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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 JUNE 28, 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. 0-12744
SUNRISE MEDICAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3836867
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2382 FARADAY AVENUE, SUITE 200
CARLSBAD, CA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 930-1500
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NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, par value $1.00......................... New York Stock Exchange
Common Stock Purchase Rights.......................... New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether 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 and (2) has been subject to such filing
requirements for the past 91 days. YES [X] NO [_]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $275,818,270 as of August 30, 1996.
On August 30, 1996, the registrant had 18,857,649 outstanding shares of $1
par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS FORM 10-K REFERENCES
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Portions of the company's Definitive Proxy
Statement for its Annual Meeting of
Stockholders to be held on November 21, 1996.... Part III, Items 10-13 (Page 40)
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SUNRISE MEDICAL INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 28, 1996
INDEX
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PAGE
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PART I
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 9
Item 3. Legal Proceedings.............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders ........... 10
-- Executive Officers of the Company.............................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 13
Item 6. Selected Financial Data........................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
Item 8. Financial Statements and Supplementary Data.................... 22
Item 9. Disagreements on Accounting and Financial Disclosure........... 22
PART III
Item 10. Directors and Executive Officers of the Registrant............. 40
Item 11. Executive Compensation......................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management. 40
Item 13. Certain Relationships and Related Transactions................. 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K.............................................................. 41
Signatures............................................................... 43
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PART I
ITEM 1. BUSINESS
Sunrise Medical Inc. ("Sunrise" or the "company") designs, manufactures and
markets medical products used in institutional and home care settings that
address the recovery, rehabilitation and respiratory needs of the patient.
Products include custom manual and electric wheelchairs, wheelchair seating
systems, ambulatory and bath safety aids, home respiratory devices, patient-
room beds and furnishings, and therapeutic mattresses and support surfaces for
healthcare markets. The company manufactures its products in the United
States, the United Kingdom, Germany, France and Spain and distributes them
through company-owned operations in those countries as well as Canada, Norway,
Sweden, Italy, Switzerland, Austria, Belgium, The Netherlands and Australia,
and through distributors in more than 80 other countries.
Sunrise Medical's corporate mission is to improve people's lives by creating
innovative, high quality products. The company's products increase mobility
and independence, speed rehabilitation and recovery, facilitate participation
in recreational activities by the disabled and enhance patient care, comfort
and respiratory capabilities. They are designed to meet the special needs of
four groups of people: the elderly, the disabled, the recovering patient, and
the respiratory sufferer.
Sunrise was formed in 1983 to take advantage of changes affecting the
healthcare industry in the United States, including a rapid growth in the
elderly segment of the United States population and the introduction in 1983
of new government healthcare reimbursement policies. The new reimbursement
policies replaced a cost-plus profit structure with set fixed payments for
services rendered by hospitals to Medicare patients. This change in policy led
to dramatic changes in the healthcare industry which included a decline in
hospital admissions, shorter hospital stays, the emergence of alternate site
treatment facilities and an increase in care at home and in nursing homes.
The company's long-term strategic objective, which it calls its "strategic
intent," is to become the global market leader in homecare and extended care
products. Sunrise is already one of the largest firms in its industry
internationally and is a leader in most of its U.S. product markets as
measured by industry sales. The company has identified seven product lines
within the homecare and extended care (institutional) markets which it
considers its core businesses: wheelchairs (custom, standard and power) and
related positioning systems; healthcare beds and furniture; patient support
surfaces; bathing and lifting products; patient aids; respiratory devices; and
accessibility products. In each of these markets, and with any other core
businesses that may be added in the future, the company seeks to achieve
global leadership over time through the pursuit of the following common
strategies:
1. PRODUCT LEADERSHIP THROUGH SPECIALIZATION--Maintain and extend product
leadership in each core business by offering innovative, high quality
products which address low, middle and higher price segments. Target
customer bases through specialized salesforces and national account
representatives, expanded distribution capabilities and convenient
financing plans that together add up to superior customer service. Adapt
product marketing and pricing strategies as necessary to correspond to
trends in each major geographic market.
2. SUPERIOR TECHNOLOGY--Through investment in research and development,
apply the latest technologies to solve patient problems associated with
post-surgical care, while steadily reducing costs to make products more
affordable to the people who need them.
3. PURSUIT OF EXCELLENCE--Aggressively develop a culture at Sunrise
dedicated to the empowerment of Associates (employees) and continuous
improvement in all areas, with particular emphasis on total quality
management and world class manufacturing methodologies.
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4. GLOBAL EXPANSION--Extend domestic market leadership internationally by
leveraging competitive advantages in product technology, financial capacity
and management systems to capitalize on worldwide macro trends in market
demographics, patient care and consolidation of manufacturing industries.
5. STRATEGIC ACQUISITIONS--Enhance core businesses by acquiring
proprietary technologies and product lines which yield immediate synergy or
help enter fast growing market niches. Extend global reach by purchase of
manufacturing or distribution operations in other countries.
DISCUSSION OF MARKET GROUPS
Homecare Products
The North American Homecare Products Group includes three core product lines
designed to address the equipment needs of the elderly and the disabled in an
outpatient setting. These product lines are: wheelchairs, including custom,
power and standard wheelchairs, and seating and positioning systems; patient
aids, which are standardized medical products designed to assist in walking,
bathing, toileting, patient lifting and patient mobility; and respiratory
products, including aerosol, oxygen and sleep therapy products. These products
are sold through a single salesforce that calls on a network of home medical
equipment ("HME") providers, rehabilitation technology suppliers, and drug
wholesalers. International sales are also generated through distributors and
dealers in several countries. Sales of the company's North American homecare
products divisions accounted for 40% of total sales in 1996.
The company believes its Quickie(R) line of custom ultralight manual
wheelchairs is the U.S. and global market leader in this category, enjoying
worldwide name recognition with both industry professionals and disabled end-
users. Jay Medical is believed to be the world leader in specialty wheelchair
cushions and modular positioning products. The company's Guardian(R) brand of
ambulatory aids and crutches is believed to hold a leading position in the
domestic home care and hospital markets. In respiratory products,
DeVilbiss(TM) nebulizers and oxygen concentrators have strong market
positions.
Quickie Designs continued to experience significant growth in sales of power
wheelchairs in 1996, while strengthening its position in worldwide sales of
custom ultra light wheelchairs. The Quickie P200(R) is now the company's
leading power wheelchair. Among the new power products introduced in 1996 were
the Quickie P210(R) power recliner with ventilator tray, the Quickie P300(R)
with suspension, the Quickie P320(R) with power tilt and recline, and a lower
cost Zippie P500(R) pediatric chair. The Quickie Revolution(R), a high
performance custom wheelchair designed to fold horizontally and store in small
areas such as the overhead compartment of an airplane, continues to be well
received.
Jay Medical Ltd. ("Jay"), acquired by Sunrise in September 1994,
manufactures and markets wheelchair cushions and positioning systems designed
to fit all major brands of wheelchairs. The cushions and pads are filled with
Jayflow(R), a patented fluid material designed and manufactured by Jay at its
facility in Boulder, Colorado. Jay's products provide flexible, cost-effective
solutions to the seating and postural problems of geriatric, pediatric and
adult wheelchair users and are sold through a network of exclusive
distributors, including Sunrise European distribution divisions, and through
rehabilitation equipment providers within the United States. Its marketing
channels and referral sources are the same as those used by Sunrise Medical's
custom wheelchair business. Jay has introduced several innovative products in
the past two years. The J2(TM) back support, designed to address the comfort
and posture control issues of the wheelchair user, is now one of Jay's leading
products. Other recent introductions are the modestly priced Jay Basic
Cushion(TM) and the Jay Duo(TM), a contoured solid seat with an integrated
cushion. During fiscal 1996 Jay received ISO 9001 certification.
Guardian Products, a leader in the U.S. patient aids market, offers a line
of consumer retail products under the CareMate(R) brand name, which is
distributed through drug stores, home centers, department stores and specialty
retailers. The professional line of Guardian(R) brand patient aid products is
marketed through HME providers, who offer the service required for home
medical care patients. Guardian has added to its research and development
capabilities to enhance its introduction of new product designs. Guardian also
received ISO 9001 certification during the past year.
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Sunrise entered the home respiratory segment of patient care early in its
1994 fiscal year with the acquisition of Homecare Holdings, Inc., the parent
company of DeVilbiss Health Care, Inc. ("DeVilbiss"). DeVilbiss manufactures
products in three categories: aerosols, oxygen and sleep therapy. Aerosols,
made up primarily of compressor nebulizers, convert liquid medicine into
airborne particles to treat breathing disorders such as asthma and cystic
fibrosis. Oxygen concentrators enrich normal room air up to 93% purity for
patients suffering from chronic obstructive lung diseases such as emphysema
and bronchitis. DeVilbiss also offers a line of portable liquid oxygen systems
and proprietary demand oxygen delivery devices for extending the range of its
portable containers. Sleep products help sufferers of obstructive sleep apnea
by supplying continuous positive airway pressure ("CPAP") while they are
sleeping.
DeVilbiss has manufacturing locations in both the U.S. and the U.K. and
distribution operations in other European countries. Management believes
DeVilbiss is the U.S. market leader in nebulizers and one of the world market
leaders in concentrators. During 1996 DeVilbiss introduced the SolAiris(TM)
family of oxygen concentrators, offering compact, light-weight three- and
five-liter units for the homecare provider. Also introduced was Horizon(TM)
AutoAdjust, the first "smart" CPAP device in the market.
In recent years, concern over the rising cost of healthcare has sparked a
marked shift toward lower priced products and services in the home medical
equipment industry. This shift has resulted in the substitution of simpler and
more generic products, as well as price concessions to payers from healthcare
providers, who are the company's primary customers. As healthcare moves from a
largely fee-for-service pattern to prepaid payment systems, this trend is
expected to intensify. High-volume, full-line providers will have a
competitive advantage over those servicing only niche markets. These trends
are causing healthcare providers to merge at an unprecedented pace;
manufacturers and distributors are following a similar consolidation course.
In this market environment, management believes that future sales growth will
be driven predominantly by unit volume growth, product innovation, contract
sales to increasingly larger customers and buying groups, and by international
expansion.
In response to these market trends, the company has established a corporate
marketing and national account sales function, focused on the domestic home
medical equipment industry. Special attention is being directed to larger
regional and national accounts, including the development of incentive
programs that benefit customers who purchase from multiple Sunrise divisions.
Institutional Products
The Institutional Products Group manufactures products that foster ease of
care for recovering patients in institutional settings such as nursing homes
and hospitals. Product lines include healthcare beds and nursing home
furniture, support surface products such as air therapy systems and foam
mattress overlays, patient lifters and specialized bathing systems designed
for immobilized patients. Domestic salesforces call directly on healthcare
institutions and medical-surgical distributors. Foreign sales of institutional
products are made through the company's international distribution network.
Sales of the company's North American institutional products divisions
represented 15% of total company sales in 1996.
The Joerns(R) line of healthcare beds and nursing home furniture is believed
to be the domestic leader in sales to the nursing home market. The nursing
home furniture market has averaged 5% annual growth over the past few years
but is cyclical in nature. In 1996 nursing home construction increased
slightly, while Joerns grew faster than the overall market. A new collection
of high-quality wood furniture designed especially for the healthcare industry
was introduced in April 1996. Joerns also introduced two new electric beds
into the nursing home market. These beds offer full electric capabilities at
prices significantly below the traditional three-motor, full electric bed.
Sales of the SunTec Systems(R) brand of homecare beds continued to grow in
1996, although faced with increased pricing pressure in the marketplace. These
beds are distributed by the company's new logistics division, SunMed Service.
The company's institutional support surface business is conducted by its Bio
Clinic division. Bio Clinic develops, manufactures and markets cost-effective
solutions for the prevention and treatment of pressure sores--
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dermal wounds which can afflict immobilized patients. The division offers a
broad line of products, including low air loss, portable air systems;
specialty mattresses; foam overlays; and foam operating room positioners. The
Eggcrate(R) line is widely recognized as the U.S. healthcare market leader in
disposable foam pressure reduction mattress overlays. Bio Clinic has important
relationships with major national distributors such as Baxter, General Medical
and Owens & Minor, who supply Bio Clinic(R) products to their hospital and
nursing home customers. Bio Clinic reaches the HME market through the Sunrise
homecare salesforce and the SunMed Service organization (see "Distribution").
In 1993 Bio Clinic established a nationwide service network to rent and
service air therapy systems and related products to institutional markets.
Over the 1993-1995 period the average daily rental prices for air therapy
products dropped steadily, significantly reducing the profit contribution from
renting these products. The air therapy rental business was sold on January
31, 1996. Bio Clinic continues to sell air therapy products to companies that
rent them on a daily basis to homecare patients and healthcare institutions.
In June 1996 the company announced that it is merging Bio Clinic into Joerns
to form a single institutional products organization. This combined business
will integrate the domestic manufacturing and marketing of all Sunrise
products aimed at nursing homes and hospitals, including Joerns(R) beds and
furniture, Bio Clinic(R) support surfaces, Hoyer(R) patient lifters, and
imported Parker Bath(TM) bathing systems.
Consumer Products
Comfort Clinic, established as a separate operating division in July 1995,
manufactures and markets therapeutic sleep products, principally foam mattress
overlays and therapeutic pillows, to health conscious consumers. These
products are sold through various retail distribution channels, including mass
merchants (such as Wal-Mart, K-Mart and J.C. Penney), department stores and
specialty stores throughout the U.S., Canada and Europe. Comfort Clinic's
mattress pads are made of polyurethane foam and vary in size, foam density,
pattern and thickness. Pillow types include foam, fiber and foam/fiber
combinations. With sales of $44 million in 1996, these consumer products
represented 7% of total company sales.
In August 1996, following a strategic review of its businesses, the company
decided to sell the Comfort Clinic division in order to concentrate on its
core healthcare products business. On August 29, 1996, the company entered
into an agreement for the sale of the assets of Comfort Clinic for cash of $14
million, with adjustment for changes in net book value at closing. The
transaction is subject to several contingencies and is expected to be
completed in October 1996.
European Operations
The company conducts manufacturing operations in four European countries
(United Kingdom, Germany, Spain and France) and owns a network of distribution
companies throughout Europe. Sales in Europe have grown significantly in each
of the last three years, reflecting expansion of the company's core businesses
as well as a number of acquisitions. European operations now account for 38%
of the company's net sales.
Sunrise Medical Ltd., the largest producer of rehabilitation equipment in
the United Kingdom, manufactures and markets four major product lines: custom
manual wheelchairs, power wheelchairs, electric scooters, and home stairlifts.
Its growth has been fueled by increasing exports and by product innovation. A
recipient of the Queen's Award for Export in 1994, Sunrise Medical Ltd.
currently exports to more than 40 countries. A synergistic relationship with
Quickie Designs has contributed to this stream of new products. Among the
products introduced in 1996 were the ComforTec(TM), an all-day geriatric
wheelchair, the Sterling Classic Scoota(TM), the Minivator 2000(TM) stairlift,
and the Quickie Triumph(TM) rigid wheelchair.
Sopur, the company's German manufacturer of custom lightweight wheelchairs,
offers a broad range of wheelchairs covering virtually all price ranges,
including standard lightweight, adult manual, power, pediatric and performance
wheelchairs. In 1996 Sopur added the Match(TM) sports wheelchair and the
Powertec F60(TM), an
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indoor/outdoor power chair also introduced in a U.K. version. An updated
Youngster(TM) wheelchair model was launched, and the full line of Jay(R)
seating products was added to Sopur's product offerings. Sopur also expanded
into the Austrian market.
Talleres Uribarri, the company's Spanish manufacturer of standard
wheelchairs and patient aids, provides Sunrise with a low-cost European
manufacturing base for standard wheelchairs. These products are exported to
other European countries through other Sunrise European divisions as well as
through independent distributors. Uribarri has also used its Spanish sales
coverage and dealer network to increase market penetration for products of
other Sunrise divisions. These steps have allowed Uribarri to continue its
strong sales growth, maintaining its leadership position in the Spanish
rehabilitation market.
In April 1995 Sunrise Medical acquired a group of related French companies,
collectively referred to as the Corona Group ("Corona"). Founded in 1954,
Corona operates two modern manufacturing facilities in Tours, France. Corona
is a market leader in France in home care beds and the second largest
manufacturer of hospital beds and nursing home beds and furniture. Corona
markets its products to French nursing homes and hospitals through its own
direct salesforce and reaches the homecare market through a network of HME
dealers. In response to budget cutbacks in the French public sector that
adversely affected the institutional market, Corona introduced new lower cost
hospital and nursing home beds. Corona has also redesigned its homecare beds
to meet all current and pending European standards; these products are now
being offered throughout Europe by Sunrise Medical's European distribution
network.
In July 1995 the company enhanced its position in the patient aids market
with the acquisition of Coopers Healthcare Plc ("Coopers"), a leading U.K.
manufacturer of patient aids and ambulatory aids. Founded in 1850, Coopers is
well-positioned for supplying patient aids to all of Sunrise Medical's
European affiliates.
In October 1995 the company acquired Parker Bath Group, a U.K. manufacturer
and distributor of specialized bathing and lifting systems for patient
transfers. This new subsidiary's Parker Bath Ltd. division manufactures
specialized bathing systems for nursing homes and hospitals, while a second
division, Oxford Hoist Company, designs, manufactures and sells patient
lifting systems for both institutional and home care use. Parker Bath Group's
operations in the United States and France, which have been combined with the
company's larger Joerns and Corona divisions, respectively, distribute their
products directly to healthcare institutions in those countries. The company
believes that, with the addition of Parker Bath Group, it is now the second
largest manufacturer of bathing and lifting systems worldwide.
DISTRIBUTION
In 1995 the company established a new logistics division, SunMed Service
("SMS"), to consolidate the customer service, order entry, distribution and
credit functions for standard products sold to the United States HME market by
all domestic Sunrise divisions. SMS became operational in February 1996 with
headquarters in the Los Angeles area. Order processing centers are maintained
in California and Pennsylvania, and eight regional distribution centers are
located throughout the United States. Large national accounts and independent
homecare providers are now able to purchase standard products across all
Sunrise divisions by placing a single order with SMS; products are shipped the
next day from one of the regional distribution centers. However, customized
products, such as most Quickie(R) wheelchairs and many Jay(R) cushion
products, continue to be ordered directly and shipped from those factories.
SEGMENT INFORMATION
The company operates predominantly in the home medical equipment industry
segment. Financial information concerning the company's two geographic
segments, North America and Europe, is included under "Geographic Segment
Information" in Notes to Consolidated Financial Statements.
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COMPETITION
The company encounters significant competition domestically from a number of
well-established manufacturers in each of its product lines, and from foreign
sources for some products. The company competes primarily on the basis of its
product features and performance, the range of products offered, the quality
of its customer service and delivery, competitive prices, the technical
expertise of its salesforces, and the strength of its distribution operations
and independent dealer network. In Europe, competition varies from market to
market. In certain countries and product markets, including the United States,
the company may face competition from other manufacturers that have larger
market shares or other competitive advantages.
MANUFACTURING
The company's manufacturing processes include fabrication, assembly, testing
and quality assurance. Certain components used in the company's products, such
as small motors and electronic controls, are manufactured by third parties.
Although the company purchases most of its raw materials, components and
supplies from a number of different vendors, it does procure a few components
and materials on a single-source basis. If one of these single-source vendors
failed to deliver components as planned, the company would be unable to ship
certain of its products.
During the past few years, prices paid by the company for certain raw
materials, such as aluminum, foam and wood, have fluctuated. When prices have
increased, the company has not always passed along the full effect of such
increases to its customers, preferring instead to maintain or enhance, if
possible, its market position.
The company has utilized a variety of operational tools such as "just-in-
time" manufacturing, total quality management, target costing and its
Associate suggestion system to reduce product costs, increase quality, shorten
delivery cycles and improve asset turnover. These complementary techniques are
all part of the company's Pursuit of Excellence program.
RESEARCH AND PRODUCT DEVELOPMENT
The company conducts research and development at each of its manufacturing
divisions. For the year ended June 28, 1996, the company spent $15.5 million
on research and development compared to $13.9 million in the prior year, a 12%
increase. Each operating unit establishes annual objectives for introducing
new products, and the company tracks progress against those objectives on a
regular basis. As a result of its effort to introduce innovative new products
across its product lines, the company has steadily increased research and
development expenditures at a rate consistent with its overall sales growth.
PATENTS
The company currently holds patents associated with certain existing
products and has filed applications for additional patents covering certain of
its newer products. Although patents sometimes can provide a meaningful
competitive advantage in a particular product market, overall, management does
not consider the ownership of patents essential to its operations as a whole.
The company relies on product quality and features, strong marketing and
distribution networks, and continuing new product introductions, in addition
to its patents, to protect and improve its market positions.
WARRANTY
The company's products are sold with limited warranties for periods of up to
five years. Customers may also purchase extended warranties on certain
products. Some components of the company's wheelchair products have a lifetime
warranty.
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GOVERNMENT REGULATION
The healthcare industry is affected by extensive government regulation and
funding at the federal and state levels.
Medicare and Medicaid. Medicare is a federally funded health insurance
program administered by private insurance companies providing health insurance
coverage for persons 65 or older and certain disabled persons. Medicaid is a
federally and state-funded health insurance program administered by state
governments that provides reimbursement for healthcare related expenses for
certain financially and medically needy persons regardless of age. These
programs provide reimbursement for rentals and sales of medical equipment and
related supplies. Medicare generally pays 80% of the allowable rate of
reimbursement for home medical equipment items, while Medicaid generally pays
100%.
The company estimates that approximately 20% of its 1996 sales were
ultimately dependent for payment upon these U.S. government programs. The
company is not a provider under Medicare or Medicaid, but its products are
sold to HME providers, nursing homes and hospitals which are providers under
these programs and do depend upon Medicare and/or Medicaid reimbursement for a
portion of their revenue. Changes in Medicare/Medicaid regulations can
adversely impact the company's revenues and collections indirectly by reducing
the reimbursement rate received by HME providers and thus make it less
profitable for them to sell or rent products to the end-user. This, in turn,
can put downward pressure on prices charged for the company's products sold
through this channel. Medicare cutbacks are expected to continue to create
pricing pressures in the future. Management believes that intensified
healthcare cost containment efforts through managed care also favor lower cost
alternatives such as home healthcare and nursing home care, as has been the
case historically. The company has made special efforts in recent years to
allocate more of its new product engineering dollars to lower cost, more
generic products favored by managed care and Medicare/Medicaid programs.
FDA Regulation. Medical equipment manufactured by the company is subject to
regulation by the U.S. Food and Drug Administration ("FDA"). All medical
devices must be the subject of device listings filed with the FDA, and medical
device manufacturers must be registered. Certain products require clearance by
the FDA prior to marketing and distribution in the United States. Delays in
receiving such approval can adversely affect the company's ability to
introduce new products on a timely basis and impact the company's results of
operations and financial condition. During the last two years, such delays
have slowed new product introductions and, in a number of cases, have led to
their initial marketing overseas in advance of the United States.
In January 1996 Quickie Designs received a Warning Letter from the FDA
alleging deficiencies in complying with the record keeping, administrative and
procedural requirements of the federal Food, Drug and Cosmetic Act. While a
Warning Letter has no legal effect, it can serve as prior notice for, and a
precursor to, legal action by the government against a company, its employees
or products. It can also lead to delays in the clearance by the FDA of the
introduction of new products, or, in certain cases, result in product
seizures, recalls and even plant shut-downs. Quickie Designs has responded to
the FDA and is taking corrective actions to address the issues raised in the
Warning Letter. Management believes that the response and corrective actions
by Quickie Designs should satisfy the agency's concerns, but no assurances can
be given that such will be the case.
EMPLOYEES (ASSOCIATES)
The company employed 4,417 full-time Associates worldwide as of June 28,
1996. Approximately 470 Associates in the United States are covered under two
collective bargaining agreements which expire on May 23, 1997 and June 29,
1998, respectively. In Europe, 149 Associates in the United Kingdom and 133 in
Germany are covered by informal union arrangements. The company has not
experienced a strike, work stoppage or labor disturbance during its thirteen-
year history. The company believes that its labor relations are generally
good.
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BACKLOG
The company's backlog of firm orders at June 28, 1996 was approximately $44
million, compared to $35 million at June 30, 1995. Approximately $20 million
in each year represented orders for patient room beds and furnishings, the one
portion of the company's business for which backlog is believed to be a
meaningful predictive factor because of the longer order lead times in this
industry. All of these orders are expected to be filled in the first half of
fiscal 1997. Generally, the company manufactures the balance of its products
to its forecast of near-term demand, shipping immediately from stock, or else
produces customized products based on actual orders received and ships within
a short period thereafter. As a result, the company does not have a
substantial backlog for these products. Therefore, management does not believe
that its overall backlog at any particular time is a very meaningful indicator
of future sales levels.
WORKING CAPITAL REQUIREMENTS
The company does not maintain inventory of its products for a significant
period of time (see "Backlog"). Most of the company's products are
manufactured in connection with specific orders which are shipped in less than
30 days, and in many cases less than 72 hours, from receipt of the order.
Patient room bed and furnishing products also are manufactured in connection
with specific orders, but may take from one to three months until products are
ready to ship. The company maintains a larger stock of those component parts
which require longer lead times to obtain from suppliers to minimize the risk
of extending time periods to fulfill product orders. Most of the company's
sales are made on standard terms requiring payment by the customer within 30
days of delivery. Some sales are made on extended terms on a selective basis.
The company occasionally accepts products for replacement upon customer
request. However, returns for credit or refund have not been a material aspect
of the company's business.
FOREIGN OPERATIONS
The company has foreign subsidiaries with manufacturing operations in the
United Kingdom, France, Germany and Spain. A total of twelve additional
subsidiaries, located in Germany (2), the United Kingdom, Canada, France (2),
Norway, Sweden, Italy, Switzerland, Australia and The Netherlands, are
involved in distribution activities. All of the company's facilities are
located in industrially developed areas where qualified labor and material
supply have been readily available at economic rates. See "International
Operations" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Notes 2 and 13 of Notes to
Consolidated Financial Statements for additional information about foreign
operations and foreign currency risk management.
ITEM 2. PROPERTIES
The company's worldwide corporate headquarters office is located in
Carlsbad, California, and comprises approximately 20,600 square feet of leased
space that Sunrise occupies under a lease expiring in 2004. The company
conducts its U.S. operations from 14 leased facilities (totaling approximately
1,050,000 square feet) under leases with expiration dates ranging from 1996
through 2008, together with three company-owned facilities totaling
approximately 390,000 square feet.
For its international operations, Sunrise leases 35 facilities in Europe,
Canada and Australia (totaling approximately 290,000 square feet) under leases
with expiration dates extending through 2017, together with 8 company-owned
facilities in Europe with approximately 450,000 square feet.
The company's facilities are used primarily for manufacturing, distribution
and administration. Sunrise has options to renew a number of its leases as
well as purchase options on certain leased facilities. Management believes
that its facilities are adequate for the company's current needs.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On October 26, 1995 the company announced an internal investigation into its
financial controls and financial statements for previously reported periods to
determine the nature and extent of accounting practices at its Bio Clinic
Corporation subsidiary that were inconsistent with generally accepted
accounting principles. Following this investigation, the company restated its
financial results for fiscal 1995 and 1994. During November and December 1995,
the company and certain of its current and former officers, directors and
employees were named as defendants in a number of stockholder class action
lawsuits, each alleging violations of the federal securities laws and seeking
unspecified damages. These lawsuits were consolidated in the U.S. District
Court for the Southern District of California. In June 1996 the company
reached an agreement in principle to settle the actions for $20 million. The
company's share of the settlement was approximately $7 million, with the
balance paid by the company's insurance carriers. The agreement also includes
settlement of a stockholder derivative action filed in San Diego Superior
Court. The settlements are subject to final court approval. Still pending are
two derivative actions in Delaware state courts against many of the same
defendants. The company believes that these suits will be dismissed once the
settlements described above become final.
The Securities and Exchange Commission ("SEC") has entered a formal order of
private investigation into the circumstances underlying the restatement of the
company's 1995 and 1994 financial results. The company is cooperating fully
with the SEC in its investigation.
In August 1995 a lawsuit was filed in the Colorado District Court of Boulder
County, Colorado entitled Alden Laboratories, Inc. v. Eric C. Jay, Pressure
Relief Technologies, Inc., d/b/a Jay Fluid Mattress, Sunrise Medical Inc.,
Quickie Designs Inc. and Jay Medical, Ltd. The plaintiff alleges that the
activities of the defendants during and prior to the acquisition by the
company of the seating business of Pressure Relief Technologies, Inc.
(formerly Jay Medical, Ltd.), constituted a breach of contract, and other
wrongful conduct by the defendants. The plaintiff seeks damages in an
unspecified amount, injunctive relief and attorneys' fees and costs. In
February 1996 the Boulder District Court granted a motion of Sunrise and its
co-defendants and entered an order compelling arbitration in this matter. In
September 1996 the parties reached an agreement in principle to settle the
dispute. A final settlement is subject to completion of documentation to the
mutual satisfaction of the parties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on April 30, 1996. The
following eight directors were elected for a one-year term. The manner in
which the shares represented at the meeting were voted in the election of each
director is set forth below.
<TABLE>
<CAPTION>
VOTED WITHHELD/ BROKER
VOTED FOR AGAINST ABSTAINED NON-VOTE
---------- ------- --------- --------
<S> <C> <C> <C> <C>
Lee A. Ault III........................ 14,349,273 0 148,167 0
Richard H. Chandler.................... 14,244,670 0 252,770 0
Lloyd E. Cotsen........................ 12,515,486 0 1,981,954 0
Babette Heimbuch....................... 14,348,207 0 149,233 0
Murray H. Hutchison.................... 14,349,573 0 147,867 0
William L. Pierpoint................... 14,349,803 0 147,637 0
Joseph Stemler......................... 14,348,573 0 148,867 0
John R. Woodhull....................... 14,349,634 0 147,806 0
</TABLE>
10
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G(3) of Form 10-K, the following information
is included as an unnumbered Item in Part I of this Report.
The following is a list of names and ages of the executive officers (within
the meaning of Item 401 of Regulation S-K) of the company, indicating all
positions and offices with the company held by each such person and each such
person's principal occupation or employment during the past five years.
Executive officers serve at the discretion of the Board of Directors. No
person other than those listed below has been chosen to become an executive
officer of the company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard H. Chandler 53 Chairman of the board, chief executive officer and president
Roberta C. Baade, Ph.D. 52 Vice president of human resources
C. Leslie de Ruiter 37 President--Sunrise Medical B.V.
Raymond W. Dyer 50 President--DeVilbiss Health Care Inc.
John R. Frymark 41 President--Guardian Products Inc.
Steven A. Jaye 40 Vice president, general counsel and secretary
Richard H. Kollisch 48 President--Sopur Medizintechnik GmbH
Roger Lewis 47 President and Managing Director--Corona-S.E.P.A.C. S.A.
Dennis J. McCarthy 55 President--Joerns Healthcare Inc.
Thomas H. O'Donnell 53 Senior vice president--North America
Barrie Payne 59 Senior vice president--Europe
John M. Radak 35 Vice president and controller
Sam Sinasohn 35 Vice president of taxes
Ted N. Tarbet 43 Senior vice president and chief financial officer
</TABLE>
Richard H. Chandler has served as chairman of the Board of Directors and
chief executive officer of the company since its inception in January 1983
through the present. In January 1996 he also became president, a position he
previously held from January 1983 until July 1993. From 1982 to 1983, he was
president of Richard H. Chandler Company, a management consulting firm, during
which period he planned the formation of the company. From 1979 to 1982, he
was president and chief executive officer of Abbey Medical, Inc. Mr. Chandler
participated in the leveraged buy-out of Abbey Medical from Sara Lee
Corporation in June 1979 and arranged for its sale to American Hospital Supply
Corporation in April 1981. From 1974 to 1979 he held senior management
positions with Sara Lee Corporation, ending as a group vice president and
including two years when he was president of its Abbey Rents/Abbey Medical
division.
Roberta C. Baade, Ph.D., was elected vice president of human resources in
June 1994. Previously, Dr. Baade was vice president of human resources for the
Space Systems Division of General Dynamics Corporation since 1991. From 1983
to 1991, she held a variety of positions with General Dynamics Corporation,
including corporate director of human resource development. Dr. Baade holds a
Ph.D. in organizational communication.
C. Leslie de Ruiter has served as president of Sunrise Medical B.V. (a
Sunrise subsidiary) since October 1992. Previously, Mr. de Ruiter held the
positions of business unit manager and marketing manager for the OPG Group, a
Dutch healthcare company that manufactures, imports and sells pharmaceuticals
and medical supplies, from 1989 through 1992. Prior to that, Mr. de Ruiter
held a variety of sales and marketing positions at Eli Lilly International
Benelux, a pharmaceutical company.
Raymond W. Dyer was elected president of DeVilbiss Health Care Inc. (a
Sunrise subsidiary) in June 1994. From 1992 to 1994, Mr. Dyer was president of
Renal Products Group of National Medical Care, Inc. a division of W.R. Grace &
Company that manufactures kidney dialysis equipment and supplies. Prior to
joining W.R. Grace, he held a variety of positions with Cobe Laboratories, a
manufacturer of blood oxygenators and dialysis equipment and supplies,
including corporate vice president for Europe, Africa and Middle East
operations and division president.
11
<PAGE>
John R. Frymark was elected president of Guardian Products Inc. (a Sunrise
subsidiary) in June 1994. Previously, Mr. Frymark served as vice president of
sales and vice president of marketing at Guardian from January 1989 until June
1994 and from July 1986 until January 1989, respectively. Prior to joining
Guardian, he was the director of marketing for the Pharmaseal Division of
Baxter Healthcare Corp, a manufacturer of disposable medical devices.
Steven A. Jaye was elected vice president, general counsel and secretary of
the company in August 1995. From 1991 through 1995, Mr. Jaye served as the
vice president--legal affairs for Magma Power Company, a publicly traded
international power producer. From 1984 through 1991 he served as a business
attorney with the law firm of Latham & Watkins. Prior to receiving his legal
degree, Mr. Jaye served as a design, production and quality assurance engineer
for Spectrolab, Inc.
Richard H. Kollisch was elected president of Sopur Medizintechnik GmbH (a
Sunrise subsidiary) in June 1992. Previously, Mr. Kollisch was vice president
and general manager during 1990 and 1991 for a division of The Stanley Works,
a hand tool manufacturer. From 1979 to 1990 he served as president and chief
executive of an American subsidiary of J.F. Behrens AG, a German manufacturer
of pneumatic tools and industrial fasteners.
Roger Lewis has served as president of Corona-S.E.P.A.C. S.A. (a Sunrise
subsidiary) since April 1995. Previously, he held the position of export
director of Sunrise Medical Ltd. from October 1990 and served as general
manager of Sunrise Medical S.A.R.L. from March 1992 to September 1993. From
1985 to 1990 Mr. Lewis was European sales director for Citizen Europe Ltd., a
Japanese computer peripheral manufacturer, and from 1978 to 1985 he held a
number of sales and marketing positions with Tube Investments PLC.
Dennis J. McCarthy was elected president of Joerns Healthcare Inc. (a
Sunrise subsidiary) in September 1990. From 1986 to 1989, Mr. McCarthy was
president of the Document Management Products Company (DMPC), a subsidiary of
Bell & Howell Company that manufactures and markets office products and
systems, where he also served as a corporate vice president. From 1981 to
1986, he was president of the Computer Output Microfilm Division of Bell &
Howell.
Thomas H. O'Donnell was appointed senior vice president--North America in
January 1996. Previously, he served as executive vice president--operations of
the company from January 1987 until August 1988, when he was elected president
of Quickie Designs Inc. (a Sunrise subsidiary). In 1986 Mr. O'Donnell was
president and chief operating officer of General Computer Company, a
manufacturer and distributor of personal computer peripherals. From 1984 to
1985, he was chief executive officer of Connecting Point of America, Inc., a
chain of computer retail stores. From 1967 to 1984, he was with IBM
Corporation in a variety of management positions, most recently as vice
president--product management for the Entry Systems Division.
Barrie Payne was named senior vice president--Europe in January 1996, after
serving as managing director of Sunrise Medical Ltd. (a Sunrise subsidiary)
since June 1983. Previously, Mr. Payne was president of A-BEC Mobility Inc., a
distributor of electric wheelchairs and other power mobility products that was
founded by him in 1972 and was purchased by Sunrise Medical in 1983.
John M. Radak was elected vice president and controller in January 1995.
Previously, Mr. Radak was vice president, finance for the respiratory care
subsidiary of Bird Medical Technologies Inc., a medical device manufacturer.
Prior to joining Bird, he held various financial management positions with
Calcomp Inc., a Lockheed/Martin subsidiary that manufactures printers and
plotters for computer graphics applications. Mr. Radak is a certified public
accountant.
Sam Sinasohn was elected vice president of taxes in March 1994. Previously,
Mr. Sinasohn served as director of taxes and assistant secretary from
September 1988 to March 1994 and as tax manager from July 1985 to September
1988. From 1982 to 1985, Mr. Sinasohn was a tax specialist for KPMG Peat
Marwick LLP. Mr. Sinasohn is a certified public accountant.
12
<PAGE>
Ted N. Tarbet was elected senior vice president and chief financial officer
in August 1993. Mr. Tarbet joined Sunrise in 1986 as corporate controller. In
1988 he was made a vice president of the company and in 1989 he was elected to
the position of vice president, chief financial officer and secretary. From
1981 to 1986, Mr. Tarbet served as controller and then as vice president and
chief financial officer of Anadex Inc., a manufacturer of personal computer
products. Mr. Tarbet is a certified public accountant.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The company's common stock, $1 par value, trades on the New York Stock
Exchange under the symbol "SMD." The highest and lowest daily closing price
for each quarterly period during the last two fiscal years was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
1996 1995
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter.................................... 29 25 1/8 26 1/2 20
Second Quarter................................... 26 7/8 15 1/8 29 1/4 24
Third Quarter.................................... 19 1/4 13 3/4 36 3/4 26 3/4
Fourth Quarter................................... 20 3/4 13 7/8 36 3/8 27 3/8
Year............................................. 29 13 3/4 36 3/4 20
</TABLE>
The number of holders of record of Sunrise common stock as of August 30,
1996 was 666. The company estimates it has approximately 10,600 beneficial
holders of its common stock. The closing price of the common stock on August
30, 1996 was 16 3/8.
The company has not paid cash dividends to holders of its common stock and
has no plans to do so in the foreseeable future. The company presently intends
to retain all earnings to fund its operations and future growth.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------
JUNE 28, JUNE 30, JULY 1, JULY 2, JULY 3,
1996 1995 1994 1993 1992(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED RESULTS OF
OPERATIONS DATA:
Net sales...................... $667,130 $601,927 $466,942 $319,196 $243,920
Gross profit................... 220,625 205,651 166,947 115,317 86,218
Marketing, selling and
administrative expenses....... 159,109 134,511 102,766 67,269 51,796
Research and development
expenses...................... 15,544 13,937 11,029 7,388 5,846
Corporate expenses............. 9,998 7,360 5,444 4,439 3,701
Amortization of intangibles.... 8,686 6,823 5,435 2,374 1,772
Unusual items.................. 65,152 -- -- -- --
Corporate operating income
(loss)........................ (37,864) 43,020 42,263 33,847 23,103
Interest expense............... 16,687 10,358 6,078 4,252 2,908
Income (loss) before taxes..... (52,460) 33,863 36,168 29,696 20,244
Net income (loss).............. $(40,867) $ 19,471 $ 21,809 $ 18,090 $ 12,027
======== ======== ======== ======== ========
Net income (loss) per share(2). $ (2.17) $ 1.03 $ 1.19 $ 1.21 $ .94
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)................ 18,810 18,819 18,317 14,950 12,786
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Working capital................ $104,991 $119,594 $101,479 $ 92,049 $ 32,137
Total assets................... 620,416 604,743 471,667 284,031 201,810
Long-term debt(3).............. 207,446 182,029 118,697 32,475 56,039
Stockholders' equity(4)........ $260,554 $299,493 $259.539 $194,723 $ 92,256
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Fiscal year 1992 contained 53 weeks.
(2) Net income (loss) per share and weighted average number of shares
outstanding for fully diluted computations are not materially different
from primary computations.
(3) Excludes current installments of long-term debt.
(4) The company did not declare cash dividends for the fiscal years 1992
through 1996.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sunrise achieved record net sales in its fiscal year ended June 28, 1996.
However, two developments had a significant adverse impact on the company's
operations. First, a deteriorating profit trend at the company's
Bio Clinic/Comfort Clinic divisions was hidden until October 1995 by
accounting irregularities at those divisions. Second, market conditions within
the U. S. homecare industry were characterized by severe pricing pressure
which worsened the company's competitive position in more generic products, in
particular certain respiratory and patient aids products. Definitive programs
to address these matters were developed throughout the company, including a
reorganization of the company's domestic salesforces, exit of certain
businesses, and initial steps to consolidate several operations in both the
U.S. and Europe.
The company recorded pre-tax charges from unusual items of $65.2 million in
1996. These charges included the costs of an internal investigation at the Bio
Clinic/Comfort Clinic divisions and subsequent restatement of fiscal 1995 and
1994 financial statements, the settlement of related stockholder litigation,
the write-down of assets at Bio Clinic and Comfort Clinic to reflect revised
estimates of realizable values, and costs related to the company's
reorganization and cost reduction program. These charges for unusual items
contributed to a loss from operations of $37.9 million.
The company incurred higher interest expense in 1996 because of increased
acquisition-related debt and higher interest rates in part caused by less
favorable terms on its renegotiated credit facility. Goodwill amortization
increased following a number of recent acquisitions. As a result, the company
incurred a loss before taxes in 1996 of $52.5 million. The net loss was $40.9
million, or $2.17 per share. Excluding the unusual items, net income in 1996
was $5.7 million or $.30 per share.
Net Sales Analysis
Sales increased 11% to $667 million in 1996, while 1995 sales of $602
million were 29% higher than sales of $467 million recorded in 1994. Excluding
the effect of Bio Clinic's air therapy rental business sold in January 1996
and the Comfort Clinic division to be sold in fiscal 1997, the company's sales
growth in 1996 was 18%. This sales performance was marked by strong global
sales of custom wheelchairs and increased market penetration in Europe across
all Sunrise product lines.
The acquisition of three European-based businesses between April and October
1995 added 11% to the company's net sales in 1996, while acquisitions
accounted for 8 percentage points of the increase in net sales in 1995.
Sunrise used acquisitions during these periods to enhance existing businesses
and to pursue international expansion. Although the magnitude of the impact
will vary from year to year, the company expects acquisitions, which are a key
component of its growth strategy, to contribute to its future sales growth.
International sales grew 41% in 1996 to $281 million, following growth of
49% in 1995. International customers accounted for 42% of total sales in 1996
compared to 33% in 1995 and 29% in 1994. Fluctuations of international
currency rates increased overall sales by less than 1% in 1996 and by 3% in
1995, while reducing sales by 2% in 1994. The effect of currency fluctuations
on reported results is expected to increase as Sunrise continues to expand its
foreign operations.
15
<PAGE>
ANALYSIS OF PRODUCT LINE SALES CONTRIBUTION
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Homecare Products.............................. $265 40% $258 43% $206 44%
Institutional Products......................... 103 15% 112 19% 100 22%
Consumer Products.............................. 44 7% 67 11% 52 11%
European Operations............................ 255 38% 165 27% 109 23%
---- --- ---- --- ---- ---
Total........................................ $667 100% $602 100% $467 100%
==== === ==== === ==== ===
</TABLE>
Concern over the rising cost of healthcare has sparked a marked shift toward
lower priced products and services in the medical community. This shift has
resulted in the substitution of simpler and more generic products, as well as
price concessions to payers from healthcare providers, who are the company's
primary customers. As healthcare moves from a largely fee-for-service pattern
to prepaid payment systems, this trend is expected to intensify. High-volume,
full-line providers will have a competitive advantage over those servicing
only niche markets. These trends are causing healthcare providers to merge at
an unprecedented pace; manufacturers and distributors are following a similar
consolidation course. In this market environment, management believes that
future sales growth will be driven predominantly by unit volume growth,
product innovation, contract sales to increasingly larger customers and buying
groups, and by international expansion.
North American sales of homecare products reached record levels in each of
the last three years, growing 2% to $265 million in 1996, after an increase of
25% to $258 million in 1995 compared to sales of $206 million in 1994. The
custom wheelchair business led this group's results during this period,
reflecting the introduction of innovative products, such as new power
wheelchair models, and the acquisition of Jay Medical in September 1994. Jay's
seating systems for wheelchairs extended the company's product offerings, both
in the U.S. and abroad. In contrast, domestic sales for respiratory products
were weak in 1996, due primarily to uncertainty regarding the Medicare
reimbursement rates for oxygen equipment and pricing pressures on certain
commodity products under the influence of managed care and Medicare/Medicaid
reimbursement policies. North American sales of patient aids declined slightly
in 1996, after modest growth in 1995, the result of pricing and competitive
pressures.
Institutional products sales in North America declined 7% in 1996 to $103
million. This followed growth of 12% in 1995 to $112 million compared to $100
million in 1994, when both healthcare beds and support surfaces contributed to
the increase. In 1996, the sales decline was the net result of two widely
divergent market patterns. Joerns' institutional sales saw solid growth as
nursing home construction rebounded in 1996. In contrast, the company's
institutional support surface business encountered severe competition and
declining prices. Also contributing to the sales decline was the sale of the
company's air therapy rental business in January 1996 following an extended
period of declining rental rates.
Reflecting the company's commitment to international expansion, sales in
Europe grew by 55% in 1996 to $255 million following an increase of 51% in
1995 to $165 million compared to sales of $109 million in 1994. Wheelchair
sales reflected strong growth in European core businesses and the acquisition
of two distribution companies during the second half of 1995, one in Italy and
one in Switzerland. Respiratory products sales in Europe continued their solid
sales growth in 1996. Sales of patient aids were boosted in 1996 with the
acquisition in July 1995 of Coopers Healthcare, a U.K.-based company, thereby
enhancing the company's worldwide position in the patient aid market. European
sales of healthcare beds and furnishings also grew substantially in 1996,
largely attributable to the additional sales of Corona, a French healthcare
bed manufacturer acquired in April 1995, and Parker Bath Group, a U.K.
manufacturer of bathing systems and patient lifters, acquired in October 1995.
16
<PAGE>
Expense and Profit Analysis
Gross margin (gross profit as a percentage of net sales) declined by 1.1% in
1996 due primarily to a significant decline in the profitability of the
company's support surfaces business. This decline in support surfaces resulted
from several factors, including a continuing shift away from the use of
disposable foam overlays in hospitals, compressed margins in the retail market
for mattress pads and pillows, and a decline in average daily rental rates in
the air therapy rental business (leading to the sale of this business in
January 1996). For the company's other product lines, the gross margin was
36.2% in 1996, as competitive pricing conditions and cost increases in certain
raw materials were largely offset by selective price increases, changes in
product mix and improvements in factory productivity. In 1995 gross margin
declined by 1.6%, as lower margins on support surfaces products were again
only partially offset by productivity improvements throughout the rest of the
company.
Marketing, selling and administrative expenses of $159.1 million were 1.5%
higher as a percentage of net sales in 1996, after an increase of 0.3% in
1995. The launch in February 1996 of SunMed Service (SMS) resulted in
increased expenses of $6.3 million. SMS is integrating the order entry,
customer service and delivery functions for standard products from all of the
company's U.S. manufacturing divisions. It is the objective of SMS to improve
service levels for both large national accounts and independent homecare
providers through its new national network of eight distribution centers.
Management expects that revenue benefits will eventually offset the
incremental costs of this new customer service capability, although the extent
and timing of such benefits are uncertain.
ANALYSIS OF EXPENSES AND PROFIT MARGINS
<TABLE>
<CAPTION>
% INCREASE
(DECREASE)
----------------
1996 1995 1994 1996/95 1995/94
------ ------ ------ ------- -------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $667.1 $601.9 $466.9 11 % 29 %
------ ------ ------ ---- ---
Gross profit ........................ 220.6 205.7 166.9 7 % 23 %
Percent of net sales............... 33.1 % 34.2% 35.8%
Marketing, selling and administrative
expenses ........................... 159.1 134.5 102.8 18 % 31 %
Percent of net sales............... 23.8 % 22.3% 22.0%
Research and development ............ 15.5 13.9 11.0 12 % 26 %
Percent of net sales............... 2.3 % 2.3% 2.4%
Corporate expenses .................. 10.0 7.4 5.4 36 % 35 %
Percent of net sales............... 1.5 % 1.2% 1.2%
Amortization of goodwill and other
intangibles ........................ 8.7 6.8 5.4 27 % 26 %
Percent of net sales............... 1.3 % 1.1% 1.2%
Unusual items ....................... 65.2 -- -- -- --
Percent of net sales............... 9.8 %
------ ------ ------ ---- ---
Corporate operating income (loss) ... (37.9) 43.0 42.3 (188)% 2 %
Percent of net sales............... (5.7)% 7.1% 9.1%
Interest and other .................. 14.6 9.2 6.1 59 % 50 %
Percent of net sales............... 2.2 % 1.5% 1.3%
------ ------ ------ ---- ---
Income (loss) before taxes .......... (52.5) 33.9 36.2 (255)% (6) %
Percent of net sales............... (7.9)% 5.6% 7.7%
Income taxes (benefit) .............. (11.6) 14.4 14.4 (181)% 0 %
Percent of income (loss) before
taxes............................. (22.1)% 42.5% 39.7%
------ ------ ------ ---- ---
Net income (loss) ................... $(40.9) $ 19.5 $ 21.8 (310)% (11)%
Percent of net sales............... (6.1)% 3.2% 4.7%
------ ------ ------ ---- ---
</TABLE>
17
<PAGE>
Research and development expense increased 12% to $15.5 million in 1996
following an increase of 26% to $13.9 million in 1995. The growth of research
and development spending has generally been consistent with sales growth.
Amortization of goodwill increased 27% in 1996 and 26% in 1995 as the result
of a number of acquisitions in the 1994 to 1996 period, all of which were
accounted for as purchases.
The company's support surfaces business lost $14.8 million at the division
profit contribution level in 1996, compared to a loss of $3.7 million in 1995,
as restated. (Profit contribution is an internal measurement used by the
company to measure divisional, product line and group performance; it does not
include any allocations of unusual items, corporate office expense, goodwill
amortization, interest, or income taxes.) During 1996, significant expense
increases were incurred in this business, including higher marketing costs and
increased bad debt expenses, while revenues were under increased competitive
pressures. In December 1995 management initiated a number of actions designed
to return this business to profitability, including staffing and overhead
reductions to align operations with a significantly lower level of sales. As
part of this plan, Bio Clinic's air therapy rental business was sold in
January 1996. Quarterly losses of the support surfaces business were reduced
from $6 million in the second quarter to approximately $3 million in each of
the third and fourth quarters.
In June 1996 the company announced plans to merge Bio Clinic with its Joerns
division to form a single institutional products organization that will
integrate the domestic manufacturing and marketing of all Sunrise products
aimed at nursing homes and hospitals. In August 1996, following a strategic
review of its businesses, the company decided to sell the Comfort Clinic
division in order to concentrate on its core healthcare products business. On
August 29, 1996, the company entered into an agreement for the sale of the
assets of Comfort Clinic for $14 million in cash, with adjustment for changes
in net book value at closing. The transaction is subject to several
contingencies, and, if the contingencies are satisfied, the sale is expected
to be completed in October 1996.
In addition to these actions related to the support surfaces business,
management conducted in December 1995 an intensive review of the company's
other operations and businesses and initiated Operation Rebound, a company-
wide profit improvement plan. This plan involved four major elements: the
consolidation of the company's domestic salesforces from twelve to six; the
integration of a number of the company's smaller divisions operating within
the same country or market; the establishment of profit improvement programs
at all divisions; and the sale of the air therapy rental business referred to
above. In June 1996 the company reached an agreement to settle stockholder
litigation filed in November and December 1995 following the announcement of
the investigation of accounting practices in its support surfaces business and
subsequent restatement of the company's 1995 and 1994 financial statements.
The company also initiated plans to consolidate certain European operations.
As a result of these actions, the company recorded pre-tax charges from
unusual items of $65.2 million in 1996. These charges included: $18.6 million
for costs of the internal investigation, restatement, and reissuance of
historical financial statements and the settlement of related litigation,
including attorneys' fees; $27.6 million for the write-down of assets at Bio
Clinic and Comfort Clinic to reflect revised estimates of net asset
realizations, including goodwill; and $19.0 million related to the company's
reorganization and cost reduction program, including severance costs of $3.2
million, facility closing costs, and product line discontinuance expenses. Of
the total charges of $65.2 million, approximately $36.2 million required cash
payments (of which $18.8 million had been paid by June 28, 1996) and $29.0
million represented non-cash charges.
Excluding the unusual items, corporate operating income declined as a
percentage of net sales in both 1996 and 1995. The 1996 decline to 4.1%
reflects lower gross margins in support surfaces, respiratory and patient aids
product lines, as well as higher selling and administrative costs. In 1995, a
compression in gross margin contributed most of the two percentage point
decline in corporate operating margin to 7.1% compared to 9.1% in the prior
year.
Interest expense rose 61% in 1996 to $16.7 million following an increase of
70% to $10.4 million in 1995, primarily due to higher average borrowings
required to finance acquisitions completed during these years and to fund
capital expenditures. In addition, higher interest rates caused by market
conditions and by less favorable terms in the company's credit agreement
contributed to the increase in interest expense in 1996. Interest rates
18
<PAGE>
increased in 1995 compared to 1994 because of market conditions. Interest
income was $2.9 million in 1996 (a 78% increase) compared to $1.6 million in
1995, reflecting the growth in the company's installment receivables.
In 1996 the company recognized a tax benefit at an effective tax rate of
only 22.1% due to non-deductible goodwill representing a relatively large
portion of the loss before income taxes. In 1995 the effective tax rate was
42.5%, an increase from the 39.7% tax rate in 1994 because of higher amounts
of goodwill amortization. The effective tax rates in 1995 and 1994 exceeded
the U.S. corporate tax rate of 35%, primarily because of state income taxes
and non-deductible goodwill amortization.
Because of the unusual items, the company incurred a net loss of $40.9
million in 1996. Excluding the unusual items, net income was $5.7 million
($.30 per share) or 0.9% of net sales. Net income of $19.5 million in 1995
represented an 11% decrease compared to net income of $21.8 million in 1994.
In 1995 net margin dropped to 3.2% from the 4.7% achieved in 1994 as a result
of a lower gross margin, increased interest expense and a higher effective tax
rate.
The company attempts to minimize or offset the impact of inflationary
pressures on labor and raw material costs through increased sales volume,
improved productivity, active cost control measures, and, to a lesser extent,
increases in product pricing, as it did in 1995. In 1996, product price
increases within selected markets again partially offset raw material cost
increases. The company believes that inflationary material cost increases may
continue and that the markets in which it sells its products will remain
price-sensitive, thereby limiting its ability to offset higher costs with
pricing actions.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
Cash Flow
Cash flows provided by operations increased to $22 million in 1996 from $19
million in 1995 and $3 million in 1994. The lower level in 1994 reflected
significant growth in receivables and inventories. Both 1996 and 1995 cash
flows include higher non-cash charges for depreciation and amortization, as
well as the non-cash and unpaid portions of unusual item charges in 1996.
Approximately $17 million of accrued unusual item costs was unpaid at June 28,
1996. Most of this amount is expected to be paid in 1997; however, this will
be partially offset by tax refunds of $12.5 million that are expected to be
received by the end of 1997.
Cash generation (defined as net income plus non-cash charges) has
historically been an important source of funding for capital spending, working
capital and acquisitions in 1996 and 1995. Cash generation was $3 million in
1996, reflecting the impact of unusual items. This compares to $46 million
(236% of net income) in 1995 and $37 million (169% of net income) in 1994.
Capital Expenditures
Capital spending in 1996 was $19.0 million, approximately equal to
depreciation expense, compared to $23.1 million, or 137% of depreciation, in
1995. In 1994 capital expenditures were $23.4 million, or 192% of depreciation
expense. Significant investments made in 1996 include upgrades and
enhancements in machinery and equipment, new product tooling, and improvements
in telecommunications and data processing systems. The company expects capital
expenditures in 1997 to be significantly in excess of the 1996 level.
Acquisitions
Sunrise completed two acquisitions in 1996 in support of its strategic
objectives. These transactions followed a total of 22 acquisitions in the
preceding four years. In July 1995 the company purchased Coopers Healthcare
Plc, a United Kingdom manufacturer of patient aids. This was followed in
October by the acquisition of Parker Bath Group, a U.K. manufacturer and
distributor of bathing systems and patient lifters.
19
<PAGE>
During 1995, Sunrise acquired certain assets and liabilities of Jay Medical
Ltd., a Boulder, Colorado-based manufacturer of wheelchair cushions and
seating systems. The company also acquired Cozy Craft, a domestic line of
seating inserts for which it was already the primary distributor.
Internationally, Sunrise acquired Corona, a French manufacturer of healthcare
beds, in April 1995 and also purchased two European distribution companies,
former importers/distributors for the company, in Italy and Switzerland.
During 1994 Sunrise acquired two domestic manufacturers of respiratory
products used in the home. DeVilbiss, acquired in July 1993, manufactures
oxygen concentrators, compressor nebulizers and sleep therapy equipment.
Pulsair, acquired in January 1994, manufactures liquid oxygen products and
proprietary oxygen demand delivery devices. Also acquired was Vitactiv, a
Swedish distributor of rehabilitation products.
Capital Structure and Leverage
The company's capital structure consists of two components: stockholders'
equity and long-term debt. Stockholders' equity was $260.6 million at the end
of 1996, a decrease of $38.9 million from the prior year-end primarily from
the net loss of $40.9 million incurred during the year. Proceeds of $6.2
million from the issuance of common stock to sellers of an acquired company
and to stock optionees were partially offset by unfavorable foreign currency
translation of $4.3 million in 1996.
ANALYSIS OF LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed-rate debt as a percentage of total debt at year-end.... 66% 72% 77%
Weighted average annual interest rate........................ 7.8% 6.6% 5.8%
Foreign denominated debt as a percentage of total debt at
year-end.................................................... 56% 41% 25%
Interest coverage (before unusual items)..................... 1.6x 4.2x 7.0x
</TABLE>
Long-term debt (excluding current installments) increased by $25 million to
$207 million at year end, primarily as a result of borrowings to finance
acquisitions ($24 million) and to pay the costs of the company's internal
investigation and related litigation ($14 million). Excluding these
borrowings, debt was reduced by $13 million in fiscal 1996. The ratio of debt
to total capitalization rose to 44% at year end compared to 38% at the end of
fiscal 1995.
Sunrise attempts to minimize interest expense while also managing its
exposure to variable interest rates by employing interest rate exchange
agreements, or swaps, to convert its bank borrowings from floating rate into
the equivalent of fixed rate debt. However, as a policy Sunrise does not use
interest rate swaps or any other derivatives that have a level of complexity
or a risk, in the judgment of Sunrise's management, that is higher than the
exposure to be hedged. The company does not hold or issue such instruments for
trading purposes.
Sunrise has used foreign-denominated borrowings from its multi-currency
credit facility to hedge against foreign currency balance sheet exposures that
would otherwise result from changes in currency values. Total foreign-
denominated debt at year end was $119 million in 1996, $76 million in 1995 and
$31 million in 1994.
In May 1996, the company's multi-currency credit facility was amended to
provide for maximum borrowings of $250 million, declining to $235 million in
January 1999 and $215 million in January 2000. The company must comply with
certain covenants, such as the maintenance of leverage ratio and interest
coverage, minimum levels of tangible net worth, and certain restrictions on
acquisitions. As of June 28, 1996 the company's funds availability from the
credit facility was approximately $62 million.
International Operations
Management estimates that over half of the worldwide market for the
company's products is outside the United States. The company seeks to access
these markets by expanding internationally and establishing manufacturing and
distribution capabilities in key countries. This exposes Sunrise to adverse
changes in local
20
<PAGE>
economic conditions, governmental purchase curtailments and swings in local
currency values. The company believes that, over time, the impact of changing
conditions in any single foreign country will be mitigated by greater
geographic diversification.
Foreign Currency Risk Management
Operating on a global basis requires a posture of active currency risk
management. To finance imports and exports, Sunrise utilizes a variety of
foreign currencies which are constantly shifting in relative value. The
company engages in hedging activities to reduce potential transaction losses
on net cash flows and balances denominated in these currencies. These amounts
can arise from cross-border trade flows or intercompany financing
transactions. The company's financial statements are also affected by foreign
currency translation fluctuations. These distort the comparative results of
foreign operations when they are translated into U.S. dollars using dissimilar
rates.
In contrast to transaction gains or losses, translation adjustments are not
the result of a cash exchange of currencies and, therefore, do not give rise
to a direct economic gain or loss. In these cases the costs to execute hedges
would exceed any consistently realizable tangible benefits. Consequently,
Sunrise does not commit economic resources to hedge against the potential
effect of foreign currency translation fluctuations. It believes that the best
long-term protection of stockholder value is to do business in a broad number
of currencies.
New Accounting Standards
In 1995 the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), which requires impairment costs to be
recorded on long-lived assets used in operations, such as property, plant and
equipment and intangible assets, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount of the assets. The company will adopt SFAS 121 in the
first quarter of 1997. Based on current circumstances, management does not
believe the effect of such adoption will be material.
The company accounts for stock options in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." In accordance with SFAS 123,
"Accounting for Stock-Based Compensation," the company intends to continue to
apply APB 25 for purposes of determining net income and to adopt the pro forma
disclosure requirements of SFAS 123 in 1997.
Dividend Policy
The company's present policy is to use available cash flow for reinvestment
in its core businesses, for future acquisitions and for debt reduction rather
than to pay a cash dividend. This policy reflects an appraisal by management
and the Board of Directors, which includes the company's largest stockholder,
of the attractiveness of the company's investment opportunities and their
confidence in its ability to continue increasing economic value for its
stockholders through cash retention and reinvestment. This policy is reviewed
periodically as industry conditions change.
Litigation
Following the announcement of the internal investigation into financial
reporting practices at the company's Bio Clinic subsidiary, the company and
certain of its current and former officers, directors and employees were named
as defendants in a number of stockholder class action lawsuits, each alleging
violations of the federal securities laws and seeking unspecified damages.
These lawsuits were consolidated in the U. S. District Court for the Southern
District of California. In June 1996 the company reached an agreement in
principle to settle the actions for $20 million. The company's share of the
settlement was approximately $7 million, with the balance paid by the
company's insurance carriers. The agreement also includes settlement of a
stockholder derivative
21
<PAGE>
action filed in San Diego Superior Court. The settlements are subject to final
court approval. Still pending are two derivative actions in Delaware state
courts against many of the same defendants. The company believes that these
suits will be dismissed once the settlements described above become final. The
Securities and Exchange Commission ("SEC") has entered a formal order of
private investigation into the circumstances underlying the restatement of the
company's 1995 and 1994 financial results. The company is cooperating fully
with the SEC in its investigation.
Forward-Looking Statements
Any statements contained in this Form 10-K which are not historical facts
are forward-looking statements that involve risks and uncertainties. The
company wishes to caution the reader that forward-looking statements, such as
the future impact of SunMed Service on company profitability, the impact of
future acquisitions, if any, and the level of future capital expenditures are
only predictions; actual events or results may differ materially as a result
of risks facing the company. These risks include, but are not limited to: the
impact of competitive products; pricing pressures caused by changes in
Medicare and Medicaid policies and other factors; the costs of raw materials;
future product demand and market acceptance risks; the effect of economic
conditions in the U.S. and abroad; product development, commercialization and
technological difficulties; shifts in industry distribution channels;
acceleration of the current trend of consolidation of the company's customer
base; governmental regulation of medical device design and manufacturing (such
as by the FDA in the U.S.); the availability and financial prospects of future
acquisition candidates; and other risks referenced in this and other
Securities and Exchange Commission filings of the company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are included herein:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management.................................................... 23
Independent Auditors' Report............................................ 24
Consolidated balance sheets as of June 28, 1996 and June 30, 1995....... 25
Consolidated statements of operations for the years ended June 28, 1996,
June 30, 1995 and July 1, 1994......................................... 26
Consolidated statements of cash flows for the years ended June 28, 1996,
June 30, 1995 and July 1, 1994......................................... 27
Consolidated statements of stockholders' equity for the years ended June
28, 1996, June 30, 1995 and July 1, 1994............................... 28
Notes to consolidated financial statements.............................. 29
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
22
<PAGE>
REPORT OF MANAGEMENT
The management of Sunrise Medical Inc. is responsible for the preparation,
integrity and accuracy of the accompanying financial statements and related
information. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis and include amounts based on our best estimates and informed
judgments, as required.
As a result of the internal investigation which led to a restatement of the
company's 1994 and 1995 financial statements, the company has: (i) increased
the staffing of the internal audit department and added an internal MIS
auditing capability; (ii) expanded the scope of involvement of independent
auditors in quarterly financial reviews and year-end audits; (iii) increased
corporate finance oversight through increased staffing, a new European
corporate office, and more frequent and intensive on-site reviews; (iv)
increased training and ongoing auditing procedures to enforce strict
compliance with corporate finance policies and procedures; and (v) developed a
written code of business conduct.
Although no cost-effective system will preclude all errors and
irregularities, we believe Sunrise Medical has in place a system of internal
controls which provides reasonable assurance that assets are safeguarded
against material loss from unauthorized use or disposition, transactions are
recorded in accordance with our policies, and the financial information
presented to our stockholders is reliable.
The Audit Committee of the Board of Directors is comprised solely of outside
directors. The Audit Committee meets periodically with the independent
auditors, our internal audit department and financial management to ensure
that each is carrying out its responsibilities. Both the independent auditors
and the internal audit department have free and direct access to the Audit
Committee.
The company's independent auditors are recommended by the Audit Committee
and selected by the Board of Directors. The consolidated financial statements
have been audited by KPMG Peat Marwick LLP, who have expressed their opinion
elsewhere herein with respect to the fairness of the statements. Their audits
included a review of the system of internal control and tests of transactions
to the extent they considered necessary to render their opinion.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Sunrise Medical Inc.:
We have audited the accompanying consolidated balance sheets of Sunrise
Medical Inc. and Subsidiaries as of June 28, 1996 and June 30, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended June 28, 1996. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in Item 14.a(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
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 financial position of Sunrise
Medical Inc. and Subsidiaries as of June 28, 1996 and June 30, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 28, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Los Angeles, California
August 16, 1996
24
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28, JUNE 30,
1996 1995
-------- --------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 1,785 $ 1,740
Trade receivables, net of allowance for doubtful accounts
of $11,523 and $5,904, respectively....................... 123,924 123,007
Installment receivables, net............................... 10,312 13,052
Inventories................................................ 80,937 81,941
Income tax refunds receivable.............................. 12,535 6,834
Deferred income taxes...................................... 17,802 4,203
Other current assets....................................... 5,016 7,662
-------- --------
Total current assets..................................... 252,311 238,439
Property and equipment, net.................................. 82,246 89,133
Goodwill and other intangible assets, less accumulated
amortization of $31,167 and $24,351, respectively........... 278,857 270,478
Other assets, net............................................ 7,002 6,693
-------- --------
Total assets................................................. $620,416 $604,743
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt..................... $ 5,748 $ 2,328
Trade accounts payable..................................... 42,861 36,096
Accrued compensation and other expenses.................... 88,331 72,485
Income taxes payable....................................... 10,380 7,936
-------- --------
Total current liabilities................................ 147,320 118,845
Long-term debt, less current installments.................... 207,446 182,029
Deferred income taxes........................................ 5,096 4,376
Stockholders' equity:
Preferred stock, $1 par. Authorized 5,000 shares; none
issued.................................................... -- --
Common stock, $1 par. Authorized 40,000 shares; 18,847 and
18,597 shares, respectively, issued and outstanding....... 18,847 18,597
Additional paid-in capital................................. 195,906 189,955
Retained earnings.......................................... 45,409 86,276
Cumulative foreign currency translation adjustment......... 392 4,665
-------- --------
Total stockholders' equity............................... 260,554 299,493
-------- --------
Total liabilities and stockholders' equity................... $620,416 $604,743
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales......................................... $667,130 $601,927 $466,942
Cost of sales..................................... 446,505 396,276 299,995
-------- -------- --------
Gross profit...................................... 220,625 205,651 166,947
-------- -------- --------
Marketing, selling and administrative expenses.... 159,109 134,511 102,776
Research and development expenses................. 15,544 13,937 11,029
Corporate expenses................................ 9,998 7,360 5,444
Amortization of goodwill and other intangibles.... 8,686 6,823 5,435
Unusual items..................................... 65,152 -- --
-------- -------- --------
Corporate operating income (loss)................. (37,864) 43,020 42,263
-------- -------- --------
Other (expense) income:
Interest expense................................ (16,687) (10,358) (6,078)
Interest income................................. 2,878 1,617 56
Other income and expense, net................... (787) (416) (73)
-------- -------- --------
(14,596) (9,175) (6,095)
-------- -------- --------
Income (loss) before income taxes................. (52,460) 33,863 36,168
Income tax expense (benefit)...................... 11,593 14,392 14,359
-------- -------- --------
Net income (loss)................................. $(40,867) $ 19,471 $ 21,809
======== ======== ========
Net income (loss) per share....................... $ (2.17) $ 1.03 $ 1.19
======== ======== ========
Weighted average number of shares outstanding..... 18,810 18,819 18,317
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................... $ (40,867) $ 19,471 $ 21,809
Depreciation and amortization............... 19,090 16,854 12,198
Amortization of goodwill and other
intangibles................................ 8,686 6,823 5,435
Deferred income taxes....................... (13,140) 2,866 (2,546)
Unusual items--non-cash charges............. 28,978 -- --
Changes in assets and liabilities, net of
effect of acquisitions:
Receivables, net.......................... 7,548 (12,021) (26,741)
Inventories............................... 2,983 (10,616) (12,680)
Prepaid expenses and other assets......... 2,703 (4,951) (4,053)
Income taxes.............................. (3,257) (1,585) 1,356
Accounts payable and other liabilities.... 8,793 1,950 8,503
--------- --------- ---------
Net cash provided by operating activities..... 21,517 18,791 3,281
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.......... (19,041) (23,144) (23,373)
Proceeds from sale of business.............. 6,004 -- --
Net cash invested in acquisition of
businesses................................. (23,072) (52,254) (104,312)
--------- --------- ---------
Net cash used for investing activities........ (36,109) (75,398) (127,685)
--------- --------- ---------
Cash flows from financing activities:
Borrowings of long-term debt................ 191,759 208,335 164,344
Repayments of long-term debt................ (177,335) (156,220) (79,053)
Proceeds from issuance of common stock...... 273 3,604 1,609
--------- --------- ---------
Net cash provided by financing activities..... 14,697 55,719 86,900
--------- --------- ---------
Effect of exchange rate changes on cash....... (60) 47 47
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 45 (841) (37,457)
Cash and cash equivalents at beginning of
year......................................... 1,740 2,581 40,038
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 1,785 $ 1,740 $ 2,581
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
27
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
FOREIGN
ADDITIONAL CURRENCY TOTAL
NUMBER PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
--------- ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 2,
1993................... 16,174 $16,174 $136,931 $ 44,996 $(3,378) $194,723
------ ------- -------- -------- ------- --------
Exercise of stock
options.............. 154 154 697 -- -- 851
Tax benefit from
exercise of stock
options.............. -- -- 758 -- -- 758
Issuance of stock for
acquisitions......... 1,668 1,668 37,579 -- -- 39,247
Net income............ -- -- -- 21,809 -- 21,809
Foreign currency
translation
adjustment........... -- -- -- -- 2,151 2,151
------ ------- -------- -------- ------- --------
Balance at July 1,
1994................... 17,996 17,996 175,965 66,805 (1,227) 259,539
------ ------- -------- -------- ------- --------
Exercise of stock
options.............. 269 269 2,255 -- -- 2,524
Tax benefit from
exercise of stock
options.............. -- -- 1,316 -- -- 1,316
Issuance of stock for
acquisition.......... 340 340 10,647 -- -- 10,987
Retirement of stock... (8) (8) (228) -- -- (236)
Net income............ -- -- -- 19,471 -- 19,471
Foreign currency
translation
adjustment........... -- -- -- -- 5,892 5,892
------ ------- -------- -------- ------- --------
Balance at June 30,
1995................... 18,597 18,597 189,955 86,276 4,665 299,493
------ ------- -------- -------- ------- --------
Exercise of stock
options.............. 27 27 200 -- -- 227
Tax benefit from
exercise of stock
options.............. -- -- 46 -- -- 46
Issuance of stock for
acquisition.......... 223 223 5,705 -- -- 5,928
Net loss.............. -- -- -- (40,867) -- (40,867)
Foreign currency
translation
adjustment........... -- -- -- -- (4,273) (4,273)
------ ------- -------- -------- ------- --------
Balance at June 28,
1996................... 18,847 $18,847 $195,906 $ 45,409 $ 392 $260,554
====== ======= ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Sunrise Medical Inc. (the "company") designs, manufactures and markets
medical products used in institutional and home care settings that address the
recovery, rehabilitation, and respiratory needs of the patient. Products
include custom, manual and electric wheelchairs, wheelchair seating systems,
ambulatory and bath safety aids, home respiratory devices, patient-room beds
and furnishings, and therapeutic mattresses and support surfaces for
healthcare and consumer markets. The company's products are designed to meet
the special needs of four groups of people: the elderly, the disabled, the
recovering patient and the respiratory sufferer.
Basis of Presentation
The consolidated financial statements include domestic and foreign
subsidiaries. All material intercompany profits, balances and transactions
have been eliminated.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results could differ from management's estimates.
Fiscal Year End
The company's fiscal year ends on the Friday closest to June 30, resulting
in years of either 52 or 53 weeks. The years ended June 28, 1996, June 30,
1995 and July 1, 1994 each contained 52 weeks.
Inventories
Certain inventories are stated at the lower of last-in, first-out (LIFO)
cost or market value. All other inventories are stated at the lower of first-
in, first-out (FIFO) cost or market value.
Property and Equipment
Property and equipment are stated at cost and depreciated over estimated
useful lives by the straight-line or declining balance methods. Assets
recorded under capital leases and leasehold improvements are amortized over
the shorter of their useful lives or the related lease terms by the straight-
line method. The estimated useful lives of property and equipment range from
two to 42 years.
Goodwill
The excess of purchase price over the fair value of net assets of acquired
subsidiaries (goodwill) is amortized on a straight-line basis over periods of
20 to 40 years. Impairment of this intangible asset is determined through
comparisons to undiscounted future operating cash flows of the acquired
businesses. The impairment is measured on estimated fair value determined by
projected discounted future operating cash flows using a discount rate the
reflects the company's average cost of funds. The assessment of goodwill
impairment could be affected if estimated future operating cash flows are not
achieved.
Long-Lived Assets
In 1995 the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), which requires impairment costs to be
recorded on long-lived assets used in operations, such as property and
equipment
29
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and intangible assets, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount of the assets. The company will adopt SFAS 121 in the
first quarter of fiscal 1997. Based on current circumstances, management does
not believe the effect of such adoption will be material.
Revenue Recognition
The company recognizes revenue from product sales at the time of shipment
and provides an appropriate allowance for estimated returns and adjustments.
Warranty Costs
Certain of the company's products are covered by warranties against defects
in material and workmanship for periods of up to five years. Components of
certain products carry a lifetime warranty. The estimated warranty cost is
recorded at the time of sale and is adjusted periodically to reflect actual
experience.
Research and Development Costs
Research and development costs relate to both present and future products
and are expensed in the year incurred.
Stock-Based Compensation
The company accounts for stock options in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." In accordance with SFAS 123,
"Accounting for Stock-Based Compensation," the company intends to continue to
apply APB 25 for purposes of determining net income and to adopt the pro forma
disclosure requirements of SFAS 123 in fiscal 1997.
Foreign Currency Translation
Substantially all assets and liabilities of the company's foreign
subsidiaries are translated at year-end exchange rates, while revenue and
expenses are translated at exchange rates prevailing during the year.
Adjustments for foreign currency translation fluctuations are excluded from
net income and are deferred as a separate element of consolidated
stockholders' equity.
Net Income (Loss) per Share
Net income (loss) per share is computed using the weighted average number of
shares of outstanding common stock and dilutive common stock equivalents from
the assumed exercise of stock options. Fully diluted earnings per share are
not materially different from primary amounts.
Cash Flow Information
Cash payments for interest in 1996, 1995 and 1994 were $16,060, $9,547 and
$6,125, respectively. Cash payments of $8,842, $13,912 and $13,057 were made
for income taxes in 1996, 1995 and 1994, respectively. During 1996 the company
received income tax refunds of $6,834 related to amended U.S. federal and
state income tax returns for 1995.
Other
Certain 1995 and 1994 amounts have been reclassified to conform to
classifications used in 1996.
2. FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with original maturities of three months or less. The carrying
amount of cash and cash equivalents approximates their fair value.
30
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Installment Receivables
Installment receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Current portion.......................................... $14,293 $16,052
Less:
Unearned interest...................................... (2,225) (2,046)
Allowance for doubtful accounts........................ (1,756) (954)
------- -------
Net current portion.................................... 10,312 13,052
Due after one year (included in other assets)............ 5,761 5,497
------- -------
Total installment receivables, net....................... $16,073 $18,549
======= =======
</TABLE>
The carrying amount of installment receivables approximates their fair
value. The majority of these receivables are due in less than one year, and
the related interest rates have not varied significantly over the past two
years.
Long-Term Debt
Based on borrowing rates currently available to the company for bank loans
with similar terms and average maturities, the carrying amount of long-term
debt at June 28, 1996 and June 30, 1995 approximated its fair value.
Foreign Currency Forward Exchange Contracts
The company transacts business in various foreign currencies, primarily
European currencies. Foreign currency forward exchange contracts are used to
hedge exposure on certain assets and transactions that are denominated in
foreign currencies. The maturities on most of these foreign currency
instruments are less than one year. Deferred gains or losses attributable to
foreign currency instruments are not material.
Swap Agreements
The company has entered into five interest rate swap agreements with U.S.
money center banks in order to minimize the impact of interest rate
fluctuations on the company's interest expense. Each swap agreement is
denominated in the currency of the related borrowings. Under the terms of each
agreement the company receives compensation when the three-month interbank
offered rate of the respective currency exceeds the swap rate and pays
compensation when it falls below the swap rate. At June 28, 1996 the three-
month interbank offered rates were as follows: French francs--3.86%; U.S.
dollars--5.59%; and German marks--3.31%.
The fair market value of these swap agreements is the amount the company
would be required to pay to terminate them, which is estimated to be $1,211 at
June 28, 1996 ($119 at June 30, 1995). Net receipts or payments under all swap
agreements are included in interest expense. The company is exposed to credit
loss in the event of nonperformance by the other party to the interest rate
swap agreements. However, the company considers the risk of nonperformance by
the other party to be minimal because the party to each swap agreement is a
member of the company's bank group.
31
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the company's interest rate swap agreements:
<TABLE>
<CAPTION>
NOTIONAL U.S. DOLLAR SWAP
AMOUNT CURRENCY AMOUNT RATE EFFECTIVE PERIOD
-------- -------- ----------- ---- ----------------
<C> <C> <C> <C> <S>
150,000 French francs $29,115 7.14% April 1995-April 1997
100,000 French francs $19,410 7.59% April 1997-April 2000
30,000 U.S. dollars $30,000 5.29% September 1995-September
1997
30,000 U.S. dollars $30,000 5.63% September 1995-September
2000
25,000 German marks $16,405 8.05% February 1992-February
</TABLE> 1997
The U.S. dollar equivalent is based on exchange rates in effect at June 28,
1996.
3. BALANCE SHEET ITEMS
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE JUNE
28, 30,
1996 1995
------- -------
<S> <C> <C>
Raw material.............................................. $33,980 $35,126
Work-in-progress.......................................... 9,629 8,490
Finished goods............................................ 37,328 38,325
------- -------
Total inventories......................................... $80,937 $81,941
======= =======
</TABLE>
If all inventories had been valued at FIFO cost, inventories would have been
approximately $82,829 and $84,195 for 1996 and 1995, respectively.
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
JUNE 28, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Land.................................................. $ 5,434 $ 4,137
Buildings, machinery and equipment.................... 140,191 140,152
Leasehold improvements................................ 11,772 11,194
-------- --------
157,397 155,483
Less accumulated depreciation and amortization........ (75,151) (66,350)
-------- --------
Property and equipment, net........................... $ 82,246 $ 89,133
======== ========
</TABLE>
4. ACQUISITIONS
On July 19, 1995 the company acquired Coopers Healthcare Plc, a United
Kingdom-based manufacturer of patient aids, for 222,266 shares of common stock
(valued at $5.9 million) and cash of $2.5 million. On October 6, 1995 the
company acquired Parker Bath Group, a U.K. manufacturer and distributor of
bathing systems and patient lifters, for cash and notes amounting to $30.0
million. Pro forma results of operations, assuming the purchase transactions
had been made at the beginning of fiscal 1996, would not be materially
different from the results reported.
In April 1995 the company acquired the outstanding stock of S.E.P.A.C.,
Corona S.A., Tecktona Bois S.A. and Tecktona Sante S.A., a group of related
French corporations (collectively, "Corona") for approximately $42.9 million.
The total purchase price of 206 million French francs included 174,918 shares
of Sunrise common stock valued at 31 million French francs with the remainder
in cash, which was funded from the company's bank credit facility. Corona
manufactures and markets hydraulic and electric beds and other furniture for
the home care, nursing home and hospital markets in France.
32
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 1994 the company purchased selected assets and liabilities of
Jay Medical, Ltd. ("Jay") for approximately $31 million. The total purchase
price included cash of $19 million also financed through the multi-currency
credit facility, a subordinated note of $7.5 million and 165,789 shares of
Sunrise Medical Inc. common stock valued at $4.5 million when issued in
December 1994. Jay manufactures specialized wheelchair seating and positioning
products which it markets throughout the world.
During fiscal 1995 the company also acquired a U.S. manufacturer of adaptive
seating accessories for wheelchairs and two wheelchair distributors, one in
Italy and one in Switzerland. These companies were acquired for approximately
$3.7 million, consisting of $2.4 million in cash and $1.3 million in
subordinated notes.
In July 1993 the company purchased all of the outstanding stock of Homecare
Holdings, Inc., the parent company of DeVilbiss Health Care, Inc.
("DeVilbiss"), for approximately $132 million. The purchase price included
1,503,900 shares of common stock valued at approximately $34 million.
DeVilbiss manufactures and distributes respiratory products. The company
completed two other acquisitions in fiscal 1994, a wheelchair distributor in
Sweden and a domestic manufacturer of liquid oxygen products and proprietary
demand oxygen delivery devices. These businesses were acquired for $9.2
million, consisting of $6.0 million in cash, 97,165 shares of the company's
common stock valued at $2.9 million and subordinated notes of $0.3 million.
All of these acquisitions were accounted for by the purchase method of
accounting. Accordingly, the excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $36 million in 1996,
$69 million in 1995 and $121 million in 1994 was recognized as goodwill and is
being amortized over periods ranging from 20 to 40 years. The operating
results of all acquisitions are included in the consolidated results of
operations from the respective dates of acquisition.
5. UNUSUAL ITEMS
On January 4, 1996 the company announced the results of an internal
investigation of its financial controls and financial statements for
previously reported periods. The company reported that it had determined that
net sales, operating income and assets at its Bio Clinic division had been
overstated and liabilities had been understated as a result of actions by a
small number of personnel in the division's finance and management information
systems departments. In order to conceal the division's declining
profitability, they falsified accounting entries and computer reports, thereby
circumventing the company's internal accounting controls and avoiding
detection. As a result, the company restated its financial statements for the
years ended June 30, 1995 and July 1, 1994.
In December 1995 the company completed an intensive review of its operations
and businesses and initiated Operation Rebound, a corporate-wide profit
improvement plan. This plan involved four major elements: the consolidation of
the company's U.S. salesforces from twelve to six; the integration of a number
of the company's smaller divisions operating within the same country or
market; establishment of profit improvement programs at all divisions; and the
sale of Bio Clinic's air therapy rental business. Approximately 250 positions
were eliminated (including 83 positions in the air therapy rental business
transferred as of January 31, 1996 to the buyer of that business), or 6% of
the company total. The air therapy rental business had net sales of $7.6
million in 1996 through the date of sale; its net sales in 1995 and 1994 were
$13.1 million and $12.8 million, respectively.
In June 1996 the company reached a settlement, subject to court approval, of
stockholder litigation related to the financial reporting matters described
above. The company also announced the merger of the remaining Bio Clinic
business into the Joerns division (thereby eliminating an estimated 60
positions), commenced a company-wide reorganization of its operations with the
goal of reducing the company's general and administrative cost structure, and
initiated the sale of its Comfort Clinic division (Note 12).
33
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a result of these actions, the company recorded pretax charges from
unusual items of $65.2 million in 1996, of which $34.8 million was recorded in
the second quarter and $30.4 million in the fourth quarter. These charges
included: $18.6 million for costs of the internal investigation, restatement,
and reissuance of historical financial statements and the settlement of
related litigation, including attorneys' fees; $27.6 million for the write-
down of assets at Bio Clinic and Comfort Clinic to reflect revised estimates
of net asset realizations, including goodwill; and $19.0 million related to
the company's reorganization and cost reduction program, including severance
costs ($3.2 million), facility closing costs, and product line discontinuance
expenses. Of the total charges of $65.2 million, approximately $36.2 million
required cash payments (of which $18.8 million had been paid by June 28, 1996,
and the balance is expected to be paid over the next twelve to eighteen
months) and $29.0 million represented non-cash charges.
6. LEASES
The company leases office and operating facilities, machinery and equipment
and automobiles under operating leases which expire over the next 20 years.
Rental expense for operating leases amounted to $9,698, $8,332 and $7,566 for
1996, 1995 and 1994, respectively.
Minimum lease payments under operating leases expiring subsequent to June
28, 1996 are:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
---------- -------
<S> <C>
1997............................................ $11,034
1998............................................ 8,348
1999............................................ 6,266
2000............................................ 5,018
2001............................................ 3,633
Thereafter....................................... 18,101
-------
Total minimum lease payments..................... $52,400
=======
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 28, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
Borrowings under multi-currency credit agreement.......... $188,205 $164,572
Unsecured subordinated notes maturing from 1996 to 2003,
payable in installments with interest rates from 7% to
9.26%.................................................... 18,422 11,829
Mortgages payable in monthly installments with interest at
various rates from 6.65% to 9.1%, maturing from 1996
through 2004, secured by property........................ 3,922 4,860
Obligations under capital leases with lease periods
expiring at various dates through 2005; interest at
various rates from 6.25% to 14.8%........................ 2,645 3,096
-------- --------
Total long-term debt...................................... 213,194 184,357
Less current installments................................. (5,748) (2,328)
-------- --------
Long-term debt, less current installments................. $207,446 $182,029
======== ========
</TABLE>
As of June 28, 1996, aggregate debt maturities were as follows: 1997--
$5,748; 1998--$5,241; 1999--$3,285; 2000--$4,847; 2001--$190,293; and
thereafter--$3,780.
The company entered into an amended and restated bank credit facility as of
September 29, 1995, which provided for an increase in the revolving credit
commitment to $275 million and an extension of the maturity
34
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
date to January 2001. The bank credit facility was further amended in May
1996, with the company obtaining a reduction of $25 million in the total
commitment. The amended credit facility provides for maximum borrowings of
$250 million, decreasing to $235 million in January 1999 and to $215 million
in January 2000. Interest is at the prime rate. However, the company has the
option of using interbank offered rates as a basis for interest and can fix
the interest rate on the outstanding portion for up to six months. A
commitment fee of .15% to .30% per year, depending upon the company's leverage
ratio, is payable on the unused portion of the line. The credit facility
requires the company to comply with certain covenants such as maintenance of
leverage ratio, tangible net worth, and interest coverage, and places certain
restrictions on acquisitions. At June 28, 1996, the amount of funds available
from the credit facility was approximately $62 million.
8. BUSINESS AND CREDIT CONCENTRATIONS
The company manufactures and distributes durable medical equipment and
supplies primarily to the home health care and extended care markets. A
significant portion of the company's receivables are due from home health care
and medical equipment dealers located throughout the United States, Canada and
Europe. Many of these product sales to dealers are ultimately funded through
government reimbursement programs such as Medicare and Medicaid. Any changes
in these programs could affect dealer liquidity and profitability. This, in
turn, could put downward pressure on prices charged for the company's products
sold through this channel of distribution.
The company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic conditions.
9. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ (5,962) $ 4,635 $ 7,008
State........................................... 23 587 811
Foreign......................................... 7,486 4,681 2,621
-------- ------- -------
1,547 9,903 10,440
-------- ------- -------
Deferred:
Federal......................................... (12,060) 3,327 2,708
State........................................... (238) 936 957
Foreign......................................... (842) 226 254
-------- ------- -------
(13,140) 4,489 3,919
-------- ------- -------
Total............................................. $(11,593) $14,392 $14,359
======== ======= =======
</TABLE>
Foreign income taxes are based upon $16,126, $13,489 and $8,027 of foreign
earnings before income taxes during 1996, 1995 and 1994, respectively. No
deferred federal income taxes have been provided for cumulative foreign
earnings of $56,598 as the company has no plans or intentions to repatriate
foreign earnings or liquidate the related foreign assets.
35
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the federal statutory tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Statutory federal income tax rate.................. (35.0)% 35.0% 35.0%
Amortization of goodwill........................... 10.8 4.2 3.7
State income taxes, net of federal taxes........... -- 2.9 3.1
Tax credits........................................ (.5) (.9) (1.1)
Foreign income tax rates........................... 1.9 .5 --
Excludable foreign sales corporation income........ (.3) (.4) (.3)
Other, net......................................... 1.0 1.2 (.9)
----- ---- ----
Effective income tax rate........................ (22.1)% 42.5% 39.7%
===== ==== ====
</TABLE>
Significant components of deferred income tax assets and liabilities are
shown below.
<TABLE>
<CAPTION>
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts.................. $ 4,663 $1,207 $ 956
Inventory reserves............................... 4,407 1,454 1,175
Vacation accruals................................ 1,010 753 749
Other accrued expenses and valuation reserves.... 7,722 673 2,067
State and local taxes............................ -- 116 486
------- ------ ------
17,802 4,203 5,433
------- ------ ------
Deferred income tax liabilities:
Accumulated depreciation and amortization........ 5,096 4,376 2,725
------- ------ ------
Net deferred income taxes.......................... $12,706 $ (173) $2,708
======= ====== ======
</TABLE>
Management believes that realization of the tax benefit of deferred tax
assets is more likely than not; therefore, no valuation allowance has been
provided.
10. STOCKHOLDERS' EQUITY
Common Stock Purchase Rights
In April 1990 the company's Board of Directors declared a dividend of one
common share purchase right ("Right") for each outstanding share of common
stock. An exercisable Right will, under certain conditions, entitle its holder
to purchase from the company one-half of one share of common stock at the
exercise price of $27.50 per whole share, subject to adjustment, until May 7,
2000. The Rights will become exercisable ten days after a person (an
"Acquiring Person") acquires 25% or more of the common stock, or ten days
after a person announces a tender offer which would result in such person
acquiring 25% or more of the common stock. The Rights may be redeemed by the
Board of Directors for $.005 per Right at any time until ten days following
the public announcement that a person has become an Acquiring Person. Under
certain circumstances after a person becomes an Acquiring Person, or after a
merger or other business combination involving the company, an exercisable
Right will entitle its holder (other than the Acquiring Person) to purchase
shares of common stock (or shares of an acquiring company) having a market
value of two times the exercise price of one Right.
36
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Profit Sharing/Savings Plan
The company has a 401(k) profit sharing/savings plan covering most of its
U.S. employees ("Associates"). Under the profit sharing portion of the plan,
the company will contribute to Associates' accounts a percentage of their
salary for the fiscal year. The percentage amount is based upon attainment of
certain earnings targets by the company as a whole in the case of corporate
office Associates, or by the subsidiary of the company for which the Associate
works. The plan is discretionary as the amounts are determined based on
earnings targets set by the Board of Directors. During 1996, 1995 and 1994,
$2,518, $2,373 and $2,469, respectively, were accrued for this plan. Under the
savings feature of the plan, individual Associates may make contributions to
the plan, which are matched by the company in an amount determined by the
Board of Directors. During 1996, 1995 and 1994, $790, $709 and $611,
respectively, of Associate contributions were matched by the company.
Stock Option Plans
The 1983 Stock Option Plan as amended ("the 83 Plan") provided for the grant
of up to 1,800,000 shares of common stock to officers, key Associates and
outside directors in the form of incentive stock options or non-qualified
stock options. The 83 Plan expired in August 1995.
In August 1993 the company adopted the 1993 Stock Option Plan ("the 93
Plan") providing for the grant of up to 4,000,000 shares of common stock to
officers, outside directors and key Associates in the form of incentive stock
options or non-qualified stock options. At the time of adoption, 300,000
unissued shares of common stock were reserved for future grants under the 93
Plan. The number of unissued shares of common stock reserved for future grants
under the 93 Plan increases annually by a number equal to 1.5% of the number
of shares of common stock issued and outstanding as of the last day of each
fiscal year. The 93 Plan expires in August 2003.
Under both plans, the option price (exercise price) is equal to the closing
market price on the day prior to the grant date. Options become exercisable in
four equal annual amounts, commencing one year subsequent to the grant date.
Option exercisability is cumulative. Unexercised options expire up to ten
years and one day after the date of grant.
Shares subject to option under both plans are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of year.. 1,259,175 1,312,175 1,144,889
Granted........................... 327,400 295,425 345,300
Exercised......................... (27,200) (268,750) (153,912)
Canceled.......................... (194,025) (79,675) (24,102)
------------ ------------ ------------
Outstanding at end of year........ 1,365,350 1,259,175 1,312,175
============ ============ ============
Exercisable at end of year........ 688,337 536,776 507,600
============ ============ ============
Price range per share of options
exercisable at end of year....... $4.57-$35.88 $4.57-$30.00 $2.32-$24.00
============ ============ ============
</TABLE>
As of June 28, 1996 there were 376,492 unissued shares of common stock
reserved for future grants under the 93 Plan.
37
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. LITIGATION
The company announced in October 1995 that it had commenced an internal
investigation of its financial controls and financial statements for
previously reported periods (see Note 5). Following this announcement, the
company and certain of its current and former officers, directors and
employees were named as defendants in a number of stockholder class action
lawsuits, each alleging violations of the federal securities laws and seeking
unspecified damages. These lawsuits were consolidated in the U.S. District
Court for the Southern District of California. In June 1996 the company
reached an agreement in principle to settle the actions for $20 million. The
company's share of the settlement was approximately $7 million, with the
balance paid by the company's insurance carriers. The agreement also includes
settlement of a stockholder derivative action filed in San Diego Superior
Court. The settlements are subject to final court approval. Still pending are
two derivative actions in Delaware state courts against many of the same
defendants. The company believes that these suits will be dismissed once the
settlements described above become final. The Securities and Exchange
Commission ("SEC") has entered a formal order of private investigation into
the circumstances underlying the restatement of the company's 1995 and 1994
financial results. The company is cooperating fully with the SEC in its
investigation.
12. SUBSEQUENT EVENT
On August 29, 1996 the company entered into an agreement for the sale of the
assets of its Comfort Clinic division for cash of $14 million, which
approximates the division's net book value at June 28, 1996, with adjustment
for changes in net book value at closing. The transaction is subject to
several contingencies and closing conditions. The division's sales in 1996
were $44 million, or 7% of the company's total net sales.
13. GEOGRAPHIC SEGMENT INFORMATION
Selected geographic information is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
JUNE 28, JUNE 30, JULY 1,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales:
North America................................ $412,361 $437,331 $358,259
Europe....................................... 254,769 164,596 108,683
-------- -------- --------
Total...................................... $667,130 $601,927 $466,942
======== ======== ========
Corporate operating income (loss):
North America................................ $(60,214) $ 24,277 $ 31,171
Europe....................................... 22,350 18,743 11,092
-------- -------- --------
Total...................................... (37,864) 43,020 42,263
Interest expense............................... (16,687) (10,358) (6,078)
Interest income................................ 2,878 1,617 56
Other income and expense, net.................. (787) (416) (73)
-------- -------- --------
Income (loss) before income taxes.............. $(52,460) $ 33,863 $ 36,168
======== ======== ========
Identifiable assets--at end of year
North America................................ $307,511 $336,040 $320,054
Europe....................................... 312,905 268,703 151,613
-------- -------- --------
Total...................................... $620,416 $604,743 $471,667
======== ======== ========
</TABLE>
38
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Eliminated from net sales for 1996, 1995 and 1994 above were $1,270, $960
and $1,102, respectively, of sales by European subsidiaries to North American
subsidiaries, and $18,146, $13,053 and $9,661 of sales, respectively, by North
American subsidiaries to European subsidiaries. Sales between geographic
locations are based upon manufacturing costs plus a reasonable profit element.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In connection with the restatement of the company's 1995 financial
statements (see Note 5), it was not practicable to reconstruct reliable
accounting records at the company's Bio Clinic subsidiary for interim dates
during that year. Therefore, the full year restatement adjustments for any
financial statement item other than net sales could not be allocated to
individual quarters. Accordingly, no quarterly financial data for 1995 other
than net sales is presented. The adjustments necessary to restate net sales in
1995 were attributable to the fourth quarter.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1996
Net sales...................... $157,172 $173,710 $169,574 $166,674 $667,130
Corporate operating income
(loss)........................ 9,562 (32,231) 8,782 (23,877) (37,864)
Net income (loss).............. 3,794 (24,092) 2,694 (23,263) (40,867)
Earnings (loss) per share...... $ 0.20 $ (1.28) $ 0.14 $ (1.23) $ (2.17)
1995
Net sales...................... $140,599 $146,863 $148,641 $165,824 $601,927
</TABLE>
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the company is included under the
caption "Election of Directors" in the company's Definitive Proxy Statement
for its Annual Meeting of Stockholders to be held on November 21, 1996 and is
incorporated herein by reference. Information regarding the executive officers
of the company is included under a separate caption in Part I hereof, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Certain information regarding executive compensation is set forth under the
caption "Compensation of Executive Officers" in the company's Definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on November 21,
1996 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
company's Definitive Proxy Statement for its Annual Meeting of Stockholders to
be held on November 21, 1996 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding related transactions is set forth under the caption
"Certain Transactions" in the company's Definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on November 21, 1996 and is
incorporated herein by reference.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)INDEX TO FINANCIAL STATEMENTS
(1)FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management.................................................. 23
Independent Auditors' Report.......................................... 24
Consolidated Balance Sheets as of June 28, 1996 and June 30, 1995..... 25
Consolidated Statements of Operations for the years ended June 28,
1996, June 30, 1995 and July 1, 1994................................. 26
Consolidated Statements of Cash Flows for the years ended June 28,
1996, June 30, 1995 and July 1, 1994................................. 27
Consolidated Statements of Stockholders' Equity for the years ended
June 28, 1996, June 30, 1995 and July 1, 1994........................ 28
Notes to Consolidated Financial Statements............................ 29
</TABLE>
(2)FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts for the years ended June
28, 1996, June 30, 1995 and July 1, 1994.............................. 42
</TABLE>
All other financial statement schedules have been omitted because they
are not required or are not applicable, or the information is otherwise
included.
(B)REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the company during the quarter
ended June 28, 1996.
(C)EXHIBITS
Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto, which index is incorporated herein by reference.
41
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 28, 1996, JUNE 30, 1995 AND JULY 1, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE
AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1994:
Allowance for doubtful
receivables.......... $3,017 $1,533 $ 859(1) $(1,036)(2) $ 4,373
====== ====== ====== ======= =======
Reserves for inventory
obsolescence......... $3,575 $1,326 $1,471(1) $ (921)(3) $ 5,451
====== ====== ====== ======= =======
1995:
Allowance for doubtful
receivables.......... $4,373 $1,871 $ 748(1) $(1,088)(2) $ 5,904
====== ====== ====== ======= =======
Reserve for
installment
receivables.......... $ -- $ 954 $ -- $ -- $ 954
====== ====== ====== ======= =======
Reserves for inventory
obsolescence......... $5,451 $2,745 $ 361(1) $(1,083)(3) $ 7,474
====== ====== ====== ======= =======
1996:
Allowance for doubtful
receivables.......... $5,904 $9,421 $ 167(1) $(3,969)(2) $11,523
====== ====== ====== ======= =======
Reserve for
installment
receivables.......... $ 954 $ 980 $ 1(1) $ (179)(2) $ 1,756
====== ====== ====== ======= =======
Reserves for inventory
obsolescence......... $7,474 $8,683 $1,249(1) $(3,742)(3) $13,664
====== ====== ====== ======= =======
</TABLE>
- --------
(1) Represents foreign currency translation adjustment and amounts recorded on
books of acquired subsidiaries at dates of acquisition.
(2) Includes write-off of uncollectible accounts.
(3) Disposition of items previously reserved.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUNRISE MEDICAL INC.
By: /s/ Ted N. Tarbet
----------------------------------
Ted N. Tarbet
Senior Vice President and
Chief Financial Officer
Date: September 24, 1996
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 indicated on September 24, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Richard H. Chandler Chairman, President and Chief Executive
____________________________________ Officer
Richard H. Chandler (principal executive officer)
/s/ Ted N. Tarbet Senior Vice President and Chief Financial
____________________________________ Officer
Ted N. Tarbet (principal financial officer)
/s/ John M. Radak Vice President and Controller
____________________________________ (principal accounting officer)
John M. Radak
/s/ J.R. Woodhull Director
____________________________________
J.R. Woodhull
/s/ Joseph Stemler Director
____________________________________
Joseph Stemler
/s/ Lee A. Ault III Director
____________________________________
Lee A. Ault III
/s/ Lloyd E. Cotsen Director
____________________________________
Lloyd E. Cotsen
/s/ Murray H. Hutchison Director
____________________________________
Murray H. Hutchison
/s/ William L. Pierpoint Director
____________________________________
William L. Pierpoint
/s/ Babette Heimbuch Director
____________________________________
Babette Heimbuch
</TABLE>
43
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation of the company and amendments thereto.
(a)
3.2 Amendment to Certificate of Incorporation of the company as set forth
under the caption "Article III--Liability of Director to the
Corporation." (b)
3.3 Bylaws of the company. (a)
3.4 Amendment to Article II, Section 2, of the company's Bylaws. (c)
3.5 Amendment to Certificate of Incorporation of the company as to the
number of authorized shares. (d)
3.6 Amendment of Bylaws to increase the number of directors to eight. (e)
3.7 Amendment of Bylaws to increase the number of directors to nine. (f)
3.8 Amendment of Bylaws to reduce the number of directors to eight. (g)
4.1 Shareholders' Rights Agreement dated April 24, 1990. (h)
10.6 Amended and Restated Stock Option Plan for Key Associates. (i)(p)
10.7 1993 Stock Option Plan. (j)(p)
10.8 Management Incentive Bonus Plan. (a)(p)
10.9 Special Bonus Plan. (k)(p)
10.10 Agreement for the Purchase of Certain Stock of Homecare Holdings, Inc.
dated as of June 29, 1993 among Sunrise Medical Inc., Homecare
Holdings, Inc., and the selling shareholders listed therein. (l)
10.11 Asset Purchase Agreement for the Purchase of Certain Assets of Jay
Medical, Ltd. (m)
10.12 Agreement for the Purchase of Shares of S.E.P.A.C., Corona S.A.,
Tecktona Bois S.A., Tecktona Sante S.A., and Sci La Planche by
Homecare Holdings France S.A. (n)
10.13 Second Amended and Restated Credit Agreement dated as of September 29,
1995 among Sunrise Medical Inc. and certain subsidiary borrowers and
guarantors, Bank of America as agent and other lenders. (o)
10.14 First Amendment to Second Amended and Restated Credit Agreement and
Waiver dated as of May 2, 1996 among Sunrise Medical Inc. And certain
subsidiary borrows and guarantors, Bank of America as agent and other
lenders. (g)
10.15 Second Amendment to Second Amended and Restated Credit Agreement and
Waiver dated as of August 22, 1996 among Sunrise Medical Inc. and
certain subsidiary borrowers and guarantors, Bank of America as agent
and other lenders.
11 Computation of Net Income (Loss) Per Share.
21 List of Subsidiaries.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
- --------
(a) Incorporated herein by reference to the company's Registration Statement
No. 2-86314.
(b) Incorporated herein by reference to the company's 1987 Definitive Proxy
Statement.
(c) Incorporated herein by reference to the company's Form 10-Q for the quarter
ended December 28, 1990.
(d) Incorporated herein by reference to the company's Form 10-Q for the quarter
ended January 1, 1993.
(e) Incorporated herein by reference to the company's Form 10-Q for the quarter
ended December 31, 1993.
44
<PAGE>
(f) Incorporated herein by reference to the company's Form 10-K for the fiscal
year ended July 1, 1994.
(g) Incorporated herein by reference to the company's Form 10-Q for the quarter
ended March 29, 1996.
(h) Incorporated herein by reference to the company's Form 10-Q for the quarter
ended March 30, 1990.
(i) Incorporated herein by reference to the company's 1990 Definitive Proxy
Statement.
(j) Incorporated herein by reference to the company's 1993 Definitive Proxy
Statement.
(k) Incorporated herein by reference to the company's Form 10-K for the fiscal
year ended July 3, 1992.
(l) Incorporated herein by reference to the company's Form 8-K dated June 29,
1993.
(m) Incorporated herein by reference to the company's Form 8-K dated September
16, 1994.
(n) Incorporated herein by reference to the company's Form 8-K dated April 7,
1995.
(o) Incorporated herein by reference to the company's Form 10-K/A for the
fiscal year ended June 30, 1995.
(p) Management contract or compensatory plan required to be filed as an exhibit
pursuant to Item 14(c).
45
<PAGE>
EXHIBIT 10.15
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this
"Second Amendment") is made and dated as of August 22, 1996, to be effective
as of June 27, 1996 (the "Effective Date") among SUNRISE MEDICAL, INC., a
Delaware corporation (the "Borrower"), the subsidiaries of Borrower signatory
hereto as "Subsidiary Borrowers" or "Guarantors," the lenders (the "Lenders")
party to the Second Amended and Restated Credit Agreement referred to below,
and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent (the
"Agent") and amends that certain Second Amended and Restated Credit Agreement
dated as of September 29, 1995 among the parties hereto as amended by a First
Amendment to Second Amended and Restated Credit Agreement and Waiver dated as
of May 2, 1996 (as so amended, the "Agreement").
RECITAL
The Borrower has requested that the Agent and Lenders amend certain
covenants in the Agreement, and the Agent and the Lenders are willing to agree
thereto on the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as
follows:
1. Terms. All terms used herein shall have the same meanings as in the
Agreement unless otherwise defined herein. All references to the Agreement
herein, in the Agreement, in the Notes and in any other Loan Documents shall
mean the Agreement as hereby amended.
2. Amendments to Agreement. The Loan Parties, the Lenders and the Agent
hereby agree that the Agreement is amended as of the Effective Date as
follows:
2.1 The definition of "Adjusted Cash Flow" in Section 1.01 of the Agreement
is amended and restated in its entirety as follows:
"Adjusted Cash Flow' means, as of the last day of any Fiscal Quarter,
Consolidated Net Income for the four Fiscal Quarters then ending plus (a)
depreciation, amortization and other non-Cash expenses (but excluding
deferred taxes), non-Cash amounts relating to non-recurring items to the
extent that they will not result in a future cash outflow, and the after-
tax amount of up to $19,000,000 in pre-tax non-recurring charges incurred
during the Fiscal Quarter ended June 28, 1996 which will result in a future
cash outflow, of Borrower and its Subsidiaries for that fiscal period, plus
(b) Interest Charges expensed during that fiscal period, minus (c) Capital
Expenditures made by Borrower or any Subsidiary during that fiscal period
net of asset dispositions in the ordinary course of business, and minus (d)
the aggregate dividends made by Borrower to its shareholders and by any
Subsidiary which is not a Wholly-Owned Subsidiary to its minority
shareholders, during that fiscal period. Each of the foregoing components
of Adjusted Cash Flow shall be computed without duplication and, in the
case of clauses (a) and (b), only to the extent included in determining
Consolidated Net Income for such fiscal period."
46
<PAGE>
2.2 The chart in the definition of "Applicable Margin" in Section 1.01 of
the Agreement is amended and restated in its entirety as follows:
<TABLE>
<CAPTION>
EUROCURRENCY
RATE ADVANCE BASE RATE COMMIT-
MARGIN ADVANCE MENT
LEVERAGE RATIO AND LC FEE MARGIN FEE
-------------- ------------ --------- -------
<S> <C> <C> <C>
less than 1.75:1 0.450% 0.000% 0.150%
greater than but
equal to 1.75:1
but less than 2.25:1 0.550 0.000 0.175
greater than but
equal to 2.25:1
but less than 2.75:1 0.625 0.000 0.200
greater than but
equal to 2.75:1
but less than 3.25:1 0.750 0.000 0.250
greater than but
equal to 3.25:1
but less than 3.50:1 1.000 0.000 0.300
greater than but
equal to 3.50:1
less than but
equal to l4.25:1 1.250 0.000 0.375
</TABLE>
2.3 The definition of "Consolidated EBITDA" in Section 1.01 of the Agreement
is amended and restated in its entirety as follows:
"Consolidated EBITDA' means, for any period for the Borrower and its
Subsidiaries, an amount equal to the sum of (a) Consolidated Net Income,
(b) Interest Charges, (c) the amount of taxes, based on or measured by
income, used or included in the determination of Consolidated Net Income,
(d) the amount of depreciation and amortization expense deducted in
determining Consolidated Net Income and (e) pre-tax non-recurring charges
up to $31,000,000 incurred in the Fiscal Quarter ended June 28, 1996, all
determined in conformity with Generally Accepted Accounting Principles."
2.4 The definition of "Consolidated Tangible Net Worth" in Section 1.01 of
the Agreement is amended and restated in its entirety as follows:
"Consolidated Tangible Net Worth' means, as of any date of determination,
Shareholders' Equity of the Borrower and its Subsidiaries on that date,
excluding the cumulative translation adjustment reported for each
applicable Fiscal Quarter, commencing with the Fiscal Quarter ending March
29, 1996, minus the Adjusted Dollar Equivalent of any Intangible Assets of
Borrower and its Subsidiaries on that date plus the after-tax amount of up
to $19,000,000 in pre-tax non-recurring charges exclusive of any portion
related to the write-off of Intangible Assets incurred in the Fiscal
Quarter ended June 28, 1996."
2.5 Section 2.11 of the Agreement is amended by inserting a new subsection
(c) immediately following subsection (b) as follows:
"(c) Other Mandatory Prepayments. If the Borrowers are required to make
any mandatory prepayments of Advances pursuant to Section 7.01(e) or
7.06(e), the Borrowers shall prepay such advances on the required date (the
"prepayment date") together with, in the case of prepayment of Eurocurrency
Rate Committed Advances, (i) accrued interest to the date of such
prepayment on the principal amounts prepaid and (ii) any additional amount
for which the Borrowers shall be obligated pursuant to Section 2.20. Any
prepayments pursuant to this section shall be applied first to Base Rate
Advances then outstanding and then to Eurocurrency Rate Committed Advances
with the shortest Interest Periods remaining; provided, however, that if
any prepayment of Eurocurrency Rate Committed Advances on any prepayment
date would result in the Borrowers being required to pay any amounts
pursuant to Section 2.20, the Borrowers may wait to prepay such
Eurocurrency Rate Committed Advances until the earlier of (x) the date the
Interest Periods relating to such Eurocurrency Rate Committed Advances
expires and (y) 10 days after such prepayment date."
47
<PAGE>
2.6 Section 7.01 of the Agreement is amended and restated in its entirety as
follows:
"SECTION 7.01 Disposition of Property. Make any Disposition, whether now
owned or hereafter acquired, other than:
"(a) Dispositions of inventory, machinery and equipment in the ordinary
course of business;
"(b) Dispositions of assets, the aggregate net book value of which does
not exceed in the aggregate for the Borrower and all Subsidiaries (a)
$10,000,000 during Fiscal Year 1997 and (b) $15,000,000 during any
Fiscal Year thereafter;
"(c) Dispositions in connection with Permitted Accounts Receivable
Financings;
"(d) Dispositions in connection with sale and leaseback transactions
permitted by Section 7.06(e); and
"(e) the Disposition of all of the assets of the Comfort Clinic
division of Bio Clinic Corporation provided that the Advances are
prepaid in an amount equal to the net cash proceeds received therefrom,
concurrently upon the receipt of such net proceeds, in accordance with
Section 2.11(c)."
2.7 Section 7.03(f) of the Agreement is amended and restated in its entirety
as follows:
"(f) the acquisition of Kid-Kart Corporation provided that such
Acquisition is a Permitted Acquisition, the total consideration of
which therefor does not exceed $8,300,000, of which Indebtedness
assumed does not exceed $1,300,000 and the cash portion does not exceed
$1,000,000; and"
2.8 Section 7.06(e) of the Agreement is amended and restated in its entirety
as follows:
"(e) sale and leaseback transactions which, together with operating
leases permitted by Section 7.17(b), do not exceed in the aggregate
$10,000,000 in aggregate payment obligations in any Fiscal Year, and
Liens in connection therewith, provided that the Advances are prepaid
in an amount equal to the net Cash proceeds received from such
transactions, concurrently upon the receipt thereof, in accordance with
Section 2.11(c); and"
"(f) Other Liens securing Indebtedness or incurred in connection with
sale and leaseback transactions permitted by Section 7.06(e) where the
obligations secured do not exceed 10% of Shareholders' Equity in the
aggregate at any time; and"
2.9 Sections 7.09, 7.10 and 7.11 of the Agreement are amended and restated
in their entirety as follows:
"SECTION 7.09 Leverage Ratio. Permit the Leverage Ratio, as of the end of
any Fiscal Quarter, to exceed the following ratio:
<TABLE>
<CAPTION>
MAXIMUM
FISCAL QUARTER ENDING RATIO
--------------------- ------------
<S> <C>
6/28/96 3.90 to 1.00
9/27/96 4.15 to 1.00
12/27/96 4.20 to 1.00
3/28/97 4.25 to 1.00
6/27/97 3.40 to 1.00
9/26/97 and thereafter 3.25 to 1.00
</TABLE>
"SECTION 7.10 Minimum Consolidated Tangible Net Worth. Permit at the end
of any Fiscal Quarter Consolidated Tangible Net Worth to be less than
(a) -$16,000,000 plus (b) 50% of Consolidated Net Income for each
Fiscal Quarter ending after June 28, 1996 (not to be reduced by any
losses incurred) plus (c) 50% of the net proceeds from the issuance of
any equity securities of the Borrower after June 28, 1996 less (d) 50%
of the Adjusted Dollar Equivalent of Intangible Assets related to
Acquisitions completed after December 27, 1996.
48
<PAGE>
"SECTION 7.11 Interest Coverage Ratio. Permit the Interest Coverage
Ratio, as of the end of any Fiscal Quarter, to be less than the following
ratio:
<TABLE>
<CAPTION>
MINIMUM
FISCAL QUARTER ENDING RATIO
--------------------- ------------
<S> <C>
6/28/96 1.50 to 1.00
9/27/96 1.00 to 1.00
12/27/96 1.00 to 1.00
3/28/97 1.00 to 1.00
6/27/97 1.00 to 1.00
9/26/97 1.10 to 1.00
12/26/97 1.40 to 1.00
3/27/98 1.40 to 1.00
7/3/98 1.40 to 1.00
10/2/98 and thereafter 1.75 to 1.00
</TABLE>
2.10 A new Section 7.17 is inserted following Section 7.16 of the Agreement
as follows:
"7.17 Lease Obligations. Create or suffer to exist any obligations for
the payment of rent for any property under any lease or agreement to lease,
except for:
"(a) leases of the Borrower and of Subsidiaries in existence on June
27, 1996 and any renewal, replacement, extension or refinancing
thereof;
"(b) additional operating leases entered into by the Borrower or any
Subsidiary after June 27, 1996 in the ordinary course of business
which, together with sale and leaseback transactions permitted by
Section 7.06(e), do not exceed in the aggregate $10,000,000 in
aggregate payment obligations in any Fiscal Year, and Liens in
connection therewith;
"(c) leases entered into by the Borrower or any Subsidiary after June
27, 1996 pursuant to sale-leaseback transactions permitted under
Section 7.06(e); and
"(d) Capital Leases permitted under Section 7.07."
2.11 Exhibit I (Compliance Certificate) to the Agreement is amended and
restated in its entirety as set forth in Exhibit I to this Second Amendment.
3. Representations and Warranties. Each of the Loan Parties represent and
warrant to Lenders and Agent:
3.1 Authorization. The execution, delivery and performance of this Second
Amendment have been duly authorized by all necessary corporate action by each
of them and has been duly executed and delivered by each of them.
3.2 Binding Obligation. This Second Amendment is the legally valid and
binding obligation of each Loan Party, enforceable in accordance with its
terms against each of them respectively, except as such enforcement may be
limited by Debtor Relief Laws or equitable principles relating to the granting
of specific performance and other equitable remedies as a matter of judicial
discretion.
3.3 No Legal Obstacle to Agreement. Neither the execution of this Second
Amendment, the making by any Borrower of any borrowing under the Agreement,
nor the performance of the Agreement has constituted or resulted in or will
constitute or result in a breach of the provisions of any Contractual
Obligation to which any Loan Party is a party, or the violation of any
Requirement of Law, or result in the creation under any agreement or
instrument of any security interest, lien, charge, or encumbrance upon any of
the assets of any of them. No approval or authorization of any Governmental
Agency is required by any Loan Party to permit the execution,
49
<PAGE>
delivery or performance by any Loan Party of this Second Amendment, the
Agreement, or the transactions contemplated hereby or thereby, or the making
of any borrowing under the Agreement.
3.4 Incorporation of Certain Representations. The representations and
warranties set forth in Article 5 of the Agreement, as amended hereby, are
true and correct in all material respects on and as of the date hereof as
though made on and as of the date hereof except to the extent any such
representation or warranty is made as of any other date.
3.5 Default. No Event of Default under the Agreement has occurred and is
continuing.
4. Conditions, Effectiveness. This Second Amendment shall become effective
as of the Effective Date subject to the delivery of the following to the Agent
in form and substance satisfactory to the Agent:
4.1 Corporate Resolutions. A copy of a resolution or resolutions passed by
the Board of Directors of Borrowers authorizing the amendments to the
Agreement herein provided for, certified by the respective Secretary or an
Assistant Secretary of such entity as of the date hereof as being in full
force and effect on the date hereof.
4.2 Authorized Signatories. A certificate, dated the date hereof, signed by
a Senior Officer of Borrowers as to the incumbency of the person or persons
authorized to execute and deliver this Second Amendment and any instrument or
agreement required hereunder on behalf of such entity.
4.3 Approval Fee. An approval fee for the benefit of each Lender approving
this Second Amendment by the close of business on August 19, 1996 equal to
0.08% of such Lender's Pro Rata Share of the Total Commitment.
4.4 Other Evidence. Such other evidence with respect to any Loan Party or
any other person as the Agent or any Lender may reasonably request to
establish the consummation of the transactions contemplated hereby, the taking
of all corporate action in connection with this Second Amendment and the
Agreement and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Agreement and Notes. Except as hereby expressly
amended, the Agreement and the Notes shall remain in full force and effect,
and are hereby ratified and confirmed in all respects.
5.2 No Material Adverse Effect. For all purposes of the Agreement, the
$31,000,000 in pre-tax non-recurring charges incurred during the Fiscal
Quarter ended June 28, 1996, including the settlement of the shareholder
litigation disclosed to the Agent and the Lenders prior to the date hereof,
shall not be deemed to have resulted in, nor shall they constitute, a Material
Adverse Effect.
5.3 Waivers. This Second Amendment is specific in time and in intent and
does not constitute, nor should it be construed as, a waiver of any right,
power or privilege under the Agreement or the Notes, or under any agreement,
contract, indenture, document or instrument mentioned in the Agreement; nor
does it preclude any exercise thereof or the exercise of any other right,
power or privilege, nor shall any future waiver of any right, power, privilege
or default hereunder, or under any agreement, contract, indenture, document or
instrument mentioned in the Agreement or the Notes, constitute a waiver of any
other default of the same or of any other term or provision.
5.4 Counterparts. This Second Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This Second Amendment shall not become
effective until each Loan Party, the Majority Lenders and the Agent shall have
signed a copy hereof, whether the same or counterparts, and the same shall
have been delivered to the Agent.
5.5 Jurisdiction. This Second Amendment, and any instrument or agreement
required hereunder, shall be governed by and construed under the laws of the
State of California.
50
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and delivered as of the date first written above.
SUNRISE MEDICAL, INC.
By:__________________________________
Ted N. Tarbet
Senior Vice President and Chief
Financial Officer
BIO CLINIC CORPORATION
DEVILBISS HEALTH CARE, INC.
GUARDIAN PRODUCTS, INC.
JAY MEDICAL LTD.
JOERNS HEALTHCARE, INC.
QUICKIE DESIGNS, INC.
SUNMED FINANCE, INC.
SUNMED SERVICE, INC.
SUNRISE MARIN HOLDINGS, INC.
By:__________________________________
Ted N. Tarbet
Treasurer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Agent
By:__________________________________
Charles Graber
Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Lender
By:__________________________________
Yvonne Dennis
Vice President
NATIONSBANK OF TEXAS, N.A.
By:__________________________________
Name:________________________________
Title:_______________________________
51
<PAGE>
ABN AMRO BANK, Los Angeles
International Branch
By:__________________________________
Name:________________________________
Title:_______________________________
UNION BANK OF CALIFORNIA
By:__________________________________
Name:________________________________
Title:_______________________________
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK
By:__________________________________
Name:________________________________
Title:_______________________________
DEUTSCHE BANK AG, Los Angeles Branch
and/or Cayman Islands Branch
By:__________________________________
Name:________________________________
Title:_______________________________
PNC BANK, N.A.
By:__________________________________
Name:________________________________
Title:_______________________________
52
<PAGE>
EXHIBIT 11
SUNRISE MEDICAL INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
FISCAL YEARS ENDED JUNE 28, 1996, JUNE 30, 1995 AND JULY 1, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income (loss).................................... $(40,867) $19,471 $21,809
Weighted average number of shares:
Shares issued...................................... 18,810 18,290 17,725
Stock options...................................... -- 529 592
-------- ------- -------
Total............................................ 18,810 18,819 18,317
-------- ------- -------
Net income (loss) per share.......................... $ (2.17) $ 1.03 $ 1.19
======== ======= =======
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss).................................... $(40,867) $19,471 $21,809
Weighted average number of shares:
Shares issued...................................... 18,810 18,290 17,725
Stock options...................................... -- 595 608
-------- ------- -------
Total............................................ 18,810 18,885 18,333
-------- ------- -------
Net income (loss) per share.......................... $ (2.17) $ 1.03 $ 1.19
======== ======= =======
</TABLE>
<PAGE>
EXHIBIT 21
SUNRISE MEDICAL INC. AND SUBSIDIARIES
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY INCORPORATION OWNERSHIP %
- ------------------ ------------- -----------
<S> <C> <C>
Bio Clinic Corporation............................... Delaware 100
Guardian Products Inc. .............................. California 100
Joerns Healthcare Inc. .............................. Wisconsin 100
Quickie Designs Inc. ................................ California 100
Jay Medical Ltd. .................................... Delaware 100
SunMed Finance Inc. ................................. Delaware 100
SunMed Service Inc. ................................. Delaware 100
Sunrise Medical Canada Inc. ......................... Canada 100
Sunrise Medical Holdings B.V. ....................... Netherlands 100
Norsk Rehab AS..................................... Norway 100
Sopur Medizintechnik GmbH.......................... Germany 100
Sunrise Medical B.V. .............................. Netherlands 100
Homecare Holdings France S.A. ..................... France 100
DeVilbiss Medical France S.A. ................... France 100
SCI La Planche S.A. ............................. France 100
Corona-S.E.P.A.C. S.A. .......................... France 100
Tecktona Sante S.A. ........................... France 100
Talleres Uribarri S.L. ............................ Spain 100
Sunrise Medical S.R.L. ............................ Italy 100
Sunrise Medical Ltd. ................................ United Kingdom 100
Coopers Healthcare PLC............................. United Kingdom 100
Parker Bath Company Ltd. .......................... United Kingdom 100
Oxford Hoist Company Ltd. ....................... United Kingdom 100
DeVilbiss Health Care, Inc. ......................... Delaware 100
DeVilbiss Health Care (UK) Ltd. ................... United Kingdom 100
Homecare (Deutschland) GmbH........................ Germany 100
DeVilbiss Medizinische Produkte GmbH............. Germany 100
DeVilbiss Health Care (Europa) GmbH.............. Germany 100
Sunrise Medical A.G. ................................ Switzerland 100
Vitactiv AB.......................................... Sweden 100
Sunrise Medical Pty Ltd. ............................ Australia 100
</TABLE>
- --------
Each corporation is the parent of those indented beneath it.
The company has omitted from the list fourteen foreign and three domestic
subsidiaries. None of the omitted companies individually or in the aggregate
is a significant subsidiary.
<PAGE>
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors
Sunrise Medical Inc.:
We consent to incorporation by reference in the Registration Statement No.
33-44082 on Form S-4, Statement No. 33-81316 on Form S-4, Statement No. 33-
49500 on Form S-3, Statement No. 33-88216 on Form S-8, Statement No. 33-35797
on Form S-8 and Statement No. 33-13460 on Form S-8 of Sunrise Medical Inc. of
our report dated August 16, 1996 relating to the consolidated balance sheets
of Sunrise Medical Inc. and subsidiaries as of June 28, 1996 and June 30, 1995
and the related consolidated statements of operations, stockholders' equity
and cash flows and related financial statement schedule for each of the years
in the three-year period ended June 28, 1996, which report appears in the June
28, 1996 annual report on Form 10-K of Sunrise Medical Inc.
KPMG Peat Marwick LLP
Los Angeles, California
September 24, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 28, 1996 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-28-1996
<CASH> 1,785
<SECURITIES> 0
<RECEIVABLES> 135,447
<ALLOWANCES> 11,523
<INVENTORY> 80,937
<CURRENT-ASSETS> 252,311
<PP&E> 157,397
<DEPRECIATION> 75,151
<TOTAL-ASSETS> 620,416
<CURRENT-LIABILITIES> 147,320
<BONDS> 207,446
0
0
<COMMON> 18,847
<OTHER-SE> 241,707
<TOTAL-LIABILITY-AND-EQUITY> 620,416
<SALES> 667,130
<TOTAL-REVENUES> 667,130
<CGS> 446,505
<TOTAL-COSTS> 446,505
<OTHER-EXPENSES> 258,489
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,687
<INCOME-PRETAX> (52,460)
<INCOME-TAX> (11,593)
<INCOME-CONTINUING> (40,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,867)
<EPS-PRIMARY> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
