreement and the Registration Rights Agreement. 4.2 Due Execution. Each of this Agreement and the Registration Rights Agreement has been duly authorized, if Purchaser is a corporation, partnership, trust or fiduciary, and has been executed and delivered by the Purchaser, and, upon due execution and delivery by the Company, this Agreement and the Registration Rights Agreement will be valid and binding agreements of the Purchaser and subject as to enforceability to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditor's rights from time to time in effect and subject to general equity principles. 4.3 Investment Representations. (a) Purchaser is acquiring the Notes for its own account, not as nominee or agent, for investment and not with a view to or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Act"), except pursuant to an effective registration statement under the Act. (b) Purchaser understands that (i) the Warrants, the Conversion Shares and the Warrant Shares (collectively, the "Securities") have [not] been registered under the Act by reason of a specific exemption therefrom, and may not be transferred or resold except pursuant to an effective registration statement or exemption from registration; (ii) each of such Securities (unless such Warrant Shares have been registered prior to the exercise of such Warrants) will be endorsed with the following legends: A) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN -6- FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS; B) Any legend required to be placed thereon by applicable federal, state, or Canadian Provincial securities laws; and (iii) the Company will instruct any transfer agent not to register the transfer of any of the Securities unless the conditions specified in the foregoing legends are satisfied; (c) Purchaser has received and reviewed the Private Placement Materials. In addition, Purchaser has been furnished with such materials and has been given access to such information relating to the Company as it or its qualified representative has requested and has been afforded the opportunity to ask questions regarding the Company and the Securities, all as Purchaser has found necessary to make an informed investment decision. (d) Purchaser is an "accredited investor" as such term is defined in Rule 501 of the Act and was not formed for the specific purpose of acquiring the Securities. (e) Purchaser is not a resident of Canada or any territory thereof, or of any jurisdiction outside the United States and its territories. 4.4 Pennsylvania Requirements. Each Purchaser who is a Pennsylvania resident, or which has its principal place of business in Pennsylvania and is not an "institutional investor" within the meaning of the Pennsylvania Securities Act of 1972 as amended and the regulations thereunder, hereby agrees not to sell any of the Securities for a period of 12 months from the date hereof, except in accordance with the requirements of section 203(d) of such act and regulation 204.011 thereunder. 5. COVENANTS OF THE COMPANY. 5.1 Information. So long as the Company is subject to the periodic reporting requirements of the Exchange Act pursuant to Section 13 or l5(d), the Company shall deliver to each holder of Notes or Warrants all annual, quarterly or other reports furnished to the public security holders; provided that if the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish to each holder of Notes or Warrants (i) as soon as available, and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries, if any, as of the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all prepared in accordance with generally accepted accounting principles and reported on by independent certified public accountants of recognized national standing; and (ii) as soon as available, and in any event within 45 days after the end of each of the first three fiscal -7- quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries, if any, as of the end of such quarter and the related consolidated statements of income and stockholder's equity (together with any other quarterly financial statements being prepared by the Company at such time), setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation and consistency by the chief financial officer or the chief accounting officer of the Company. 6. REPRESENTATIONS OF PLACEMENT AGENT; COMPENSATION OF PLACEMENT AGENT. The Company has authorized the Placement Agent to conduct the private placement of the Securities (the "Private Placement") under Regulation D and Regulation S of the Act, and the Placement Agent represents and agrees with the Company as follows: 6.1 Sales to Accredited Investors. Placement Agent has and will only make offers and sales of the Securities to Regulation D Purchasers or potential Regulation D Purchasers it reasonably believes to be "accredited investors" as that term is defined in Rule 501(a) under the Act; 6.2 Regulation D Compliance. Offers and sales of the Securities have and will be made in compliance with Regulation D, to the extent applicable to the Placement Agent, and the Placement Agent has not and shall not offer to sell the Securities by any form of general solicitation or general advertising that is prohibited by Rule 502(c) promulgated under the Act. 6.3 Compliance Generally. The Placement Agent has and will observe all securities laws and regulations applicable to it in any jurisdiction in which it has or may offer, sell or deliver any of the Securities and it will not, directly or indirectly, offer, sell or deliver any of the Securities or distribute or publish any prospectus, circular, advertisement or other offering material in relation to any of the Securities in or from any state in the United States or country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. 6.4 Sales Commissions. In consideration of the Placement Agent's services hereunder, the Company shall pay to the Placement Agent in cash on each Closing Date a commission equal to seven and one-half percent (7.5 %) of the proceeds of the Securities sold at such Closing (the "Placement Fee"). 6.5 Placement Agent Expenses. Upon the initial closing, the Company shall reimburse the Placement Agent for its reasonable out-of-pocket expenses of the Private Placement, including the reasonable fees and expenses of the Placement Agent's counsel, up to a maximum of $50,000. This amount may include expenses from other pending or abandoned transactions involving the Placement Agent. 6.6 Placement Agent Warrant. At each Closing, the Company agrees to sell to the Placement Agent a Warrant to purchase a number of shares of the Company's Common Stock -8- equal to five percent (5%) of the number of Conversion Shares sold into which the Notes sold at such Closing are convertible (the "Placement Agent Warrant") at a purchase price of $.001 per share of Common Stock covered by the Placement Agent Warrant. The Placement Agent Warrant will be exercisable at any time before the fifth anniversary of the initial Closing at a price of $0.875 (subject to adjustments for stock dividends, splits, combinations and certain other issuances of Common Stock or Common Stock equivalents, all as provided in the Placement Agent Warrant). The Placement Agent Warrant will be in a form reasonably satisfactory to the Company and the Placement Agent. 6.7 Right of First Refusal to Manage Future Offerings. For a period of one (1) year commencing upon the last Closing Date hereunder, the Placement Agent shall have a right of first refusal to act as the managing underwriter for any and all equity offerings (excluding offerings to Company employees, or to others as consideration for the purchase of assets for use in the Company's business, or in one or more business combinations) of any securities of the Company, or any successor to or any subsidiary of the Company. The Placement Agent must exercise this right of first refusal within thirty (30) days of receipt of written notice from the Company, or its successor or subsidiary, of its intention to offer securities for sale. 6.8 Blue Sky Compliance. The Placement Agent will comply with the state securities or blue sky laws of each state in which the Securities have been or will be offered ("Applicable Blue Sky Laws"). The Placement Agent has ensured and will ensure that all applications, notices and other filings required to be made under Applicable Blue Sky Laws have been or will be timely made. The Placement Agent has ensured that all legends or other notices required to be either printed in the Private Placement Memorandum or otherwise given to offerees or purchasers of the Securities under Applicable Blue Sky Laws have been so printed or given. 7. CONDITIONS TO CLOSING. 7.1 Conditions to Obligations of the Purchaser. Each Purchaser's obligation to purchase the Securities at the Closing is subject to the fulfillment, at or prior to such Closing, of all of the following conditions: (a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date; except as described in or contemplated by the Private Placement Materials, the business, assets, financial condition and results of operations of the Company shall not have been adversely affected in any material way prior to the Closing Date; and the Company shall have performed all obligations and conditions herein required to be performed by it on or prior to the Closing Date. (b) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchaser. -9- (c) Qualifications, Legal Investment. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Securities pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Closing Date. No stop order or other order enjoining the sale of the Securities shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC, or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the Closing, the sale and issuance of the Securities shall be legally permitted by all laws and regulations to which the Purchasers and the Company are subject. (d) Registration Rights Agreement. The Company shall have entered into the Registration Rights Agreement in substantially the form included in the Private Placement Materials (Tab C). (e) Legal Opinion. Counsel to the Company shall have provided a legal opinion to the Purchasers dated as of the Closing Date reasonably acceptable to the Placement Agent. 7.2 Conditions to Obligations of the Company. The Company's obligation to issue and sell the Securities at the Closing is subject to the fulfillment to the Company's satisfaction, on or prior to the Closing, of the following conditions: (a) Representations and Warranties True. The representations and warranties made by each Purchaser in Section 4 and by the Placement Agent in Sec. 6 hereof shall be true and correct at the Closing Date with the same force and effect as if they had been made on and as of the Closing Date. (b) Performance of Obligations. Each Purchaser and the Placement Agent shall have performed and complied with all agreements and conditions herein required to be performed or complied with by them on or before the Closing Date, and each Purchaser shall have delivered payment to the Company in respect of its purchase of Notes. (c) Qualifications, Legal Investment. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Securities pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Closing Date. No stop order or other order enjoining the sale of the Securities shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the Closing, the sale and issuance of the Securities shall be legally permitted by all laws and regulations to which each Purchaser and the Company are subject. -10- 8. MISCELLANEOUS. 8.1 Governing Law. This Agreement shall be governed by and construed under the laws of the Commonwealth of Pennsylvania as applied to agreements among California residents, made and to be performed entirely within the Commonwealth of Pennsylvania without regard to principles of conflict of laws. 8.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 8.3 Entire Agreement. This Agreement and the Exhibits hereto and thereto, and the other documents delivered pursuant hereto and thereto, constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 8.4 Separability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.5 Amendment and Waiver. Except as otherwise provided herein, any term of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of the Company and the Purchaser and with respect to any amendment or waiver of the provisions of Section 6, the Placement Agent. Any amendment or waiver effected in accordance with this section shall be binding upon each future holder of any security purchased under this Agreement (including securities into which such securities have been converted) and the Company. 8.6 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery, on the first business day following mailing by overnight courier, or on the fifth day following mailing by registered or certified mail, return receipt requested, postage prepaid, addressed to the Company and the Purchaser at the respective addresses included herein. 8.7 Fees and Expenses. The Company and the Purchasers shall bear their own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby; provided, that in the event that the transactions contemplated hereby close, the Company shall reimburse the Placement Agent in accordance with the provisions of Section 6.5. The fees and expenses for which the Company shall be liable hereunder shall in no event -11- exceed $50,000 in the aggregate. Purchasers acknowledge that the Placement Agent will receive a commission equal to 7.5% of the aggregate amount sold in the Offering and will be entitled to purchase for nominal consideration a five-year warrant to purchase up to 85,714 shares of the Company's Common Stock at an exercise price equal to $0.875, as described in the Private Placement Materials under the heading "Summary of the Offering." 8.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. -12- EX-10.12 5 OFFSHORE NOTE AND WARRANT PURCHASE AGREEMENT Exhibit 10.12 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. OFFSHORE NOTE AND WARRANT PURCHASE AGREEMENT This Offshore Common Stock Purchase Agreement (this "Agreement") is made as of the Closing Date (as hereinafter defined) by and between Sunrise Technologies International, Inc., a Delaware corporation (the "Company), with its principal office at 47257 Fremont Boulevard, Fremont, CA 94538, Pennsylvania Merchant Group Ltd (the "Placement Agent") and each of the purchasers who are signatories hereto and any other purchasers who are made a party to this Agreement pursuant to Section 1(d) (individually, a "Purchaser" and collectively, the "Purchasers"). RECITALS The Company has engaged the Placement Agent as exclusive agent of the Company in connection with the placement and sale (the "Offering") of $1,500,000 Convertible Subordinated Notes (the "Notes") with Warrants. The Notes will be convertible into shares of the Company's $.001 par value common stock ("Common Stock") commencing on the Closing Date (as hereinafter defined) at an initial conversion price (the "Conversion Price") of $0.875 per share of Common Stock. The Notes are Redeemable at the Company's option, in whole but not in part, at any time on or after March 31, 1997, at a price equal to the principal of the Notes then outstanding plus accrued and unpaid interest to the date of redemption (the "Redemption Date"). Holders of the Notes will receive not more than 60 nor fewer days than 30 days' notice prior to the Redemption Date, during such time they may exercise their conversion rights. Each Purchaser will receive one warrant to purchase Common Stock, substantially in the form attached (the "Warrants") for each $1.75 in Notes purchased by such Purchaser. Each Warrant entitles the holder to purchase one share of Common Stock for $1.00 during the five year period commencing on the initial Closing Date (as hereinafter defined). The Notes and Warrants will be sold by the Company to Purchasers pursuant to Regulations D and S under the Securities Act of 1933, as amended (the "Act") (individually the "Regulation D Purchasers" and "Regulation S Purchasers"). Regulation S Purchasers will purchase Notes and Warrants pursuant to this Agreement and Regulation D Purchasers will purchase the Notes and Warrants pursuant to a U.S. Note and Warrant Purchase Agreement of even date herewith (the "U.S. Agreement"). Offers and sales of Notes and Warrants will only be made pursuant to the Confidential Private Offering Memorandum dated February 5, 1997 (together with all amendments, supplements, exhibits and attachments thereto, the "Private Placement Materials"). AGREEMENT In consideration of the mutual promises, representations, warranties and conditions set forth in this Agreement, the Company, each Purchaser (severally and not jointly) and the Placement Agent intending to be legally bound agree as follows: -1- 1. PURCHASE AND SALE OF NOTES AND WARRANTS. 1.1 Issue of Notes and Warrants. (a) The Company has authorized the issuance and sale of up to $1,500,000 Notes, and up to 1,714,286 share of Common Stock (the "Conversion Shares") pursuant to the conversion of the Notes, up to 857,143 Warrants and up to 857,143 additional shares of Common Stock (the "Warrant Shares") pursuant to the exercise of the Warrants, pursuant to the provisions of this Agreement and the U.S. Agreement made as of the Closing Date (b) In reliance upon the Purchaser's representations and warranties contained in Section 4 hereof and upon the Placement Agent's representations and warranties contained in Section 6 hereof, and subject to the terms and conditions set forth herein, the Company hereby agrees to sell to each Purchaser the aggregate amount of Notes and Warrants set forth below such Purchaser's signature on the subscription page bearing such Purchaser's name. (c) In reliance upon the representations and warranties of the Company contained herein, and subject to the terms and conditions set forth herein, each Purchaser hereby agrees to purchase the amount of Notes and Warrants set forth on the subscription page bearing such Purchaser's name at the purchase price set forth above. Each Purchaser shall severally, and not jointly, be liable for only the amount of Notes and Warrants that appear on the subscription page hereof that relates to such Purchaser. (d) The Company's agreement with each of the Purchasers is a separate agreement, and the sale of the Notes and Warrants to each of the Purchasers is a separate sale. 2. CLOSING DATE; DELIVERY. 2.1 Closing. (a) The initial closing of the sale and purchase of the Notes under this Agreement (the "Closing"), together with the initial closing of the sale and purchase of Notes under the U.S. Agreement, shall be held at 10:00 a.m. (Pacific Standard Time) on or before February 20, 1997 (the "Closing Date"), at the offices of Thelen, Marrin, Johnson & Bridges, San Jose CA, or at such other time and place as the Company and the Placement Agent may agree. There is no minimum amount of Notes required for an initial closing. (b) From time to time prior to and following the Closing Date, the Company may, but shall not be obligated to, offer and sell the balance of the Notes authorized but not sold as of the Closing Date herein to other purchasers (the "Other Purchasers") at one or more subsequent closings to be held no later than February 20, 1997 unless otherwise extended by the Company and the Placement Agent. By executing this Agreement, the Purchasers hereunder agree to the inclusion of such Other Purchasers as parties to this Agreement and the Registration Rights Agreement referenced in Section 7.l(d) herein (the "Registration Rights Agreement"), and it shall be a condition to each subsequent closing that the Other Purchasers, if any shall become parties to this Agreement and the Registration Rights Agreement and subject to the terms hereof -2- and thereof. If such a subsequent closing is held, the terms "Closing" and "Closing Date", as used herein, shall be deemed to apply to the initial closing and each such subsequent closing. 2.2 Delivery. At the Closing, subject to the terms and conditions hereof, the Company will deliver to each Purchaser the Notes subscribed for by such Purchaser, dated as of the Closing Date, and Warrants, against payment of the purchase price therefor by wire transfer, unless other means of payment shall have been agreed upon by such Purchaser, on one hand, and the Company, and the Placement Agent, on the other hand. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Subject to and except as disclosed by the Company in the Private Placement Materials, the Company hereby represents and warrants to each Purchaser as of the date hereof as follows, and all such representations and warranties shall be true and correct as of the Closing Date as if then made and shall survive the Closing: 3.1 Organization. Each of the Company and Laser Biotech, Inc. as its subsidiary (the "Subsidiary") is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Company and the Subsidiary has all requisite power and authority to own or lease its properties and to conduct its business as now conducted. Each of the Company holds all licenses and permits required for the conduct of its business as now conducted, which, if not obtained, would have a material adverse effect on the business, financial condition or results of operations of the Company taken as a whole. Each of the Company and the Subsidiary is qualified as a foreign or domestic corporation and is in good standing in all states where the conduct of its business or its ownership or leasing of property requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, financial condition or results of operations of the Company taken as a whole. The Company has previously delivered a true and complete copy of its Certificate of Incorporation ("Certificate") and Bylaws to the Placement Agent. 3.2 Capitalization. The authorized, issued and outstanding capital stock of the Company on September 30, 1996 is as set forth in the Report on Form 10-Q (September 30,1996) which is included in the Offering Materials (Tab A). Since September 30, 1996, there has been no material change in the capitalization of the Company, except as has been described in the Private Placement Materials. All of the issued and outstanding shares of Common Stock have been duly authorized, validly issued and are fully paid and nonassessable. Except as stated in the Private Placement Materials and except for rights granted under the Company's stock option plans, there are no existing subscriptions, options, warrants, calls, commitments, agreements, conversion or other rights of any character (contingent or otherwise) to purchase or otherwise acquire from the Company at any time, or upon the happening of any stated event, any shares of the capital stock of the Company. 3.3 Authority. The Company has all requisite corporate power and authority to enter into this Agreement, the Warrants, Registration Rights Agreement, and the warrant to purchase up to 85,714 shares of Common Stock issued to the Placement Agent (the "Placement Agent Warrant"), and to consummate the transactions contemplated hereby and thereby. The -3- execution and delivery of this Agreement, the Warrants, the Registration Rights Agreement and the Placement Agent Warrant and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of the Company, and upon their execution and delivery by the Company, such documents will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the indemnification and contribution provisions of the Registration Rights Agreement may be limited by principles of public policy, and subject as to enforceability to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditors' rights from time to time in effect and subject to general equity principles. 3.4 Securities Filings. The Company has filed with the Securities and Exchange Commission (the "SEC") the documents set forth in the Private Placement Materials included herein under Tab A (the "SEC Filings"). The Company has filed with the SEC all reports and all other filings required to be filed with the SEC under the rules and regulations of the SEC. (a) The SEC Filings conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the SEC thereunder as of their respective filing dates and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The documents or portions thereof that were incorporated by reference in the SEC Filings pursuant to the requirements of the Exchange Act, when such incorporated documents or portions were first filed with the SEC, conformed in all material respects with any applicable requirements of the Exchange Act and the rules and regulations of the SEC thereunder. (b) The consolidated financial statements of the Company included in the SEC Filings fairly presented in all material respects the financial position and results of operations of the Company and the Subsidiary at their respective dates and for the respective periods to which they apply; and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as otherwise stated therein. (c) Notwithstanding any provision therein to the contrary, it is understood by the Company and the Purchasers that the Company is not representing or warranting any statement in the SEC Filings relating to future, anticipated or possible circumstances, occurrences or developments. 3.5 Issuance of the Notes. The Notes, when issued against payment therefor pursuant to the terms of this Agreement, will be duly and validly authorized and issued, fully paid and nonassessable. 3.6 No Conflict with Law or Documents. The execution, delivery and consummation of this Agreement, the Warrants and the Registration Rights Agreement and the transactions contemplated hereby and thereby will not (a) conflict with any provisions of the Articles or Bylaws of the Company or the Subsidiary; (b) result in any violation of or default or loss of a benefit under, or permit the acceleration of any obligation under (in each case, upon the -4- giving of notice, the passage of time, or both) any mortgage, indenture, lease, agreement or other instrument, permit, franchise, license, judgment, order, decree, law, ordinance, rule or regulation applicable to the Company, the Subsidiary or their respective properties. 3.7 Consents, Approvals and Private Offering. Except for any filings required under federal and applicable state securities laws, all of which shall have been made as of the Closing Date to the extent required as of such time, no consent, approval, order or authorization of, or registration, declaration or filing with, any federal, state, local or foreign governmental authority is required to be made or obtained by the Company in connection with the execution and delivery of this Agreement, the Registration Rights Agreement and the consummation of the transactions contemplated hereby and thereby. 3.8 Absence of Certain Developments. Except as described in the Private Placement Materials, since September 30, 1996, neither the Company has (a) incurred or become subject to any material liabilities (absolute or contingent) except current liabilities incurred, and liabilities under contracts entered into, in the ordinary course of business, consistent with past practices; (b) mortgaged, pledged or subjected to any lien, charge or other encumbrance any of its assets, tangible or intangible; (c) sold, assigned or transferred any of its assets or canceled any debts or obligations except in the ordinary course of business, consistent with past practices; (d) suffered any extraordinary losses, or waived any rights of substantial value; (e) entered into any material transaction other than in the ordinary course of business, consistent with past practices; or (f) otherwise had any change in its condition, financial or otherwise, except as shown on or reflected in the consolidated balance sheet as of September 30, 1996 that is included in the Company's Report on Form 10-Q for the quarter ended September 30, 1996, except for changes in the ordinary course of business, consistent with past practices, none of which individually or in the aggregate has been materially adverse, and excepted further that the Company continues to incur additional substantial losses of the nature set forth in and/or otherwise contemplated by the Private Placement Materials. Except as described in the SEC Filings, neither the Company nor the Subsidiary has entered into any agreement since September 30, 1996 of the type that would be required under the SEC's rules and regulations to be filed as an exhibit to a Report on Form 10-K. 3.9 Litigation. Except as described in the Private Placement Materials, to the Company's knowledge, there are no actions, suits, proceedings or investigations pending against or affecting the Company or the Subsidiary that in the aggregate could reasonably be anticipated to result in any material adverse effect on the Company. 3.10 Registration Rights. Except for shares issued or issuable in connection with the Company's existing stock option plans and those disclosed in the Private Placement Materials the Company has not granted any rights to have any of the Company's securities registered under the Act. 3.11 Disclosure. The Private Placement Materials taken as a whole do not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. -5- 3.12 Security Interest. In order to secure the Company's obligations under the Notes and perfect the Purchasers' security interests in all of the Company's pending and issued ophthalmic patents, the Company has made all the necessary filings and has not granted a security interest in such patents to any other party. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents, warrants and covenants with the Company as follows: 4.1 Legal Power. Purchaser has the requisite corporate, partnership, trust or fiduciary power, as appropriate, and is authorized, if Purchaser is a corporation, partnership or trust, to enter into this Agreement and the Registration Rights Agreement, to purchase the Notes and Warrants hereunder, and to carry out and perform its obligations under the terms of this Agreement and the Registration Rights Agreement. 4.2 Due Execution. This Agreement and the Registration Rights Agreement have been duly authorized, if Purchaser is a corporation, partnership, trust or fiduciary, executed and delivered by Purchaser, and, upon due execution and delivery by the Company, this Agreement and the Registration Rights Agreement will be valid and binding agreements of Purchaser, and subject as to enforceability to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditors' rights from time to time in effect and subject to general equity principles. 4.3 Investment Representations. Each Purchaser represents and agrees that: (a) Purchaser is acquiring the Notes for its own account, not as a nominee or agent, for investment and not with a view to or for resale in connection with, any distribution or public offering thereof within the meaning of the Act, except pursuant to an effective registration statement under the Act; (b) Such Purchaser is not a U.S. Person (as defined in Regulation S) and is not an affiliate of the Company (as defined in Regulation S); (c) At the time such Purchaser's buy order for the Notes and the Warrants was originated such Purchaser was outside the United States, its territories and possessions; (d) The Purchaser: (i) will not, during the period commencing on the latest Closing Data and ending on the day 40 days after the final Closing Date (the "Restricted Period"), offer or sell any of the Securities in the United States, its territories or possessions, or to a U.S. Person or for the account or benefit of a U.S. Person (other than distributors), other than in accordance with Rules 903 or 904 of Regulation S; and -6- (ii) will, after the expiration of the Restricted Period, offer, sell, pledge or otherwise transfer the Shares only pursuant to registration under the Act or an available exemption therefrom and, in any case, in accordance with applicable state and foreign securities laws. (e) None of such Purchaser, its affiliates or any person acting on behalf of the Purchaser or any such affiliates has engaged, or will engage, in any Directed Selling Efforts (as defined in Regulation S under the Act) with respect to the Securities or any distribution, as that term is used in the definition of Distributor (as defined in Rule 902CC) in Regulation S under the Act, with respect to the Securities. (f) The transactions contemplated by this Agreement: (i) have not been pre-arranged with a purchaser located in the United States, its territories or possessions, or who is a U.S. Person; and (ii) are not part of a plan or scheme to evade the registration provisions of the Act. (g) The Purchaser is purchasing the Notes for its own account for the purpose of investment and not (A) with a view to, or for sale in connection with, any distribution thereof or (B) for the account or on behalf of any U.S. Person. (h) The Purchaser is not a corporation that has been formed principally for the purpose of investing in securities not registered under the Act. (i) Neither the Company, the Placement Agent nor any person or entity acting on its or their behalf made to the Purchaser or any person acting on its behalf in the United States any statement conveying a purpose or intent to sell the Shares to the Purchaser. The person executing this Agreement on behalf of the Purchaser was outside the United States, its territories and possessions at the time of such execution. (j) Neither the Purchaser, any affiliate of the Purchaser, nor any person or entity acting on its or their behalf has undertaken or carried out any activity for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States, its territories or possessions, for any of the Shares. (k) If the Purchaser offers and sells any of the Securities during the Restricted Period, then it will do so only: (i) in accordance with the provisions of Regulations S; (ii) pursuant to registration of the Shares under the Act; or (iii) pursuant to an available exemption from the registration requirements of the Act. (1) Purchaser understands that the Shares have not been registered under the Act by reason of a specific exemption therefrom, and may not be transferred or resold except pursuant to an effective registration statement or exemption from registration and each certificate representing the Shares will be endorsed with the following legends: -7- (i) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SUCH SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION AS CONFIRMED IN ANY OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, AND IN EACH CASE IN ACCORDANCE WITH ANY OTHER APPLICABLE LAW. (ii) Any legend required to be placed thereon by applicable federal or state securities laws, and (iii) the Company will instruct any transfer agent not to register the transfer of any of the Securities unless the conditions specified in the foregoing legends are satisfied. (m) Receipt and review of Offering Materials. Each Purchaser represents that Purchaser has received and reviewed the Private Placement Materials and has been given full and complete access to the Company and/or the Placement Agent for the purpose of obtaining such information as the Purchaser or its qualified representative has reasonably requested and has been afforded the opportunity to ask questions regarding the Company and the Shares, all as Purchaser or its qualified representative has found necessary to make an informed investment decision. 5. COVENANTS OF THE COMPANY. 5.1 Information. So long as the Company is subject to the periodic reporting requirements of the Exchange Act pursuant to Section 13 or l5(d), the Company shall deliver to each holder of Notes or Warrants all annual, quarterly or other reports furnished to its public security holders; provided that if the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish to each holder of Notes or Warrants (i) as soon as available, and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries, if any, as of the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all prepared in accordance with generally accepted accounting principles and reported on by independent certified public accountants of recognized national standing; and (ii) as soon as available, and in any event within 45 days after the end of each of the first three -8- fiscal quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries, if any, as of the end of such quarter and the related consolidated statements of income and stockholder's equity (together with any other quarterly financial statements being prepared by the Company at such time), setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation and consistency by the chief financial officer or the chief accounting officer of the Company. 6. REPRESENTATIONS OF PLACEMENT AGENT; COMPENSATION OF PLACEMENT AGENT. The Company has authorized the Placement Agent to conduct the Private Placement of the Securities (the "Private Placement") under Regulation D and Regulation S of the Act, and the Placement Agent represents and agrees with the Company as follows: 6.1 Regulation S Compliance. Offers and sales of the Securities to Regulation S Purchasers will be made in compliance with Regulation S and have not and will not be made to any U.S. Person or for the account and benefit of any U.S. Person. Neither the Placement Agent nor any of its employees or affiliates or any person or entity acting on its behalf has or shall engage in any directed selling efforts (as defined by Regulation S) with respect to the Securities. 6.2 Compliance Generally. The Placement Agent has and will observe all securities laws and regulations applicable to it in any jurisdiction in which it has or may offer, sell or deliver Notes and it will not, directly or indirectly, offer, sell or deliver Notes or distribute or publish any prospectus, circular, advertisement or other offering material in relation to the Notes in or from any state in the United States or country or jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. 6.3 Sales Commissions. In consideration of the Placement Agent's services hereunder, the Company shall pay Placement Agent in cash on each Closing Date a commission of seven and one-half percent (7.5 %) of the proceeds of the Securities sold at such Closing (the "Placement Fee"). 6.4 Placement Agent Expenses. Upon the initial closing, the Company shall reimburse the Placement Agent for its reasonable out-of-pocket expenses of the Private Placement, including the reasonable fees and expenses of the Placement Agent's counsel, up to a maximum of $50,000. This amount may include expenses from other pending or abandoned transactions involving the Placement Agent. 6.5 Placement Agent Warrant. At each Closing, the Company agrees to sell to the Placement Agent a Warrant to purchase a number of shares of the Company's Common Stock equal to five percent (5%) of the number of Conversion Shares into which the Notes sold at such Closing are convertible (the "Placement Agent Warrant") at a purchase price of $.001 per share of Common Stock covered by the Placement Agent Warrant. The Placement Agent Warrant will be exercisable at any time before the fifth anniversary of the initial Closing at a price of $0.875 -9- (subject to adjustments for stock dividends, splits, combinations and certain other issuances of Common Stock or Common Stock equivalents, all as provided in the Placement Agent Warrant). The Placement Agent Warrant will be in a form reasonably satisfactory to the Company and the Placement Agent. 6.6 Right of First Refusal to Manage Future Offerings. For a period of one (1) year commencing upon the last Closing Date hereunder, the Placement Agent shall have a right of first refusal to act as the managing underwriter for any and all equity offerings (excluding offerings to Company employees, or to others as consideration for the purchase of assets for use in the Company's business, or in one or more business combinations) of any securities of the Company, or any successor to or any subsidiary of the Company. The Placement Agent must exercise this right of first refusal within thirty (30) days of receipt of written notice from the Company, or its successor or subsidiary, of its intention to offer securities for sale. 6.7 Blue Sky Compliance. The Placement Agent will comply with the state securities or blue sky laws of each state in which the Securities have been or will be offered ("Applicable Blue Sky Laws"). The Placement Agent has ensured and will ensure that all applications, notices and other filings required to be made under Applicable Blue Sky Laws have been or will be timely made. The Placement Agent has ensured that all legends or other notices required to be either printed in the Private Placement Memorandum or otherwise given to offerees or purchasers of the Securities under Applicable Blue Sky Laws have been so printed or given. 7. CONDITIONS TO CLOSING. 7.1 Conditions to Obligations of the Purchaser. Each Purchaser's obligation to purchase the Securities at the Closing is subject to the fulfillment, at or prior to such Closing, of all of the following conditions: (a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of said date; except as described in or contemplated by the Private Placement Materials, the business, assets, financial condition and results of operations of the Company shall not have been adversely affected in any material way prior to the Closing Date; and the Company shall have performed all obligations and conditions herein required to be performed by it on or prior to the Closing Date. (b) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchaser. (c) Qualifications, Legal Investment. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Securities pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Closing Date. -10- No stop order or other order enjoining the sale of the Securities shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC, or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the Closing, the sale and issuance of the Securities shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject. (d) Registration Rights Agreement. The Company shall have entered into the Registration Rights Agreement in substantially the form included in the Private Placement Materials (Tab C). (e) Legal Opinion. Counsel to the Company shall have provided a legal opinion to the Purchasers reasonably acceptable to the Placement Agent. 7.2 Conditions to Obligations of the Company. The Company's obligation to issue and sell the Securities at the Closing is subject to the fulfillment to the Company's satisfaction, on or prior to the Closing, of the following conditions: (a) Representations and Warranties True. The representations and warranties made by each Purchaser in Section 4 hereof and by the Placement Agent in Section 6 hereof shall be true and correct at the Closing Date with the same force and effect as if they had been made on and as of the Closing Date. (b) Performance of Obligations. Each Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by them on or before the Closing Date, and each Purchaser shall have delivered payment to the Company in respect of its purchase of Securities. (c) Qualifications, Legal Investment. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful sale and issuance of the Securities pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Closing Date. No stop order or other order enjoining the sale of the Securities shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company, threatened by the SEC or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the Closing, the sale and issuance of the Securities shall be legally permitted by all laws and regulations to which each Purchaser and the Company are subject. 8. MISCELLANEOUS. 8.1 Governing Law. This Agreement shall be governed by and construed under the laws of the Commonwealth of Pennsylvania as applied to agreements among California residents, made and to be performed entirely within the Commonwealth of Pennsylvania without regard to principles of conflict of laws. -11- 8.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 8.3 Entire Agreement. This Agreement and the Exhibits hereto and thereto, and the other documents delivered pursuant hereto and thereto, constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 8.4 Separability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.5 Amendment and Waiver. Except as otherwise provided herein, any term of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of the Company and the Purchaser. Any amendment or waiver effected in accordance with this section shall be binding upon each future holder of any security purchased under this Agreement (including securities into which such securities have been converted) and the Company. 8.6 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery, on the first business day following mailing by overnight courier, or on the fifth day following mailing by registered or certified mail, return receipt requested, postage prepaid, addressed to the Company and the Purchaser at the respective addresses included herein. 8.7 Fees and Expenses. The Company and the Purchasers shall bear their own expenses and legal fees incurred on its behalf with respect to this Agreement and the transactions contemplated hereby; provided, that in the event that the transactions contemplated hereby close, the Company shall reimburse the Placement Agent in accordance with the provisions of Section 6.5. The fees and expenses for which the Company shall be liable hereunder shall in no event exceed $50,000 in the aggregate. Purchasers acknowledge that the Placement Agent will receive a commission equal to 7.5% of the aggregate amount sold in the Offering and will be entitled to purchase for nominal consideration a five-year warrant to purchase up to 85,714 shares of the Company's Common Stock at an exercise price equal to $0.875, as described in the Private Placement Materials under the heading "Summary of the Offering." -12- 8.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. -13- EX-11.1 6 COMPUTATION OF PER SHARE LOSS Exhibit 11.1 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. Exhibit 11.1 STATEMENT REGARDING COMPUTATION OF PER SHARE LOSS Weighted average shares:
Years Ended December 31, ----------------------------------------------- 1996 1995 1994 Primary: Common stock 26,414,218 14,935,468 10,129,283 Warrants and stock options ---- ---- ---- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding 26,414,218 14,935,468 10,129,283 ========== ========== ========== Fully Diluted: Common stock 26,414,218 14,935,468 10,129,283 Warrants and stock options ---- ---- ---- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding 26,414,218 14,935,468 10,129,283 ========== ========== ========== Fully diluted earnings per share are not presented on the face of the Consolidated Statement of Operations since they are not materially different than primary earnings per share.
EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Laser Biotech, Inc. (a California corporation) Sunrise Acquisition Corporation (a Delaware corporation) EX-23.1 8 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS EXHIBIT 23.1 SUNRISE TECHNOLOGIES INTERNATIONAL, INC. EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement (Form S-8, No. 33-82314) and Registration Statement (Form S-8, No. 33-53466) pertaining to the 1988 Stock Option Plan and in the Registration Statement (Form S-8, No. 33-53448) pertaining to the 1992 Employee Stock Purchase Plan of Sunrise Technologies International, Inc. of our report dated March 10, 1997 with respect to the consolidated financial statements and schedule of Sunrise Technologies International, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Palo Alto, California April 9, 1997 41 EX-27 9 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 647,000 0 472,000 140,000 2,135,000 3,542,000 199,000 2,655,000 3,741,000 2,469,000 0 28,000 0 0 1,244,000 3,741,000 5,654,000 5,654,000 4,016,000 4,016,000 7,658,000 115,000 0 (5,968,000) 0 (5,968,000) 0 0 0 (5,968,000) (.23) (.23)
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