<PAGE>
As filed with the Securities and Exchange Commission on December 6, 1996
Registration No. 333-14493
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
SUNRISE MEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware 8342 95-3836867
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation of
Organization) 2382 Faraday Avenue, Suite 200
Carlsbad, California 92008
(619) 930-1500
(Address, including Zip Code, Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
Steven A. Jaye
Vice President, Secretary and General Counsel
SUNRISE MEDICAL INC.
2382 Faraday Avenue, Suite 200
Carlsbad, California 92008
(619) 930-1500
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
--------------------------------------
With copies to:
Jeffrey T. Pero, Esq. Jack Manning, Esq.
LATHAM & WATKINS DORSEY & WHITNEY LLP
650 Town Center Drive 507 Davidson Building
Twentieth Floor 8 Third Street North
Costa Mesa, California 92626 Great Falls, Montana 59401
(714) 540-1235 (406) 727-3632
--------------------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement
--------------------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Amount to be Offering Price Offering Registration
Registered (1) Per Share (1) Price Fee (2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value -- -- $6,899,320 $2,091
- -----------------------------------------------------------------------------------------------------------
Common Share Purchase Rights (3) -- -- -- $100
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Number of shares and related information omitted pursuant to Rule 457(o) of
the Securities Act of 1933, as amended.
(2) Previously paid.
(3) Prior to the occurrence of certain events, rights are attached to and trade
with the Common Stock of the Company. Value attributable to such right, if
any, is reflected in the market price of the Common Stock. Fee paid
represents the minimum statutory fee pursuant to Section 6(b) of the
Securities Act of 1933.
--------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further Amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
KID-KART, INC.
732 Cruiser Lane
Belgrade, Montana 59714
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Kid-Kart, Inc. ("Kid-Kart") which will be held at ___ a.m., local time, on
________________, 1996, at the _____________________, Belgrade, Montana.
At the Special Meeting, shareholders of Kid-Kart ("Kid-Kart Shareholders")
will be asked to consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of September 24, 1996 (the "Merger
Agreement") by and among Sunrise Medical Inc., a Delaware corporation
("Sunrise"), Jay Medical Ltd., a Delaware corporation and a wholly-owned
subsidiary of Sunrise (the "Sunrise Sub"), and Kid-Kart, providing for the
merger of Kid-Kart with and into the Sunrise Sub with Sunrise Sub continuing as
the surviving corporation (the "Merger"). Under the Merger Agreement, each share
of Kid-Kart common stock (the "Kid-Kart Shares") outstanding as of the time the
Merger is consummated (the "Effective Time") (other than Kid-Kart Shares, if
any, held by Kid-Kart Shareholders who perfect dissenters' rights under Sections
35-1-826 through 35-1-839, Montana Code Annotated (1995)) will be converted into
the right to receive $110, to be paid in the form of common stock, $1.00 par
value per share, of Sunrise (the "Sunrise Common Stock"), with any fractional
shares paid in cash. All outstanding options to purchase Kid-Kart Shares are to
be cancelled and the holder of each option to purchase a share of Kid-Kart
Common Stock shall receive $110, less the exercise price of the option, to be
paid in the form of Sunrise Common Stock, with any fractional shares paid in
cash. Under the Merger Agreement, each of the Kid-Kart Shareholders and holders
of options of Kid-Kart ("Kid-Kart Option holders," and together with Kid-Kart
Shareholders, "Kid-Kart Holders"), will be required to indemnify Sunrise, up to
the amount of the Escrow Fund, against any losses incurred by Sunrise or Sunrise
Sub as a result of the inaccuracy or breach of any representations, warranties
or covenants of Kid-Kart contained in the Merger Agreement. Fifteen percent of
the shares of Sunrise Common Stock issued in connection with the Merger to each
Kid-Kart Holder will be held in an escrow fund (the "Escrow Fund") for a period
of 12 months from the Effective Time (which period may be extended if claims are
pending) and may be applied to satisfy the foregoing indemnification
obligations, any uncollected accounts receivable, or any shortfall in the Net
Worth Guarantee (as defined in the Merger Agreement). Under the Merger
Agreement, each Kid-Kart Holder will also be required to jointly and severally
indemnify Sunrise for any tax assessed on Kid-Kart which accrued in respect of
any period prior to and including the Effective Time, other than sales or
transfer taxes due on the Merger, which will be paid by Sunrise. Such
indemnification obligation is not limited to the amount held in the Escrow Fund.
The Merger is intended to be tax free to Kid-Kart Shareholders for federal
income tax purposes to the extent of the Kid-Kart Shares are exchanged solely
for Sunrise Common Stock.
The Proposed Merger is described more completely in the accompanying Proxy
Statement/Prospectus, the forepart of which includes a summary of the terms of
the Merger and certain other information relating to the proposed transaction.
I urge you to review carefully the Proxy Statement/Prospectus and accompanying
Appendices.
The Kid-Kart Board of Directors has determined that the Merger is in the
best interests of Kid-Kart and its shareholders. Sunrise designs, manufactures
and markets medical products used in institutional and home care settings and
distributes them through Company-owned operations in the United States, the
United Kingdom, Germany, France, Spain, Canada, Norway, Sweden, Italy,
Switzerland, Australia, Poland and the Netherlands and through distributors in
more than 80 other countries.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND RELATED TRANSACTIONS AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER AGREEMENT AND THE MATTERS
PRESENTED AT THE SPECIAL MEETING.
I hope you will attend the Special Meeting. However, whether or not you
plan to attend the meeting, please complete, sign and date the accompanying
proxy card and Shareholder Certificate and promptly return them in the enclosed
prepaid envelope. If you are present at the meeting you may, if you wish,
withdraw your proxy and vote in person.
Sincerely,
WAYNE H. HANSON
President
<PAGE>
KID-KART, INC.
732 Cruiser Lane
Belgrade, Montana 59714
------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _______________________, 1996
------------------------------------------------------------------
To the Shareholders of Kid-Kart, Inc.:
Notice Is Hereby Given that a Special Meeting of Shareholders (the "Special
Meeting") of Kid-Kart, Inc., a Montana corporation ("Kid-Kart"), will be held on
_________, 1996, at the _______________________________, Belgrade, Montana,
commencing at ____ a.m. , local time, to consider and vote upon the following
matter:
1. A proposal to approve and adopt the Agreement and Plan of Merger dated
as of September 24, 1996 (the "Merger Agreement") by and among Sunrise Medical
Inc., a Delaware corporation ("Sunrise"), Jay Medical Ltd., a Delaware
corporation and a wholly-owned subsidiary of Sunrise (the "Sunrise Sub"), and
Kid-Kart, providing for the merger of Kid-Kart with and into the Sunrise Sub
with the Sunrise Sub continuing as the surviving corporation (the "Merger").
Under the Merger Agreement, each share of Kid-Kart common stock (the "Kid-Kart
Shares") outstanding as of the time the Merger is consummated (the "Effective
Time") (other than Kid-Kart Shares, if any, held by Kid-Kart Shareholders who
perfect dissenters' rights under Sections 35-1-826 through 35-1-839, Montana
Code Annotated (1995)) will be converted into the right to receive $110, to be
paid in the form of common stock, $1.00 par value per share, of Sunrise (the
"Sunrise Common Stock"), with any fractional shares paid in cash. All
outstanding options to purchase Kid-Kart Shares are to be cancelled and the
holder of each option to purchase a share of Kid-Kart common stock shall receive
$110 less the exercise price of the option, to be paid in the form of Sunrise
Common Stock, with any fractional shares paid in cash.
The Merger and other related matters are more fully described in the
accompanying Proxy Statement/ Prospectus, and appendices thereto, which form a
part of this Notice.
Approval of the Merger requires the affirmative vote of holders of
two-thirds of the outstanding shares of Kid-Kart common stock. Only shareholders
of record at the close of business on _________, 1996, the record date for the
Special Meeting, are entitled to notice of and to vote at the Special Meeting
and any adjournment or postponements thereof.
The Board of Directors of Kid-Kart has unanimously approved the Merger and
believes that the terms of the Merger are fair to, and in the best interests of,
the holders of Kid-Kart common stock. The Board of Directors of Kid-Kart
recommends that the Shareholders vote to approve the proposal described above at
the Special Meeting.
Whether or not you plan to attend the Special Meeting, please fill in,
sign, date and return the enclosed form of proxy card promptly. A return
envelope is enclosed for your convenience and requires no postage for mailing in
the United States.
Sincerely,
WAYNE H. HANSON
President
_____________, 1996
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Information contained herein is subject to completion or amendment. A +
+ registration statement relating to these securities has been filed with the +
+ Securities and Exchange Commission. These securities may not be sold nor may +
+ offers to buy be acceoted prior to the time the registration statement +
+ becomes effective. This prospectus shall not constitute an offer to sell or +
+ the solicitation of an offer to buy nor shall there be any sale of +
+ these securities in any State in which such offer, solicitation or sale +
+ would be unlawful prior to registration or qualification under the +
+ securities laws of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 6, 1996
SUNRISE MEDICAL INC.
KID-KART, INC.
PROXY STATEMENT/PROSPECTUS
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
KID-KART, INC.
To Be Held On ________________ __,1996
This Proxy Statement/Prospectus is being furnished to holders of shares of
common stock, no par value ("the Kid-Kart Shares"), in Kid-Kart, Inc., a Montana
corporation ("Kid-Kart"), in connection with the solicitation of proxies to be
used at the special meeting of shareholders of Kid-Kart, and any adjournments or
postponements thereof (the "Special Meeting") to be held on _______, 1996, at
______ a.m., local time, at the ________________, Belgrade, Montana. The holders
of Kid-Kart Shares are referred to herein as the "Kid-Kart Shareholders." At the
Special Meeting, the Kid-Kart Shareholders will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger dated as
of September 24, 1996 (the "Merger Agreement") by and among Sunrise Medical,
Inc., a Delaware corporation ("Sunrise" or the "Company"), Jay Medical Ltd., a
Delaware corporation and a wholly-owned subsidiary of Sunrise (the "Sunrise
Sub"), and Kid-Kart, providing for the merger of Kid-Kart with and into the
Sunrise Sub, with Sunrise Sub continuing as the surviving corporation (the
"Merger"). The Board of Directors of Kid-Kart unanimously recommends a vote in
favor of the Merger.
Under the Merger Agreement, each Kid-Kart Share outstanding as of the time
the Merger is consummated (the "Effective Time") (other than Kid-Kart Shares, if
any, held by Kid-Kart Shareholders who perfect dissenters' rights under Sections
35-1-826 through 35-1-839, Montana Code Annotated (1995)) will be converted into
the right to receive $110, to be paid in the form of common stock of Sunrise,
$1.00 par value per share (the "Sunrise Common Stock"), with any fractional
shares paid in cash. All outstanding options to purchase Kid-Kart Shares are to
be cancelled and the holder of each option to purchase a share of Kid-Kart
common stock shall receive $110, less the exercise price of the option, to be
paid in the form of Sunrise Common Stock, with any fractional shares paid in
cash. Information regarding the actual number of shares of Common Stock to be
received in the Merger will be available by calling 1-800-388-5278 ext. 3002
after December __, 1996. Each Kid-Kart Holder will be obligated to indemnify and
hold harmless Sunrise, up to the amount held in an escrow fund (the "Escrow
Fund"), against any losses that Sunrise or Sunrise Sub incurs as a result of the
inaccuracy or breach of any representations, warranties or covenants of Kid-Kart
contained in the Merger Agreement. Fifteen percent of the shares of Sunrise
Common Stock issuable to each Kid-Kart Holder in connection with the Merger will
be held in the Escrow Fund for a period of 12 months from the Effective Time and
may be applied to satisfy the foregoing indemnification obligations, any
uncollected accounts receivable or any shortfall in the Net Worth Guarantee (as
defined in the Merger Agreement). Under the Merger Agreement, each Kid-Kart
Holder will also be required to indemnify Sunrise for any tax assessed on Kid-
Kart which accrued in respect of any period prior to and including the Effective
Time, other than sales or transfer taxes due on the Merger, which will be paid
by Sunrise and that indemnification obligation is not limited to the amount held
in the Escrow Fund. See "The Merger Agreement-- Indemnification," "--
Representations and Warranties" and "--Escrowed Shares." A copy of the Merger
Agreement is attached as Appendix A to this Proxy Statement/Prospectus.
See "Risk Factors and Other Considerations" beginning on page 13 of this
Proxy Statement/Prospectus for certain factors which should be considered in
evaluating matters considered herein.
------------------------------------------
THE SECURITIES ISSUABLE PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECU-
RITIES COMMISSION PASSED UPON THE ACCURACY OR ADE-
QUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus and the accompanying form of Proxy and
Acknowledgment are first being mailed or delivered to shareholders of Kid-Kart
on or about __________, 1996.
------------------------------------------
The date of this Proxy Statement/Prospectus is _____________, 1996.
(Cover continued on next page)
<PAGE>
(Continued from previous page)
Sunrise has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on
Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Sunrise Common Stock to be issued pursuant to the
Merger Agreement (the "Sunrise Shares"). This Proxy Statement/Prospectus
constitutes the Prospectus of Sunrise filed as a part of the Registration
Statement. All information contained herein with respect to Sunrise has been
furnished by Sunrise and all information contained herein with respect to
Kid-Kart has been furnished by Kid-Kart.
Sunrise Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "SMD". On November 29, 1996, the closing price of the Sunrise
Common Stock on the NYSE was $14 3/8. There is no established trading market
for the Kid-Kart Shares. See "Distributions and Market Prices for Kid-Kart
Shares."
No person is authorized to give any information or to make any
representations other than those contained herein and, if given or made, such
information must not be relied upon as having been authorized by Sunrise or
Kid-Kart. This Proxy Statement/Prospectus does not constitute an offer to sell
any securities other than the registered securities to which it relates, or an
offer to sell or a solicitation of an offer to buy any of the registered
securities to which this Proxy Statement/Prospectus relates to or by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to any person to whom it is unlawful to make such offer or solicitation.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
AVAILABLE INFORMATION.................................................................. 3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................................
SUMMARY................................................................................
Sunrise Medical Inc................................................................
Kid-Kart, Inc......................................................................
The Special Meeting................................................................
Conversion of Securities...........................................................
Recommendation of the Board of Directors...........................................
Indemnification and Escrow Arrangements............................................
Risk Factors and Other Considerations..............................................
Effective Time of the Merger.......................................................
Conditions to the Merger...........................................................
Termination........................................................................
Treatment of Stock Options.........................................................
Rights of Dissenting Kid-Kart Shareholders.........................................
Transaction Costs..................................................................
Certain United States Federal Income Tax Consequences..............................
Regulatory Matters.................................................................
Resales of Sunrise Common Stock....................................................
Accounting Treatment...............................................................
SELECTED FINANCIAL INFORMATION OF SUNRISE..............................................
SELECTED FINANCIAL INFORMATION OF KID-KART.............................................
COMPARATIVE PER SHARE DATA.............................................................
MARKET PRICES OF SUNRISE COMMON STOCK..................................................
RISK FACTORS AND OTHER CONSIDERATIONS..................................................
Possible Volatility of Stock Price.................................................
Risks Regarding the Federal Income Tax Treatment of the Merger.....................
Failure to Integrate the Business..................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SUNRISE.......................................................
Results of Operations..............................................................
Thirteen Weeks Ended September 27, 1996.......................................
Fiscal Years Ended June 28, 1996, June 30, 1995 and July 1, 1994..............
Net Sales Analysis............................................................
Expense and Profit Analysis...................................................
Financial Position, Capital Resources and Liquidity...........................
Cash Flow..............................................................
Capital Expenditures...................................................
Acquisitions...........................................................
Capital Structure and Leverage.........................................
International Operations...............................................
Foreign Currency Risk Management.......................................
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
New Accounting Standards...............................................
Dividend Policy........................................................
Litigation.............................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
SUNRISE................................................................................
CERTAIN TRANSACTIONS OF SUNRISE........................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF KID-KART......................................................
Nine months Ended September 30, 1996 Compared to Nine months Ended.....
September 30, 1995...............................................
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994..
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993..
Financial Condition and Liquidity.............................................
Cash Flow Analysis.....................................................
Future Capital Expenditures............................................
Kid-Kart Indebtedness..................................................
Inflation and Foreign Currency Fluctuations............................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
KID-KART...............................................................................
THE SPECIAL MEETING....................................................................
General.......................................................................
Matters to be Considered......................................................
The Special Meeting...........................................................
THE MERGER.............................................................................
Recommendation of the Board of Directors of Kid-Kart..........................
Background of the Merger......................................................
Stockholders Agreement........................................................
Expected Benefits from the Merger.............................................
Alternatives to Merger........................................................
Interests of Certain Persons in the Merger....................................
Restrictions on Sales of Stock................................................
Regulatory Approvals..........................................................
Accounting Treatment..........................................................
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
THE MERGER AGREEMENT...................................................................
Merger Consideration..........................................................
Adjustment of Merger Consideration............................................
Conversion of Shares; Fractional Shares.......................................
Escrow Shares.................................................................
Appraisal Rights..............................................................
Kid-Kart Stock Options........................................................
Conditions to the Merger......................................................
Representatins, Warranties and Covenants................................
Consents................................................................
Board and Stockholder Approval..........................................
Affilitate Agreement....................................................
Opinions of Counsel.....................................................
Certificates............................................................
Ancillary Agreements....................................................
Registration of Sunrise Shares..........................................
NYSE Listing............................................................
Tax Representations.....................................................
Assigmment of SBA Loans.................................................
Stockholder Certificates................................................
Building Variance.......................................................
Termination.............................................................
Representations and Warranties................................................
Certain Covenants.............................................................
Indemnification...............................................................
Amendment, Waiver and Termination.............................................
Transaction Costs.............................................................
BUSINESS OF SUNRISE....................................................................
Discussion of Market Groups...................................................
Distribution..................................................................
Segment Information...........................................................
Competition...................................................................
Manufacturing.................................................................
Research and Product Development..............................................
Patents.......................................................................
Warranty......................................................................
Government Regulation.........................................................
Employees (Associates)........................................................
Backlog.......................................................................
Working Capital Requirements..................................................
Foreign Operations............................................................
Properties....................................................................
Legal Proceedings.............................................................
DESCRIPTION OF CAPITAL STOCK OF SUNRISE................................................
Preferred Stock...............................................................
Sunrise Common Stock..........................................................
Common Share Purchase Rights..................................................
DIRECTORS OF SUNRISE...................................................................
EXECUTIVE OFFICERS OF SUNRISE..........................................................
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
Sunrise has filed with the Commission a Registration Statement on Form S-4
under the Securities Act, with respect to the Sunrise Shares. This Proxy
Statement/Prospectus, which constitutes a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement and
exhibits to the Registration Statement. Copies of the information and the
exhibits are on file at the offices of the Commission and may be obtained, upon
payment of the fees prescribed by the Commission, or may be examined without
charge at the offices of the Commission. All summaries of agreements contained
in this Proxy Statement/Prospectus are subject in all respects to the full text
of such documents. Reference is made to the copies of certain of those documents
filed with the Commission for the complete statement of their provisions.
Sunrise is subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, must
file reports and other information with the Commission. Such reports and other
information filed by Sunrise can be copied at the public reference facilities
maintained by the Commission at 450 Fifth Street N.W., Washington, D.C. 20549
and at the Regional Offices of the Commission at 7 World Trade Center, New York,
New York 10048; and at Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates from the Public Reference Room of the Commission at its office
in Washington, D.C. The Commission maintains a Web site at http://www.sec.gov.
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including without limitation statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Sunrise has made
forward-looking statements in this Prospectus concerning, among other things,
the following: the future impact of SunMed Service on company profitability, the
impact of future acquisitions, if any, and the level of future capital
expenditures. These statements are only predictions, however; actual events or
results may differ materially as a result of risks facing Sunrise. 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 the by the F.D.A. in the U.S.); the availability and
financial prospects of future acquisition candidates; failure to integrate the
Kid-Kart business with and into Sunrise, and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including without limitation under the captions "Summary,"
"Risk Factors and other Considerations," "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Sunrise," "Management's
Discussion and Analysis of financial Condition and Results of Operations of
Kid-Kart," "Business of Sunrise," and "Business of Kid-Kart." Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Proxy Statement/Prospectus, including
the Appendices. Kid-Kart Shareholders are urged to carefully read the Proxy
Statement/Prospectus and its Appendices in their entirety before voting on the
matters discussed herein.
Sunrise Medical Inc.
Sunrise is in the business of designing, manufacturing and marketing
medical products used in institutional and home care settings that address the
recovery, rehabilitation and respiratory needs of patients. Sunrise was
incorporated in Delaware in January 1983. Sunrise's principal offices are
located at 2382 Faraday Avenue, Suite 200, Carlsbad, California 92008 and its
telephone number is (619) 930-1500. Unless the context otherwise requires, all
references herein to Sunrise refer to Sunrise Medical Inc. and its consolidated
subsidiaries.
Kid-Kart, Inc.
Kid-Kart is in the business of designing, manufacturing and marketing
strollers, push wheelchairs, positioning systems and other adaptive medical
equipment for the pediatric rehabilitation market. Kid-Kart was incorporated in
Montana on August 23, 1990. Kid-Kart's principal offices are located at 732
Cruiser Lane, Belgrade, Montana 59704 and its telephone number is (406)
388-1080. Kid-Kart has no subsidiaries.
The Special Meeting
The Special Meeting is scheduled to be held on _______, 1996, at ____ a.m.
local time, at the ____________, Belgrade, Montana. At the Special Meeting,
Kid-Kart Shareholders of record as of the close of business on the Record Date
will be asked to consider and vote on a proposal to approve the Merger
Agreement, providing for the Merger of Kid-Kart into the Sunrise Sub.
The close of business on _____, 1996 has been fixed as the Record Date for
the determination of Kid-Kart Shareholders entitled to notice of and to vote at
the Special Meeting (the "Record Date"). Each Kid-Kart Share is entitled to one
vote on the Merger Agreement. The presence, either in person or by proxy, of a
majority of the Kid-Kart Shares constitutes a quorum for the Special Meeting.
The proposal to approve the Merger Agreement requires the affirmative vote
of the Kid-Kart Shareholders who collectively hold the right to vote more than
two-thirds of all outstanding Kid-Kart Shares. Abstentions and failures to vote
will have the practical effect of voting against the Merger Agreement since they
represent fewer votes for approval. As of the Record Date, there were 53,574
Kid-Kart Shares outstanding held by 65 holders of record, of which 34.39% were
beneficially owned by directors, executive officers and affiliates of Kid-Kart.
Wayne H. Hanson, the president and chief executive officer of Kid-Kart and
William Senecal, the chief financial officer of Kid-Kart, who own 26.88% and
4.29%, respectively, of the Kid-Kart Shares, have entered into a Stockholders
Agreement, pursuant to which each of them has committed to vote the Kid-Kart
Shares held by them in favor of the Merger. See "The Merger--Stockholders
Agreement" and "Security Ownership of Certain Beneficial Owners and Management
of Kid-Kart."
Conversion of Securities
Upon consummation of the transactions contemplated by the Merger Agreement,
Kid-Kart will be merged with and into the Sunrise Sub, and each outstanding
Kid-Kart Share (other than Kid-Kart Shares, if any, held by Kid-Kart
Shareholders who perfect dissenters' rights under Montana Law) will be converted
into the right to receive $110 to be paid in the form of registered Sunrise
Shares, valued at the Nominal Share Price, as defined below. All outstanding
options to purchase Kid-Kart Shares are to be cancelled and the holder of each
option to purchase a share of Kid-Kart common stock shall receive $110, less the
exercise price of the option, to be paid in the form of registered Sunrise
Common Stock, valued at the Nominal Share Price, as defined below. No
certificates representing fractional Sunrise Shares will be issued in the
Merger, but cash will be paid in lieu thereof. Pursuant
4
<PAGE>
to the Merger Agreement, as a condition to closing, the Registration Statement
shall have been declared effective by the Commission and shall not be the
subject of any stop order or proceedings seeking a stop order. If the
Registration Statement is not declared effective, or if it is the subject of a
stop order or proceeding seeking a stop order, the Merger will not be
consummated unless the conditions pertaining thereto are waived and the approval
of the Kid-Kart Shareholders is resolicited by means of an updated Proxy
Statement/Prospectus. The Sunrise Shares to be issued and the cash to be paid in
lieu of fractional shares is defined as the "Merger Consideration." The "Nominal
Share Price" is defined in the Merger Agreement as the average of the closing
sale prices of Sunrise Common Stock as printed in The Wall Street Journal (West
Coast Edition) for the five business days preceding the tenth business day prior
to the Closing Date.
Recommendation of the Board of Directors
The Kid-Kart Board of Directors unanimously recommends that Kid-Kart
Shareholders vote in favor of Kid-Kart's participation in the Merger. This
recommendation is based upon the Kid-Kart Board of Directors' belief that:
(i) the terms of the Merger, when considered as a whole, are fair to the
Kid-Kart Shareholders; (ii) the Sunrise Shares being offered in exchange for the
Kid-Kart Shares constitutes fair consideration for the interests of the Kid-Kart
Shareholders; and (iii) after comparing the potential benefits and detriments of
the Merger with those of several alternatives, the Merger is more attractive to
the Kid-Kart Shareholders than such alternatives. These beliefs are based upon
the Board of Directors' analysis of the terms of the Merger, an assessment of
its potential economic impact upon the Kid-Kart Shareholders, a comparison of
the potential benefits and detriments of the Merger and several alternatives to
the Merger and a review of the financial condition and performance of Kid-Kart
and the terms of critical agreements by which it is bound.
Indemnification and Escrow Arrangements
Fifteen percent of the shares of Sunrise Common Stock issued in connection
with the Merger to each Kid-Kart Holder will be held in escrow (the "Escrow
Fund") for a period of twelve months from the Effective Time, which period may
be extended if claims are pending, and may be applied to satisfy (i) the
indemnification obligations described below, (ii) any accounts receivable which
remain uncollected after six months following the Closing Date, net of any bad
debt reserve and the amount of receivables for which Kid-Kart has negotiated
terms extending beyond 180 days from the Closing Date, or (iii) any shortfall in
the net worth of Kid-Kart below $1,375,000, as reflected on the balance sheet
prepared in connection with the Closing (the "Net Worth Guarantee"). Kid-Kart
estimates that as of November 30, 1996, its net worth was $ . See "The Merger
Agreement--Escrowed Shares."
Pursuant to the Merger Agreement, the Kid-Kart Holders will indemnify
Sunrise, up to the amount of the Escrow Fund, against any losses that Sunrise or
the Sunrise Sub may suffer as a result of the inaccuracy or breach of any
representations, warranties or covenants of Kid-Kart contained in the Merger
Agreement. The number of Sunrise Shares to be returned to Sunrise out of the
Escrow Fund in settlement of any indemnification claims will be determined based
on the trading price of the Sunrise Common Stock on the date an indemnification
claim is made. During the period in which the Escrow Fund is outstanding, the
price of Sunrise Common Stock may decrease below the Nominal Share Price in
which case the number of shares of Sunrise Common Stock returned to Sunrise will
be greater than the number of shares computed using the Nominal Share Price. The
price of Sunrise Common Stock may also increase above the Nominal Share Price
during this period in which case the number of Shares returned to Sunrise will
be lower than the number of shares computed using the Nominal Share Price. The
total liability of the Kid-Kart Shareholders for such indemnification claims,
however, is limited to the number of shares originally placed in the Escrow
Fund. In addition, each Kid-Kart Holder will be jointly and severally liable for
any taxes assessed on Kid-Kart for all periods up to and including the Effective
Time, other than sales or transfer taxes due on the Merger, which will be paid
by Sunrise. Such indemnity is not limited (i) in amount by either the Escrow
Fund or the total consideration paid to the Kid-Kart Holders or (ii) in duration
during which Sunrise can bring a claim, although the statute of limitations for
the payment of unpaid taxes is three years, subject to extension under certain
circumstances. See "The Merger Agreement--Indemnification" and "--
Representations and Warranties" and "Certain United States Federal Income Tax
Consequences--Escrowed Shares."
5
<PAGE>
Risk Factors and Other Considerations
In evaluating the Merger and Sunrise, Kid-Kart Shareholders should
carefully consider the risks discussed under "Risk Factors and Other
Considerations" beginning on page 13 of this Proxy Statement/Prospectus. These
risks include the possibility that the market price of Sunrise Common Stock will
fluctuate significantly; the risk that although Kid-Kart will obtain an opinion
from its legal counsel that the Merger will constitute a tax free transaction to
Kid-Kart Shareholders for Federal income tax purposes, the opinion will not be
binding on the Internal Revenue Service (the "IRS") and the IRS could contend
that the Merger is a taxable transaction to the holders of Kid-Kart Common
Stock; and the risk that difficulties may be encountered in integrating the
operations of Sunrise and Kid-Kart or that the benefits expected from such
integration may not be realized.
Effective Time of the Merger
If the Merger is approved by two-thirds of the Kid-Kart Shareholders and
the other conditions to the consummation of the Merger are satisfied or, where
permissible, waived, the Merger will become effective upon the filing of a
Certificate of Merger with the Delaware Secretary of State and Articles of
Merger with the Montana Secretary of State. It is anticipated that the
Certificate and Articles of Merger will be so filed as soon as practicable after
the satisfaction or, where permissible, waiver of the conditions in the Merger
Agreement, including the affirmative vote at the Special Meeting of the Kid-Kart
Shareholders who collectively hold the right to vote more than two-thirds of all
outstanding Kid-Kart Shares. See "The Merger Agreement--Effective Time of the
Merger" and "--Conditions to the Merger."
Conditions to the Merger
The obligations of Sunrise and Kid-Kart to consummate the Merger are
subject to the satisfaction of certain conditions, including, among others,
(i) obtaining requisite Kid-Kart stockholder approval and requisite third party
and governmental approvals, (ii) the effectiveness of the Registration
Statement, (iii) the approval for listing on the New York Stock Exchange,
subject to notice of issuance, of the Sunrise Shares, (iv) the receipt of
written representations from the officers of Kid-Kart and others to evidence
compliance with the conditions set forth in the Merger Agreement, as may be
reasonably requested by Sunrise, (v) the correctness of all representations and
warranties as of the Closing Date and the performance of all agreements and
covenants required by the Merger Agreement, (vi) the receipt of written
representations from all Kid-Kart Holders adopting each of the covenants set
forth in the Merger Agreement, agreeing to be bound by and authorizing Sunrise
to take certain actions relating to post-closing adjustments to the purchase
price set forth in the Merger Agreement, appointing Wayne Hanson as the
Stockholder Representative, representing such Holder's name, address and federal
tax identification number and stating that he or she is not a foreign person
within the meaning of the Code, waiving any and all preemptive rights and
authorizing the transfer to Sunrise of up to the amount of the Escrow Shares
withheld from such individual to satisfy indemnification claims, the Net Worth
Guarantee and uncollected accounts receivable, (vii) the receipt of certain tax
representations from the Kid-Kart Shareholders, (viii) the receipt by Sunrise of
affiliate agreements from each affiliate of Kid-Kart, (ix) the receipt of an
opinion letter from Kid-Kart's legal counsel as to certain legal matters
regarding the organization and capitalization of Kid-Kart, the approval of the
transaction, the receipt of all necessary consents, the absence of a violation
of Kid-Kart's charter or of law, the absence of pending litigation against
Kid-Kart and the effectiveness of the Merger, (x) the receipt of corporate
documents from Kid-Kart and (xi) the execution of an employment and a
noncompetition agreement by Wayne H. Hanson.
Termination
On or after October 1, 1996, the Merger Agreement may be terminated at any
time prior to the Closing Date (i) by mutual consent of Sunrise and Kid-Kart,
(ii) by Sunrise upon the occurrence of an event which has or is reasonably
likely to have a Material Adverse Effect on Kid-Kart, or (iii) by Kid-Kart upon
the occurrence of an event which has or is reasonably likely to have a Material
Adverse Effect on Sunrise. The term "Material Adverse Effect" as used in the
Merger Agreement means changes, developments or occurrences which, individually
or in the aggregate, have materially and adversely affected or could reasonably
be expected to have a material adverse effect on the business, prospects,
assets, liabilities, working capital, reserves, earnings or condition (financial
or otherwise) of the entity concerned.
6
<PAGE>
Treatment of Stock Options
At the Effective Time, all options to purchase shares of Kid-Kart Common
Stock (individually, a "Kid-Kart Option") outstanding under Kid-Kart's 1993
Stock Option Plan (the "Kid-Kart Stock Option Plan") granted on or prior to the
Effective Time, whether or not currently exercisable, will be cancelled and the
holder of each option to purchase a share of Kid-Kart Common Stock shall receive
$110, less the exercise price of the option, to be paid in Sunrise Common Stock,
valued at the Nominal Share Price. Any fractional shares shall be paid in cash.
The "Nominal Share Price" is defined in the Merger Agreement as the average of
the closing sale prices of Sunrise Common Stock as printed in The Wall Street
Journal (West Coast Edition) for the five business days preceding the tenth
business day prior to the Closing Date. See "The Merger Agreement--Treatment of
Kid-Kart Options" and "Certain United States Federal Income Tax
Consequences--Kid-Kart Stock Options" and "Certain United States Federal Income
Tax Consequences--Kid-Kart Stock Options."
Rights of Dissenting Kid-Kart Shareholders
A Kid-Kart Shareholder will be entitled to dissenters' rights of appraisal
in connection with the Merger if Kid-Kart consummates a Merger and if the
Kid-Kart Shareholder properly exercises dissenters' rights under Sections
35-1-826 through 35-1-839, Montana Code Annotated (1995). The full text of
Sections 35-1-826 through 35-1-839 is attached as Appendix B to this Proxy
Statement/Prospectus. As described therein, any Kid-Kart shareholder who wishes
to dissent must deliver to Kid-Kart, prior to the vote on the Merger Agreement,
a written notice of intent to demand payment for such shareholder's shares if
the Merger is effectuated. In addition, the shareholder must refrain from voting
in favor of the Merger Agreement. A shareholder who fails to deliver the notice
on time or who votes in favor of the Merger Agreement will not have any
dissenters' rights. If a shareholder returns a signed proxy but does not specify
a vote against approval of the Merger Agreement or a direction to abstain, the
proxy will be voted for approval of the Merger Agreement, which will have the
effect of waiving the shareholder's dissenters' rights. See "Dissenters' Rights
of Kid-Kart Shareholders."
Transaction Costs
Merger expenses have been allocated between Sunrise and Kid-Kart such that
Sunrise and Kid-Kart shall each pay its own attorneys', accountants' and other
fees incurred by it and associated with the transactions described in the Merger
Agreement. However, to the extent such fees cause a shortfall in the Net Worth
Guarantee, such fees will result in a reduction of the Merger Consideration. Up
to $35,000 payable to a consultant of Kid-Kart and up to $18,000 payable to
Kid-Kart's attorneys will not be counted against the Net Worth Guarantee. See
"The Merger Agreement--Net Worth Guarantee."
Certain United States Federal Income Tax Consequences
The Merger is intended to qualify as a reorganization with the meaning of
Section 368(a) of the Internal Revenue Code. Based upon an opinion of Dorsey &
Whitney LLP, which is based upon certain tax-related assumptions and
representations that will be made by Kid-Kart and Sunrise, Kid-Kart believes
that no gain or loss will be recognized by Kid-Kart or its shareholders for U.S.
federal income tax purposes on the exchange of Kid-Kart Common Stock for Sunrise
Common Stock (except with respect to cash, if any, in lieu of fractional
interest in Sunrise Common Stock). See "Certain United States Federal Income Tax
Consequences--Opinions" for a discussion of assumptions and representations
underlying the opinion. However, Kid-Kart Optionholders will realize taxable
ordinary compensation income equal to the fair market value of Sunrise Common
Stock received in lieu of Kid-Kart Options. If the IRS contends that the Merger
is not a reorganization within the meaning of Section 368(a) of the Code, the
transfer by Kid-Kart of its assets to Sunrise could be considered to be a sale
of assets, resulting in taxable gain to the extent that the fair market value of
the consideration received by Kid-Kart Shareholders exceeds the adjusted basis
of such assets. The amount of any such tax would be significant. Because of
indemnification obligations undertaken in the Merger Agreement, the Kid-Kart
Shareholders would be liable to pay any tax on such gain, to the extent of the
Escrow Fund. In addition, the Kid-Kart Shareholders would be liable to pay tax
on the gain resulting from the deemed sale of their Kid-Kart Shares for the
value of the Sunrise
7
<PAGE>
Common Stock received in exchange therefore. See "The Merger
Agreement--Conditions to the Merger" and "Certain United States Federal Income
Tax Consequences."
Regulatory Matters
No material federal or state regulatory approvals must be obtained in order
to consummate the Merger. See "The Merger--Regulatory Approvals."
Resales of Sunrise Common Stock
The shares of Sunrise Common Stock to be issued pursuant to the Merger have
been registered under the Securities Act, and therefore may be resold without
restriction by persons who are not deemed to be "affiliates" (as such term is
defined under the Securities Act) of either Sunrise or Kid-Kart. See "The
Merger--Restrictions on Sales of Stock."
Accounting Treatment
For accounting and financial reporting purposes, the Merger will be
accounted for using the purchase method under generally accepted accounting
principles.
8
<PAGE>
SELECTED FINANCIAL INFORMATION OF SUNRISE
The financial information set forth below should be read in conjunction
with Sunrise's financial statements, related notes and other financial
information included elsewhere in this Proxy Statement/Prospectus. Sunrise has
restated previously issued financial results for the fiscal years ended June 30,
1995 and July 1, 1994. The restatement primarily reflected adjustments to reduce
the recorded amounts of receivables, inventories, and property, plant and
equipment at Sunrise's Bio Clinic subsidiary, thereby reducing consolidated net
income. See Note 5 of Notes to Consolidated Financial Statements of Sunrise.
Selected financial data for September 27, 1996 and September 29, 1995 and the
thirteen week periods then ended are unaudited; however, in the opinion of
management, such data include all adjustments (consisting only of normally
recurring accruals) necessary for a fair presentation of operating results for
such periods. Results for the interim periods are not necessarily indicative of
results for the full year.
<TABLE>
<CAPTION>
Years Ended Thirteen Weeks Ended
------------------------------------------------------- ------------------------
June 28, June 30, July 1, July 2, July 3, September September
-------- -------- ------- ------- ------- 27, 1996 29, 1995
1996 1995 1994 1993 1992(1) --------- ---------
------ ------ ------ ------ ------- (unaudited) (unaudited)
(In thousands, except per share amounts)
Consolidated results of operations data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................................... $667,130 $601,927 $466,942 $319,196 $243,920 $165,353 $157,172
Gross profit................................ 220,625 205,651 166,947 115,317 86,218 54,454 54,700
Marketing, selling and administrative
expenses................................... 159,109 134,511 102,776 67,269 51,796 37,270 37,010
Research and development expenses........... 15,544 13,937 11,029 7,388 5,846 3,759 3,724
Corporate expenses.......................... 9,998 7,360 5,444 4,439 3,701 2,994 2,363
Amortization of intangibles................. 8,686 6,823 5,435 2,374 1,772 2,040 2,041
Unusual Items............................... 65,152 -- -- -- -- -- --
Corporate operating income (loss)........... (37,864) 43,020 42,263 33,847 23,103 8,391 9,562
Interest expense............................ 16,687 10,358 6,078 4,252 2,908 4,002 3,530
Income (loss) before taxes.................. (52,460) 33,863 36,168 29,696 20,244 5,883 6,690
Net income (loss)........................... $(40,867) $ 19,471 $ 21,809 $ 18,090 $ 12,027 $ 3,060 $ 3,794
========= ======== ======== ======== ======== ======== ========
Net income (loss) per share(2).............. $ (2.17) $ 1.03 $ 1.19 $ 1.21 $ .94 $ .16 $ .20
========= ======== ======== ======== ======== ======== ========
Weighted average shares outstanding(2)...... 18,810 18,819 18,317 14,950 12,786 19,023 19,147
========= ======== ========= ======== ======== ======== ========
Consolidated balance sheet data:
Working capital............................. $104,991 $119,594 $101,479 $ 92,049 $ 32,137 $107,930 $130,177
Total assets................................ 620,416 604,743 471,667 284,031 201,810 625,011 619,454
Long-term debt(3)........................... 207,446 182,029 118,697 32,475 56,039 204,248 187,611
Stockholders' equity(4)..................... $260,554 $299,493 $259,539 $194,723 $ 92,256 $263,721 $307,766
======== ======== ======== ======== ======== ======== ========
</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) Sunrise did not declare cash dividends for the fiscal years 1992 through
1996.
9
<PAGE>
SELECTED FINANCIAL INFORMATION OF KID-KART
The financial information set forth below should be read in conjunction
with Kid-Kart's financial statements, related notes and other financial
information included elsewhere in this Proxy Statement/Prospectus. The following
selected financial information is derived from the historical financial
statements of Kid-Kart for the years ended December 31, 1993, 1994 and 1995 and
the nine month periods ended September 30, 1995 and 1996 included elsewhere in
this Proxy Statement/Prospectus. Selected financial data for the years ended
December 31, 1991 and 1992 are derived from financial statements not included in
this Proxy Statement/Prospectus. Selected financial data other than selected
financial data at and for the year ended December 31, 1995 is derived from
unaudited financial statements; however, in the opinion of management, such data
include all adjustments (consisting only of normally recurring accruals)
necessary for a fair presentation of operating results for such periods. Results
for the interim periods are not necessarily indicative of results for the full
year.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------------- -----------------
1995 1994 1993 1992 1991 1996 1995
------ ------ ------ ------ ------ ------ ------
(In thousands, except share and per share amounts)
Results of operations data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 3,210 $ 2,004 $ 919 $ 298 $ 74 $ 3,165 $ 2,392
Gross profit........................... 1,515 838 356 119 27 1,395 1,016
Marketing, selling and administrative
expenses............................. 835 658 261 102 57 800 580
Research and development expenses...... 109 44 37 11 18 31 21
Operating income (loss)................ 571 136 58 6 ( 48) 564 415
Interest expense, net of other income.. 43 18 5 5 0 54 32
Income (loss) before taxes............. 528 118 53 1 ( 48) 510 383
Net income (loss)...................... $ 322 $ 107 $ 39 $ 1 $( 48) $ 321 $ 255
======== ======== ======== ======== ========= ======== ========
Net income (loss) per share............ $ 5.73 $ 2.16 $ 0.91 $ 0.02 $( 1.23) $ 5.12 $ 4.55
Weighted average shares outstanding.... 56,214 49,367 43,211 43,982 38,906 62,612 55,999
<CAPTION>
December 31, September 30,
----------------------------------------------- -----------------
1995 1994 1993 1992 1991 1996 1995
------ ------ ------ ------ ------ ------ ------
Balance sheet data:
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital........................ $ 1,197 $ 566 $ 283 $ 119 $ 21 $ 847 $ 882
Total assets........................... 1,960 1,411 483 234 78 2,629 1,780
Long-term debt......................... 644 446 88 46 35 342 434
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Stockholders' equity.............. 938 501 232 94 ( 3) 1,266 833
</TABLE>
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following tabulation reflects (a) the historical net income per share
of Sunrise Common Stock in comparison with the pro forma net income per share;
(b) the historical net income per Kid-Kart Share in comparison with the pro
forma net income attributable to the $110 in shares of Sunrise Common Stock
which will be received for each Kid-Kart Share; and (c) the historical book
value per share of Sunrise Common Stock and Kid-Kart Shares in comparison with,
in the case of Sunrise, the pro forma book value per share after giving effect
to the Merger and, in the case of Kid-Kart, the pro forma book value
attributable to $110 in shares of Sunrise Common Stock. The information
presented in this tabulation should be read in conjunction with the financial
statements and the notes thereto of Sunrise and Kid-Kart included elsewhere
herein.
<TABLE>
<CAPTION>
Sunrise
Fiscal
Year Ended
June 28, 1996
---------------
Income (loss) per share
<S> <C>
Historical.............................................. $ (2.17)
Pro forma............................................... (2.11)
Book Value
Historical.............................................. 13.82
Pro forma............................................... 13.84
<CAPTION>
Kid-Kart
Year Ended
Dec. 31, 1995
---------------
Income per share
Historical.............................................. $ 5.73
Pro forma............................................... 0.67*
Book Value
Historical.............................................. 17.51
Pro forma............................................... 1.95*
</TABLE>
* Calculation based on an estimated price per share of Sunrise Common Stock
of $14 3/8 (the closing price of Sunrise Common Stock on November 29,
1996).
12
<PAGE>
MARKET PRICES OF SUNRISE COMMON STOCK
Sunrise'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 and first two quarters of
fiscal year 1997 was as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
1997 1996 1995
-------------- -------------- -----------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter..................................... 18 1/8 15 1/8 29 25 1/8 26 1/2 20
Second Quarter (through November 29).............. 16 13 5/8 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 660. Sunrise estimates it has approximately 10,600 beneficial holders
of its common stock. The last reported sale price per share of the common stock
on September 23, 1996, the last trading day preceding the day the Merger
Agreement was entered into, was 15 3/8. The closing price of the common stock on
November 29, 1996 was 14 3/8.
No public market exists for the Kid-Kart Shares. See "Market Prices of Kid-
Kart Shares."
Sunrise has not paid cash dividends to holders of its common stock and has
no plans to do so in the foreseeable future. Sunrise presently intends to retain
all earnings to fund its operations and future growth.
Kid-Kart Shareholders are urged to obtain current market quotations
for Sunrise Common Stock.
13
<PAGE>
RISK FACTORS AND OTHER CONSIDERATIONS
In evaluating the Merger of Kid-Kart and Sunrise, Kid-Kart Shareholders
should carefully consider the following factors, in addition to other matters
set forth elsewhere or incorporated in this Proxy Statement/Prospectus,
including the Appendices.
Possible Volatility of Stock Price
The market price of Sunrise Common Stock will be subject to significant
fluctuations in response to variations in Sunrise's quarterly operating results,
general trends in the market for home healthcare products and services and other
factors. In addition, broad market fluctuations, as well as general economic or
political conditions and agendas such as healthcare reform, may adversely affect
the market price of Sunrise Common Stock, regardless of Sunrise's actual
performance.
Risks Regarding the Federal Income Tax Treatment of the Merger
The Internal Revenue Service has not been and will not be asked to rule
upon the tax consequences of the Merger. Instead, Kid-Kart will rely upon the
opinion of Dorsey & Whitney LLP, its counsel, that the Merger will constitute a
tax-free transaction to Kid-Kart and the holders of Kid-Kart Common Stock for
Federal income tax purposes. This opinion will be based upon the accuracy of
certain representations made by Sunrise, Sunrise Sub, Kid-Kart and the Kid-Kart
Shareholders and on certain assumptions. See "Certain United States Federal
Income Tax Consequences--Opinions" for a discussion of assumptions and
representations underlying the opinion. Furthermore, the opinion will not be
binding on the IRS. The IRS could contend that the Merger does not constitute a
"reorganization" within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that the Merger should
therefore be treated as a taxable transaction to the holders of Kid-Kart Common
Stock. See "Certain Federal Income Tax Consequences" for further discussion of
the tax consequences of the Merger.
Failure to Integrate the Businesses
The Merger involves the integration of two companies that have previously
operated independently. Among the factors considered by the Boards of Directors
of Sunrise and Kid-Kart in connection with their approval of the Merger
Agreement were the opportunities for operating efficiencies that should result
from the Merger, including the distribution of Kid-Kart products through the
Sunrise international and domestic distribution and sales network, the
coordination of marketing, engineering and manufacturing personnel and the
shared purchasing power of the combined entities. No assurance can be given that
difficulties will not be encountered in integrating the operations of Sunrise
and Kid-Kart or that the benefits expected from such integration will be
realized. See "The Merger."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SUNRISE
The following discussion should be read in conjunction with Sunrise's historical
financial statements for the years ended June 28, 1996, June 30, 1995 and July
1, 1994 and for the thirteen week periods ended September 27, 1996 and September
29, 1995 included elsewhere in this Proxy Statement/Prospectus. Financial data
for September 27, 1996 and September 29, 1995 and the thirteen week periods then
ended are unaudited. Such unaudited financial statements include all adjustments
(consisting only of normally recurring accruals) that Sunrise's management
considers necessary for a fair presentation of operating results for such
periods.
RESULTS OF OPERATIONS
Thirteen Weeks Ended September 27, 1996
Net sales for the first quarter of fiscal 1997 were $165.4 million compared to
$157.2 million in the comparable period of fiscal 1996, an increase of 5%.
Excluding the effect of the company's support surfaces rental and consumer
businesses, which have been sold, sales grew 10%, with companies acquired during
the past year adding 5%, base business growing 6%, and foreign currency
translation reducing sales by 1%.
The company reports its operating results using three groupings, which reflect
its operating management structure: Homecare and Extended Care (both based in
North America) and Europe (which includes sales of both homecare and extended
care products).
The Homecare Products group's sales increased 3% in the first quarter of fiscal
1997 to $64.4 million, compared to $62.7 million in the first quarter of fiscal
1996. This group was led by 11% growth of respiratory products, in part
reflecting new product introductions. Wheelchair sales growth was at a lower
rate, while sales of patient aids declined slightly. An extended consumer
patient aids product line, Caremate/(R)/, was rolled out to Sears stores during
the quarter.
The Extended Care Products group recorded sales of $24.0 million in the first
quarter of fiscal 1997, a decline of 8% from sales of $25.9 million in the
comparable period of fiscal 1996. A significant decline in sales of healthcare
support surfaces (in part reflecting the sale of the company's air therapy
rental business in January 1996) more than offset sales growth at the company's
Joerns division. The level of operating losses in the healthcare support
surfaces business narrowed significantly in the period ended September 27, 1996
in comparison to prior quarters.
In Europe, sales increased 20% in the first quarter of fiscal 1997 to $67.0
million compared to $56.0 million in the first quarter of fiscal 1996. The
company's businesses in Germany, Spain, the U.K. and its European distribution
group all had solid sales growth, while revenues in France declined
slightly.
Key items as a percentage of net sales were:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------
September 27, September 29,
1996 1995
------------- -------------
<S> <C> <C>
Gross profit 32.9% 34.8%
Corporate operating income 5.1% 6.1%
Interest expense 2.4% 2.2%
Net income 1.9% 2.4%
</TABLE>
Gross profit of $54.5 million in the first quarter of fiscal 1997 was $.2
million below the $54.7 million recorded in the comparable period of fiscal
1996. The gross margin, or gross profit as a percentage of net sales, decreased
by 1.9% to 32.9%, as a result of pricing and cost pressures on certain products,
and lower margins in the company's consumer business (Comfort Clinic).
Marketing, selling and administrative expenses increased by 1% in the first
quarter of fiscal 1997 compared to the prior year period, but declined as a
percentage of net sales to 22.5% compared to 23.5% in the first quarter of
fiscal 1996. The company incurred marketing costs of approximately $1.4 million
in the 1997 period in connection with its sponsorship of the 1996 Atlanta
Paralympic Games. Excluding these costs, marketing, selling and administrative
expenses were 21.7% of net sales, with the improvement reflecting the results of
a company-wide profit improvement program instituted early in the 1996 calendar
year.
Corporate expenses were $3.0 million in the first quarter of fiscal 1997, an
increase of $.6 million compared to the first quarter of fiscal 1996. This
increase reflects costs associated with a new European corporate office, as well
as higher internal audit and insurance costs.
Interest expense for the first quarter of fiscal 1997 was $4.0 million or 13%
higher than interest expense of $3.5 million in the first quarter of the prior
year, attributable to higher average borrowings and a slight increase in
interest rates. Other income of $.7 million in the 1997 period includes the
effect of the favorable resolution of a legal dispute.
The effective tax rate of 48.0% in the first quarter of fiscal 1997 was higher
than the rate of 43.3% in the same period of fiscal 1995 as a result of non-
deductible goodwill amortization representing a greater portion of income before
income taxes.
Net income for the first quarter of fiscal 1997 was $3.1 million, or $0.16 per
share, compared to net income of $3.8 million ($.20 per share) in the first
quarter of fiscal 1996.
Fiscal Years Ended June 28, 1996, June 30, 1995 and July 1, 1994
Sunrise achieved record net sales in its fiscal year ended June 28, 1996.
However, two developments had a significant adverse impact on Sunrise's
operations. First, a deteriorating profit trend at Sunrise's Bio Clinic/Comfort
Clinic divisions was hidden until October 1995 by accounting irregularities at
those divisions. See Note 5 of Notes to Consolidated Financial Statements.
Second, market conditions within the U.S. homecare industry were characterized
by severe pricing pressure which worsened Sunrise's competitive position in more
generic products, in particular certain respiratory and patient aids products.
Definitive programs to address these matters were developed throughout Sunrise,
including a reorganization of Sunrise's domestic salesforces, exit of certain
businesses, and initial steps to consolidate several operations in both the U.S.
and Europe.
Sunrise 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 Sunrise's reorganization
and cost reduction program. These charges for unusual items contributed to a
loss from operations of $37.9 million.
Sunrise 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, Sunrise
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, Sunrise'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 Sunrise'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, Sunrise 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 $281 million, following growth of
49% in 1995. International customers accounted for 42% of total sales in 1996
compared to 33% in 1995 and 29% in 1994. Fluctuations of international currency
rates increased overall sales by less than 1% in 1996 and by 3% in 1995, while
reducing sales by 2% in 1994. The effect of currency fluctuations on reported
results is expected to increase as Sunrise continues to expand its foreign
operations.
15
<PAGE>
<TABLE>
<CAPTION>
Analysis of Product Line Sales Contribution
($ in millions) 1996 1995 1994
-------------------------------------------------------------------------------------------------------------------
<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 Sunrise'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 Sunrise'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, Sunrise's
institutional support surface business encountered severe competition and
declining prices. Also contributing to the sales decline was the sale of
Sunrise's air therapy rental business in January 1996 following an extended
period of declining rental rates.
Reflecting Sunrise'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
Sunrise'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.
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 Sunrise'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
16
<PAGE>
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 Sunrise'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 Sunrise.
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 $6.3 million. SMS is integrating the order entry, customer service
and delivery functions for standard products from all of Sunrise's U.S.
manufacturing divisions. It is the objective of SMS to improve service levels
for both large national accounts and independent homecare providers through its
new national network of eight distribution centers. Management expects that
revenue benefits will eventually offset the incremental costs of this new
customer service capability, although the extent and timing of such benefits are
uncertain.
<TABLE>
<CAPTION>
Analysis of Expenses and Profit Margins
% Increase
(Decrease)
------------------
($ in millions) 1996 1995 1994 1996/95 1995/94
- -----------------------------------------------------------------------------------------------------------------------------------
<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%
% of net sales 33.1% 34.2% 35.8%
Marketing, selling
and administrative expenses 159.1 134.5 102.8 18% 31%
% of net sales 23.8% 22.3% 22.0%
Research and development 15.5 13.9 11.0 12% 26%
% of net sales 2.3% 2.3% 2.4%
Corporate expenses 10.0 7.4 5.4 36% 35%
% of net sales 1.5% 1.2% 1.2%
Amortization of goodwill and
other intangibles 8.7 6.8 5.4 27% 26%
% of net sales 1.3% 1.1% 1.2%
Unusual items 65.2 -- -- -- --
% of net sales 9.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate operating income (loss) (37.9) 43.0 42.3 (188)% 2%
% of net sales (5.7)% 7.1% 9.1%
Interest and other 14.6 9.2 6.1 59% 50%
% of net sales 2.2% 1.5% 1.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (52.5) 33.9 36.2 (255)% (6%)
% of net sales (7.9)% 5.6% 7.7%
Income taxes (benefit) (11.6) 14.4 14.4 (181)% 0%
% of income (loss) before taxes (22.1)% 42.5% 39.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(40.9) $ 19.5 $ 21.8 (310)% (11)%
% of net sales (6.1)% 3.2% 4.7%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
17
<PAGE>
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.
Sunrise'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 Sunrise 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 Sunrise 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, Sunrise decided to sell the Comfort Clinic division in order to
concentrate on its core healthcare products business. In October 1996, Sunrise
sold the assets of Comfort Clinic for $14 million in cash, subject to certain
adjustments for changes in net book value through the date of closing.
In addition to these actions related to the support surfaces business,
management conducted in December 1995 an intensive review of Sunrise's other
operations and businesses and initiated Operation Rebound, a company-wide profit
improvement plan. This plan involved four major elements: the consolidation of
Sunrise's domestic salesforces from twelve to six; the integration of a number
of Sunrise'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 Sunrise 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 Sunrise's 1995 and
1994 financial statements. Sunrise also initiated plans to consolidate certain
European operations.
As a result of these actions, Sunrise 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 related to Bio Clinic and Comfort Clinic,
consisting of losses on the sale of businesses of $5.8 million, goodwill
writedowns of $13.8 million, and other asset adjustments of $8.0 million to
reflect revised estimates of net asset realizations; and $19.0 million related
to Sunrise's reorganization and cost reduction program, including severance
costs of $3.2 million, facility closing costs of $5.4 million, and product line
discontinuance and other expenses of $10.4 million. Of the total charges of
$65.2 million, approximately $36.2 million required cash payments and $29.0
million represented non-cash charges. Of the charges requiring cash payments,
approximately $18.8 million had been paid by June 28, 1996 and an additional
$1.6 million was paid in the quarter ended September 27, 1996.
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 Sunrise's credit agreement contributed
to the increase in interest expense in 1996. Interest rates increased in 1995
18
<PAGE>
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 Sunrise's installment receivables.
In 1996 Sunrise 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, Sunrise 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, compared to net income of $19.5 million in 1995
($1.03 per share), a decrease of 71%. This decrease was principally the result
of higher losses in the support surfaces business, costs related to the launch
of SunMed Service, increases in corporate expenses and goodwill amortization,
and higher interest expense. 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 income
as a percentage of net sales 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.
Sunrise 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. Sunrise
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
During the first quarter of fiscal 1997 the company's working capital
increased by $2.9 million to $107.9 million. Cash of $9.1 million was provided
by operating activities during the period, compared to $3.1 million in the first
quarter of fiscal 1996. Purchases of property and equipment were $3.4 million,
down from $6.7 million in the 1996 period. Long-term debt was reduced by $3.5
million in the first quarter of fiscal 1997.
In 1996, cash flows provided by operations increased to $22 million 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 amounts
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. Sunrise expects capital
expenditures in 1997 to be at least 50% in excess of the 1996 level, including
expenditures for additional plant and equipment to support continued growth,
cost reduction initiatives, and for maintenance and replacement of existing
capacity. The company recently signed a contract to purchase for $3 million a
370,000 square foot facility for the consolidation of four U.K.-based
manufacturing divisions into a combined Sunrise Medical Ltd. entity. The
consolidation is expected to be completed by October 1997. These capital
expenditures are expected to be funded by cash flows from operations and from
additional borrowings under Sunrise's bank credit facility.
19
<PAGE>
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 Sunrise 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.
During 1995, Sunrise acquired certain assets and liabilities of Jay Medical
Ltd., a Boulder, Colorado-based manufacturer of wheelchair cushions and seating
systems. Sunrise 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 Sunrise, 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
Sunrise'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.
<TABLE>
Analysis of Long-Term Debt
1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-rate debt as a percentage of
total debt at year-end 66.0% 72.0% 77.0%
Weighted average annual interest rate 7.8% 6.6% 5.8%
Foreign denominated debt as a
percentage of total debt at year-end 56.0% 41.0% 25.0%
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 bank borrowings to finance
acquisitions ($24 million) and to pay the costs of Sunrise's internal
investigation and related litigation ($14 million). 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. Sunrise 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, Sunrise'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. Sunrise must comply with certain
covenants, such as the maintenance of leverage ratio and interest coverage,
minimum levels of tangible
20
<PAGE>
net worth, and certain restrictions on acquisitions. As of September 27, 1996
Sunrise was in compliance with all such covenants. Funds available from the
credit facility as of September 27, 1996 were approximately $62 million.
International Operations
Management estimates that over half of the worldwide market for Sunrise's
products is outside the United States. Sunrise 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
economic conditions, governmental purchase curtailments and swings in local
currency values. Sunrise 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. Sunrise
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. Sunrise'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. Sunrise adopted SFAS 121 in the first
quarter of fiscal 1997. The effect of such adoption was immaterial.
Sunrise 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," Sunrise 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
Sunrise'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 Sunrise's largest stockholder, of the
attractiveness of Sunrise'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 Sunrise's Bio Clinic subsidiary, Sunrise 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
21
<PAGE>
and seeking unspecified damages. These lawsuits were consolidated in the U.S.
District Court for the Southern District of California. In June 1996 Sunrise
reached an agreement in principle to settle the actions for $20 million.
Sunrise's share of the settlement was approximately $7 million, with the balance
paid by Sunrise'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. Two derivative actions in
Delaware state courts which had been filed against many of the same defendants
were dismissed in November 1996. The Securities and Exchange Commission ("SEC")
has entered a formal order of private investigation into the circumstances
underlying the restatement of Sunrise's 1995 and 1994 financial results. Sunrise
is cooperating fully with the SEC in its investigation.
22
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF SUNRISE
The following table sets forth as of September 23, 1996, the name and
address, the total number of shares of Common Stock beneficially owned (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"1934 Act")), and the percentage of the outstanding shares of the Common Stock
so owned (i) by each person who is known to Sunrise to own beneficially 5% or
more of the outstanding shares of Common Stock, (ii) by each of the directors,
(iii) by Sunrise's chief executive officer and each of the Named Officers and
(iv) by all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares Beneficially
-------------------
Owned at September 23,
----------------------
1996(1)
-------
Number Percent
------ -------
Name of Beneficial Owner of Shares of Class
------------------------ --------- --------
<S> <C> <C>
Directors
Richard H. Chandler.............................. 1,957,758 (3) 10.1%
Wisconsin Investment Board....................... 1,246,200 6.6%
121 E. Wilson St.
Madison, WI 53702
LGT Asset Management............................. 1,210,000 6.4%
50 California St., 27th Fl.
San Francisco, CA 94111-4624
Lazard Freres & Co. 1,150,000 6.1%
Thirty Rockefeller Plaza
New York, NY 10020
Lee A. Ault III.................................. 26,000 (4) *
Lloyd E. Cotsen.................................. 15,750 (5) *
Babette Heimbuch................................. 2,900 (6) *
Murray H. Hutchison.............................. 27,000 (7) *
William L. Pierpoint............................. 24,220 (8) *
Joseph Stemler................................... 42,118 (9) *
John R. Woodhull................................. 22,000 (10) *
Thomas H. O'Donnell.............................. 70,702 (11) *
Barrie Payne..................................... 61,995 (12) *
Dennis J. McCarthy............................... 56,250 (13) *
Richard Kollisch................................. 36,250 (14) *
All directors & executive officers
as a group (21 persons).......................... 2,443,931 (15) 12.7%
</TABLE>
- ---------------------------
*Less than 1%
(1) Except as otherwise indicated, the address of each of the persons named
below is c/o Sunrise Medical Inc., 2382 Faraday Avenue, Suite 200,
Carlsbad, California 92008.
(2) Includes shares held for the benefit of the named person as of August 30,
1996 under the Sunrise 401(k) plan, as well as shares deemed to be
outstanding pursuant to stock options presently exercisable or exercisable
within 60 days after September 23, 1996. On the record date, September 23,
1996, there were a total of 18,858,649 shares of Sunrise's Common Stock
issued and outstanding.
(3) Includes Mr. Chandler's options to purchase 66,250 shares of Common Stock.
Also includes 15,350 shares held in a non-profit foundation of which Mr.
Chandler and family members are directors, and as to which Mr. Chandler
disclaims beneficial ownership.
23
<PAGE>
(4) Includes Mr. Ault's options to purchase 10,000 shares of Common Stock.
(5) Includes Mr. Cotsen's options to purchase 13,750 shares of Common Stock.
(6) Includes Ms. Heimbuch's options to purchase 2,500 shares of Common Stock.
(7) Includes Mr. Hutchison's options to purchase 12,500 shares of Common Stock.
(8) Includes Mr. Pierpoint's options to purchase 5,000 shares of Common Stock.
(9) Includes Mr. Stemler's options to purchase 3,750 shares of Common Stock.
(10) Includes Mr. Woodhull's options to purchase 12,500 shares of Common Stock.
(11) Includes Mr. O'Donnell's options to purchase 67,500 shares of Common Stock.
Also includes 3,002 units of Common Stock held in Sunrise's Profit
Sharing/Savings Plan for Mr. O'Donnell's benefit as of August 30, 1996.
(12) Includes Mr. Payne's options to purchase 45,025 shares of Common
Stock.
(13) Includes Mr. McCarthy's options to purchase 56,250 shares of Common Stock.
(14) Includes Mr. Kollisch's options to purchase 36,250 shares of Common Stock.
(15) Includes options to purchase 425,677 shares of Common Stock held by all
directors and officers as a group. Also includes 9,687 units of Common
Stock held for the benefit of executive officers under Sunrise's Profit
Sharing/Savings Plan as of August 30, 1996.
(16) Includes the 9,687 units of Common Stock and the 425,677 options referred
to in Note 16 above. The number of outstanding shares of Common Stock for
this purpose is 19,294,013.
Compliance with Section 16(a) of the 1934 Act
Section 16(a) of the 1934 Act requires Sunrise's directors and executive
officers, and any persons who are beneficial owners of more than 10 percent of
the Common Stock to report their initial ownership of Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission.
Specific dates for such reports have been established and Sunrise is required to
disclose in this Proxy Statement any failure to file such reports by such dates
during fiscal 1996. All of such filing requirements were satisfied during such
period.
CERTAIN TRANSACTIONS OF SUNRISE
To assist Mr. Thomas O'Donnell, senior vice president-North America, in his
relocation to the corporate office, Sunrise provided an interest free loan of
$437,000 to Mr. O'Donnell on February 29, 1996. The loan was evidenced by a
promissory note secured by a deed of trust, and has been repaid as of the date
hereof. In addition, Sunrise agreed to reimburse Mr. O'Donnell for any loss on
the sale of his Fresno residence, and to provide a tax gross up to assist with
any negative impact relating to his relocation.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF KID-KART
The following discussion should be read in conjunction with Kid-Kart's
historical financial statements for the years ended December 31, 1995, 1994 and
1993 and for the nine-month periods ended September 30, 1996 and 1995 included
elsewhere in this Proxy Statement/Prospectus. Financial data for periods other
than the year ended December 31, 1995 are unaudited. Such unaudited financial
statements include all adjustments (consisting only of normally recurring
accruals) that Kid-Kart's management considers necessary for a fair presentation
of operating results for such periods. All dollar amounts are in thousands.
Results of Operations
Nine months Ended September 30, 1996 Compared to Nine months Ended September 30,
1995
Sales were $3,165 for the nine months ended September 30, 1996, an increase
of $773, or 32.3%, compared to sales of $2,392 in the same period of 1995.
Approximately 30% of this growth was the result of the introduction of new
products and the remainder was due to continued expansion of Kid-Kart's
distribution network and increased acceptance of Kid-Kart products.
Gross profit was $1,395 for the nine months ended September 30, 1996, an
increase of $379, or 37.3%, over the same period in 1995, primarily reflecting
higher sales volume. Gross margin (gross profit as a percentage of sales)
increased to 44.1% in the nine months ended September 30, 1996 from 42.5% in the
same period of 1995, as fixed costs were spread over larger unit sales and
economies were achieved in the purchase of certain raw materials and components.
Operating expenses were $831 for the nine months ended September 30, 1996,
compared to $601 in the corresponding period of 1995, an increase of $230 or
38.2%. The higher level of expenses resulted from the expansion of the business.
Operating profit was $564 for the nine months ended September 30, 1996, an
increase of $149, or 35.9% compared to $415 in the corresponding period of 1995
as a result of the factors described above. Interest expense, net of other
income increased to $54 for the 1996 period compared to $32 in the prior year
period, due to higher average borrowings.
The effective tax rate for the nine month period ended September 30, 1996
was 37.1% compared to 33.4% in the same period in 1995. The lower rate in the
1995 period reflects the benefit of lower statutory tax rates on the first $100
of taxable income. Net income increased by $66 to $321 in the first nine months
of 1996 compared to net income of $255 in the first nine months of 1995, an
increase of 25.9%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Sales for the year ended December 31, 1995 were $3,210 compared to $2,004
in the year ended December 31, 1994, an increase of $1,206 or 60.2%.
Approximately 30% of this growth was the result of the introduction of new
products. The remainder was due to continued expansion of Kid-Kart's
distribution network with the addition of 400 domestic dealers and five new
manufacturer's representatives and to increased acceptance of Kid-Kart products.
Gross profit was $1,515 in 1995, an increase of $677, or 80.8%, compared to
gross profit of $838 in 1994. Gross margin improved to 47.2% in 1995 from 41.8%
in 1994, due primarily to higher sales and increased efficiencies in production
processes.
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<PAGE>
Operating expenses were $944 in 1995 compared to $702 in 1994, an increase
of $242, or 34.5%, a slightly lower rate of growth than the increase in sales,
as a result of the expansion of the business.
Operating profit in 1995 was $571 compared to $136 in 1994, an increase of
$435 or 319.9%, reflecting higher sales and substantially improved gross margin.
Interest expense, net of other income, was $43 in 1995 compared to $18 in 1994,
due to the incurrence of additional debt to finance working capital and an
expansion of property and equipment.
The effective tax rate in 1995 was 39.0%, a rate in excess of the federal
statutory rate of 34.0% primarily because of state taxes. In 1994 the effective
tax rate was 9.3%, partially as the result of recognition of deferred tax
assets based on management's determination that it was more likely than not that
Kid-Kart would realize the benefits of the deferred tax assets, after
considering the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible.
Net income was $322 in 1995 compared to $107 in 1994, an increase of
200.9%.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Sales for the year ended December 31, 1994 were $2,004, an increase of
$1,085, or 118.1%, compared to sales of $919 in the year ended December 31,
1993. This growth was the result of the introduction of the Kid-EZ product line.
Gross profit was $838 in 1994 compared to $356 in 1993, an increase of
$482, or 135.4%. Gross margin improved to 41.8% in 1994 compared to 38.7% in
1993, reflecting the benefit of higher sales volume and the reduced cost of
certain materials.
Operating expenses in 1994 were $702 compared to $298 in 1993, an increase
of $404 or 135.6%, due to the addition of personnel and the expansion of
facilities consistent with actual and anticipated sales growth.
Operating profit was $136 in 1994, or 6.8% of sales, compared to $58 in
1993, or 6.3% of sales. Interest expense, net of other income, increased by $13,
or 260%, to $18 in 1994, due to higher average borrowings.
The effective tax rate in 1994 was 9.3% compared to 26.4% in 1993. The tax
rate in 1994 reflected recognition of a deferred tax asset, while the 1993
effective rate was based on statutory federal and state tax rates. Net income
was $107 in 1994 compared to net income of $39 in 1993, an increase of 174.4%.
Financial Condition and Liquidity
Cash Flow Analysis
Operating activities used cash of $11 in the nine months ended September
30, 1996, while cash of $202 was used in operating activities in the first nine
months of 1995. During both interim periods, these amounts reflect substantial
increases in accounts receivable and inventories. Cash flows used in investing
activities were $404 and $25 for the nine months ended September 30, 1996 and
1995, respectively, consisting of capital expenditures for property and
equipment. Cash flows provided by financing activities were $413 and $205,
respectively, primarily related to increased borrowings on a line of
credit.
Cash flows used in operating activities for the years ended December 31,
1995 and 1994 were $223 and $217, respectively. During 1995, cash flows provided
by operating activities were primarily affected by increases in accounts
receivable and inventories and a reduction of accounts payable. Cash flows used
in investing activities were $44 and $365 for 1995 and 1994, respectively,
consisting of capital expenditures. Cash flows provided by financing activities,
consisting of bank financing and sales of common stock, were $259 in 1995 and
$603 in 1994.
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<PAGE>
Cash flows used in operating activities were $217 and $110 for the years
ended December 31, 1994 and 1993, respectively. Capital expenditures were $365
and $23 in 1995 and 1994, respectively. Cash flows provided by financing
activities were $603 in 1994 and $134 in 1993.
Future Capital Expenditures
Capital expenditures for the last quarter of 1996 are expected to be
approximately $200. Capital expenditure budgets have not been established for
1997. Kid-Kart expects to fund its capital expenditure requirements principally
from borrowings on its bank credit line.
Kid-Kart Indebtedness
Kid-Kart has a revolving line of credit with a borrowing capacity of $400,
bearing interest at the prime rate plus 2% (an effective rate of 11% at December
31, 1995). In July 1996 Kid-Kart refinanced the line of credit to increase the
maximum balance to $480 and reduced the interest rate to prime plus 1.5%.
Interest is payable monthly, with the principal due on April 15, 1997. The line
of credit is secured by all inventories, accounts receivable and equipment of
Kid-Kart and is guaranteed by Wayne Hanson and William Senecal, President and
Chief Financial Officer, respectively, of Kid-Kart. Pursuant to the terms of the
Merger Agreement, as soon as practicable following the closing of the Merger,
Kid-Kart and Sunrise have agreed to take all reasonable steps to eliminate the
personal guarantees.
Long-term debt consists of a 6% note to the City of Belgrade due in 2000
and two notes payable to a bank, due in monthly installments including interest
through 2010 and secured by substantially all of Kid-Kart's assets. Management
anticipates that all payments of principal and interest will be made from future
cash flows.
Inflation and Foreign Currency Fluctuations
Kid-Kart's management believes that the effect of inflation and changing
prices on Kid-Kart's sales and net income is not material. Kid-Kart's sales are
predominately in U.S. dollars. Kid-Kart does not engage in any hedging
activities to offset foreign currency fluctuations, as such fluctuations
historically have not been material to Kid-Kart's financial condition or results
of operations.
27
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF KID-KART
The following table sets forth as of October 15, 1996, the number and
percentage of shares of Kid-Kart's Common Stock beneficially owned, directly or
indirectly, by each of Kid-Kart's directors and Named Officers, and by the
directors and executive officers of Kid-Kart as a group. The address for each
person listed below is 732 Cruiser Lane, Belgrade, Montana 59714. Management
knows of no person, except for Wayne Hanson, Kid-Kart's chairman of the Board of
Directors, president and chief executive officer, who owns beneficially or of
record as much as five percent of the outstanding shares of Kid-Kart Common
Stock.
<TABLE>
<CAPTION>
Shares Beneficially
-------------------
Owned at October 15,
--------------------
1996
-----------------------
Number Percent
------ -------
Name of Beneficial Owner of Shares of Class
------------------------ --------- --------
<S> <C> <C>
Directors
Wayne Hanson.................................. 14,400 26.88%
Quentin Petersen.............................. 1,725 3.22%
Named Officers
William Senecal............................... 2,300 4.29%
All directors & executive officers
as a group (4 persons)........................ 18,425 34.39%
</TABLE>
28
<PAGE>
THE SPECIAL MEETING
General
This Proxy Statement/Prospectus and proxy are first being mailed on or
about _________, 1996 to the Kid-Kart Shareholders in connection with the
solicitation of proxies by the Board of Directors for use at the Special Meeting
to be held on __________, 1996, at _________ local time, at the ___________,
Belgrade, Montana, and at any adjournments or postponements thereof.
Matters to be Considered
At the Special Meeting, Kid-Kart Shareholders of record as of the close of
business on the record date, _______, 1996 will be asked to consider and vote on
a proposal to approve the Merger Agreement.
The Board of Directors of Kid-Kart has determined that the Merger Agreement
is fair to, and in the best interests of, Kid-Kart and the Kid-Kart
Shareholders. Accordingly, the Board of Directors recommends that Kid-Kart
Shareholders vote in favor of approving the Merger Agreement.
The Special Meeting
Holders of record of the Kid-Kart Shares at the close of business on the
record date, ______, 1996, will be entitled to receive notice of and to vote at
the Special Meeting. On such date, there were 53,574 Kid-Kart Shares outstanding
held by 65 holders of record. Each Kid-Kart Share is entitled to one vote on the
Merger Agreement.
The presence, either in person or by proxy, of a majority of the Kid-Kart
Shares constitutes a quorum for the Special Meeting. The Special Meeting may be
adjourned for the purpose of obtaining additional proxies or votes or for any
other purpose, and, at any subsequent reconvening of the Special Meeting, all
proxies will be voted in the
29
<PAGE>
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for any proxies that have theretofore properly been
revoked or withdrawn), notwithstanding that they may have been properly voted on
the same or any other matter at a previous meeting.
The affirmative vote of Kid-Kart Shareholders who collectively hold the
right to vote more than two-thirds of all outstanding Kid-Kart Shares is
required to approve the Merger Agreement. Abstentions, failures to vote and
broker nonvotes will have the practical effect of voting against the Merger
Agreement since they represent fewer votes for approval.
If a proxy in the accompanying form is properly executed and returned
before the voting, the Kid-Kart Shares represented thereby will be voted in the
manner specified on the proxy. If no specification is made, the Kid-Kart Shares
will be voted in favor of the Merger Agreement. A proxy is revocable by
delivering a subsequently signed and dated proxy or other written notice to
Wayne Hanson, president of Kid-Kart, at any time before its exercise. A proxy
may also be revoked if the Kid-Kart Shareholder who executed the proxy is
present at the Special Meeting and chooses to vote in person.
30
<PAGE>
THE MERGER
Recommendation of the Board of Directors of Kid-Kart
The Board of Directors of Kid-Kart unanimously recommends that the Kid-Kart
Shareholders vote in favor of Kid-Kart's participation in the Merger. This
recommendation is based upon the Board of Directors' belief that the terms of
the Merger, when considered as a whole, are fair to the Kid-Kart Shareholders
and the Sunrise Shares being offered in exchange for the Kid-Kart Shares
constitute fair consideration for the interests of the Kid-Kart Shareholders.
These beliefs are based upon the Board of Directors' analysis of the terms of
the Merger, an assessment of its potential economic impact upon the Kid-Kart
Shareholders, a comparison of the potential benefits and detriments of the
Merger and several alternatives to the Merger and a review of the financial
condition and performance of Kid-Kart. In addition, in arriving at its unanimous
recommendation that Kid-Kart Shareholders vote in favor of the Merger, the Board
of Directors of Kid-Kart considered the following:
. The Board of Directors expected companies with substantially greater
resources to enter the market for dependent mobility products which
would have required greater financial resources than those expected to
be available to Kid-Kart for Kid-Kart to compete effectively with the
new market entrants.
. Sunrise would provide an immediate sales and distribution network for
Kid-Kart products in international markets which had not previously
been exploited by Kid-Kart.
. The Board of Directors believed that Kid-Kart would realize operating
efficiencies as a result of the combination with Sunrise including
efficiencies in the areas of marketing, engineering and
manufacturing.
. The Board of Directors found a synergy between the corporate cultures
of Sunrise and Kid-Kart, including an emphasis on people, whether
customers, employees or vendors.
Background of the Merger
On January 4, 1996, representatives of Sunrise Sub contacted the management
of Kid-Kart to discuss Kid-Kart's interest in selling its assets to or being
acquired by Sunrise. Shortly thereafter representatives of Kid-Kart traveled to
Fresno, California to meet with management of Sunrise Sub at which point the
organization of each company, as well as each of the parties intentions, were
discussed. On January 17, 1996 representatives of Sunrise Sub visited the
Kid-Kart facilities in Belgrade, Montana and reviewed products, production
capabilities, systems and other operations. Following the January 17 meeting,
representatives of Sunrise Sub and Kid-Kart discussed on various occasions by
telephone the operational and financial elements of a combination of the
organizations and on May 1, 1996 the president of Sunrise and representatives of
Sunrise Sub returned to Kid-Kart to discuss preliminary details of a proposed
merger. On May 28, 1996, the president and chief financial officer of Kid-Kart
traveled to the Sunrise corporate offices in Carlsbad, California to discuss the
details of a merger. On June 2, 1996 a letter of intent was signed by Sunrise
and Kid-Kart providing, subject to certain conditions, that Sunrise acquire each
of the outstanding shares of capital stock and options to purchase shares of
capital stock of Kid-Kart in return for $110 per share, payable in shares of
Sunrise Stock. The price of $110 per share was determined in the course of arms
length negotiations between Kid-Kart and Sunrise.
Following execution of the letter of intent, discussions between
representatives of Sunrise and Kid-Kart resumed with respect to the terms of a
Merger Agreement. In addition, the parties conducted due diligence concerning
the respective businesses. After approval by the respective Boards of Directors
of Sunrise and Kid-Kart, the Merger Agreement was executed on September 24,
1996.
The directors of Sunrise and Kid-Kart have approved the Merger Agreement,
concluded that the Merger is in the best interest of their respective
shareholders and have authorized the consummation of the Merger, subject to the
approval by the Kid-Kart Shareholders and certain other conditions set forth in
the Merger Agreement. The terms
31
<PAGE>
of the Merger, including the $110 price per share and the formula pursuant to
which shares of Kid-Kart Common Stock will be exchanged for Sunrise Common
Stock, resulted from arms-length negotiations between the management of Kid-Kart
and the management of Sunrise.
If the Merger is consummated, Kid-Kart Shareholders who exchange Kid-Kart
shares for Sunrise shares will receive marketable stock, subject in certain
cases to restrictions described in "Restrictions on Sales of Stock," and will
have an equity interest in a larger, integrated enterprise. Sunrise Common Stock
is traded under the symbol "SMD" on the New York Stock Exchange.
Stockholders Agreement
Wayne H. Hanson, the president and chief executive officer of Kid-Kart and
William Senecal, the chief financial officer of Kid-Kart, who own 26.88% and
4.29%, respectively, of the Kid-Kart Shares, have entered into a Stockholders
Agreement, pursuant to which each of them has committed to vote the Kid-Kart
Shares held by them in favor of the Merger. See "Security Ownership of Certain
Beneficial Owners and Management of Kid-Kart."
Expected Benefits from the Merger
The following highlights the primary benefits to Kid-Kart Shareholders
expected by the Kid-Kart Board of Directors as a result of the Merger. There can
be no assurance that any of these benefits will be realized.
. The acquisition of Sunrise Common Stock, because it is listed on the New
York Stock Exchange and traded in the public market, will result in
liquidity for Kid-Kart Shareholders.
. Sunrise produces many more types of products than Kid-Kart, resulting in
greater diversification.
. Sunrise has a well-developed international distribution and sales network
that may be able to expand the distribution of Kid-Kart products into a
broader range of markets.
. Sunrise has access to sources of capital unavailable to Kid-Kart that
will enable Sunrise to compete more effectively than Kid-Kart with new
market entrants.
Alternatives to Merger
The following is a brief discussion of the benefits and disadvantages of
alternatives to the Merger that could have been pursued by the Board of
Directors.
Continuation of Kid-Kart. An alternative to the Merger would be to continue
Kid-Kart. This option avoids whatever disadvantages might be inherent in the
Merger. See "Risk Factors." The primary disadvantage with continuing Kid-Kart is
the failure of that strategy to secure the benefits that the Board of Directors
expects to result from the Merger. For example, continuing Kid-Kart would not
secure for the Kid-Kart Shareholders the liquidity that results from acquisition
of the Sunrise Common Stock which is listed on the New York Stock Exchange,
the expansion of Kid-Kart product distribution through the Sunrise sales and
distribution organization or the enhanced ability to compete with new market
entrants.
Secondary Market for Kid-Kart Shares. Another possible alternative to
create liquidity for Kid-Kart Shareholders desiring to dispose of their
investments in Kid-Kart is the creation or support of the secondary market for
the Kid-Kart Shares through an initial public offering, limited cash tender
offers, repurchase programs sponsored by Kid-Kart, privately negotiated
transactions or purchases or tender offers sponsored by persons unrelated to
Sunrise. However, while the Board of Directors felt that one or more of these
alternatives might provide some liquidity for Kid-Kart Shareholders, they were
concerned about the costs and expenses of implementing these measures and
believed that certain of the measures were not sufficiently broad-based to
provide an overall solution to the liquidity problem. While these options were
briefly considered by the Board of Directors, it ultimately concluded that they
would not be available to Kid-Kart on financially favorable terms, compared to
the option of combining with a company with shares already traded in the
secondary market, and accordingly no detailed financial analysis was ever done
as to these alternatives which would put the Board of Directors in a position to
predict with any degree of certainty the possible impact of these alternatives
on the value of the Kid-Kart Shares.
32
<PAGE>
Interests of Certain Persons in the Merger
In considering the recommendations of the Kid-Kart Board of Directors with
respect to the Merger Agreement and transactions contemplated thereby, Kid-Kart
Shareholders should be aware that certain members of the management of Kid-Kart
and Sunrise and the Board of Directors of Kid-Kart and Sunrise have interests in
the Merger that are in addition to the interests of Kid-Kart Shareholders
generally. The Kid-Kart Board of Directors was aware of these interests and
considered them, among other factors, in approving the Merger.
Employment Agreement. It is anticipated that, on or before the Closing Date
of the Merger, Wayne H. Hanson will enter into a two year employment agreement
with Sunrise Sub.
Stock Option Plans. As provided in the Merger Agreement, at the Effective
Time, all Kid-Kart Options outstanding under the Kid-Kart Stock Option Plan
granted on or prior to the Effective Time, whether or not currently exercisable,
will be cancelled and the holder of each option to purchase a share of Kid-Kart
Common Stock shall receive $110, less the exercise price of the option, to be
paid in registered Sunrise Common Stock, valued at the Nominal Share Price. Any
fractional shares shall be paid in cash. The "Nominal Share Price" is defined in
the Merger Agreement as the average of the closing sale prices of Sunrise Common
Stock as printed in The Wall Street Journal (West Coast Edition) for the five
business days preceding the tenth business day prior to the Closing Date. See
"The Merger Agreement--Treatment of Kid-Kart Options" and "Certain United States
Federal Income Tax Consequences--Kid-Kart Stock Options" and "Certain United
States Federal Income Tax Consequences--Kid-Kart Stock Options."
Indemnification. Under the terms of the Merger Agreement, Kid-Kart Holders
are required to indemnify Sunrise, up to the amount of the Escrow Fund, against
any losses that Sunrise or the Sunrise Sub may suffer as a result of the
inaccuracy or breach of any representations, warranties or covenants of Kid-Kart
contained in the Merger Agreement. The number of Sunrise Shares to be returned
to Sunrise out of the Escrow Fund in settlement of any indemnification claims
will be determined based on the trading price of the Sunrise Common Stock on the
date an indemnification claim is made. During the period in which the Escrow
Fund is outstanding, the price of Sunrise Common Stock may decrease below the
Nominal share Price in which case the number of shares of Sunrise Common Stock
returned to Sunrise will be greater than the number of shares computed using the
Nominal Share Price. The price of Sunrise Common Stock may also increase above
the Nominal Share Price during this period in which case the number of Shares
returned to Sunrise will be lower than the number of shares computed using the
Nominal Share Price. The total liability of the Kid-Kart Holders for such
indemnification claims, however, is limited to the number of shares originally
placed in the Escrow Fund. In addition, each Kid-Kart Holder will be jointly and
severally liable for any taxes assessed on the Company for all periods up to and
including the Effective Time, other than sales or transfer taxes due on the
Merger, which will be paid by Sunrise. Such indemnity is not limited (i) in
amount by either the Escrow Fund or the total consideration paid to the Kid-Kart
Holders or (ii) in duration during which Sunrise can bring a claim, although the
statute of limitations for the payment of unpaid taxes is three years, subject
to extension under certain circumstances. See "The Merger Agreement--
Indemnification" and "--Representations and Warranties" and "Certain United
States Federal Income Tax Consequences--Escrowed Shares."
Restrictions on Sales of Stock
Shares of Sunrise Common Stock to be received in connection with the Merger
by Kid-Kart Shareholders who are deemed to be "affiliates" (as such term is
defined in Rule 144 under the Securities Act) of Kid-Kart prior to the Merger
("Kid-Kart Affiliates") (such shares are referred to herein as the "Restricted
Securities") may be resold by them in transactions permitted by the resale
provisions of Rule 145(d) under the Securities Act or as otherwise permitted
under the Securities Act. Under Rule 144 under the Securities Act, an affiliate
is a person who directly or indirectly controls or is controlled by or is under
common control with Kid-Kart and may include certain officers and directors of
Kid-Kart, principal shareholders of Kid-Kart and certain other shareholders with
special relationships with Kid-Kart.
Rule 145 requires that, in a resale of their Restricted Securities,
Kid-Kart Affiliates comply with a volume restriction and other restrictions on
the manner of sale and that certain information about Sunrise be currently
available to the public. The volume restriction limits the number of shares that
an affiliate may transfer, in the aggregate, within any three-month period to
the greater of (i) 1% of the outstanding Sunrise Common Stock or (ii) the
average weekly period trading volume in the Sunrise Common Stock during the
preceding four calendar weeks. A Kid-Kart Affiliate may sell its shares of
Sunrise Common Stock without regard to the volume restrictions and restrictions
on the manner of sale if it has owned the shares for at least two years, certain
information about Sunrise is currently available to the public and the Kid-Kart
Affiliate is not then an affiliate of Sunrise. A Kid-Kart Affiliate may also
sell its shares of Sunrise Common Stock without regard to the foregoing
restrictions (including
33
<PAGE>
the requirement that certain information about Sunrise is currently available to
the public) if it has held its shares of Sunrise Common Stock for a period of at
least three years and such person has not been an affiliate of Sunrise for at
least three months. A Kid-Kart Affiliate who is also an affiliate of Sunrise may
sell its shares of Sunrise Common Stock, subject to the volume restrictions on
the manner of sale, if it has held the shares of Sunrise Common Stock for a
period of at least two years and certain information about Sunrise is currently
available to the public.
Regulatory Approvals
Sunrise and Kid-Kart are not aware of any license or regulatory permit
which is material to the businesses of Sunrise or Kid-Kart and which is likely
to be adversely affected by consummation of the merger or of any approval or
other action by any state, federal or foreign government or governmental agency
(other than routine re-licensing procedures) that would be required prior to the
Merger.
Accounting Treatment
For accounting and financial reporting purposes, the Merger will be
accounted for using the purchase method under generally accepted accounting
principles.
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THE MERGER AGREEMENT
The discussion to follow is a summary of the material terms of the Merger
Agreement, a copy of which is attached as Appendix A and incorporated by
reference herein. This summary does not purport to be complete and is qualified
in its entirety by reference to the full text of the Merger Agreement. Any
discrepancy between the summary provided herein and the Merger Agreement shall
be resolved by the terms of the Merger Agreement.
Merger Consideration
Pursuant to the Merger Agreement, the Delaware Law and the Montana Law,
Kid-Kart will merge with and into the Sunrise Sub, and the Kid-Kart
Shareholders, except for Dissenting Shareholders, shall receive $110 for each
outstanding Kid-Kart Share, to be paid in the form of shares of Sunrise Stock,
valued at the Nominal Share Price, which is defined in the Merger Agreement as
the average of the closing sale prices of the Sunrise Stock on the New York
Stock Exchange as printed in The Wall Street Journal (West Coast Edition) for
the five (5) trading days ending on the business day preceding the tenth
business day prior to the Special Meeting of Kid-Kart Shareholders, and cash for
any fractional shares.
Adjustment of Merger Consideration
The total consideration to be received by Kid-Kart Holders pursuant to the
Merger Agreement (the "Merger Consideration") shall be reduced by (i) the
amount, if any, by which Kid-Kart's audited Net Worth determined in accordance
with generally accepted accounting principles, consistently applied, as of the
Closing Date is less than $1,375,000 (the "Net Worth Guarantee,") (ii) the
amount of any accounts receivable which remain uncollected after six months
following the Closing Date, net of any bad debt reserve and the amount of
receivables for which Kid-Kart has negotiated terms extending beyond 180 days
from the Closing Date, and (iii) the amount of any indemnification claims made
by Sunrise or Sunrise Sub, (A) up to the amount of the Escrow Fund, for any loss
that Sunrise or Sunrise Sub may incur as a result of the inaccuracy or breach of
any representations, warranties or covenants of Kid-Kart contained in the Merger
Agreement, or (B) for any taxes assessed on Kid-Kart for all periods up to and
including the Effective Time, other than sales or transfer taxes due on the
Merger, which will be paid by Sunrise. Kid-Kart estimates that as of November
30, 1996, its net worth was $ . However, it is possible that the Net Worth
Guarantee will not be satisfied and that the Merger Consideration will be
decreased accordingly. Kid-Kart anticipates that accounts receivable remaining
uncollected after six months following the closing date, excluding accounts
receivable for which Kid-Kart has negotiated terms extending beyond 180 days
from the closing date, will be less than the established bad-debt reserve.
Kid-Kart does not anticipate at this time any indemnification claims as a result
of inaccuracies in or breaches of any representations, warranties, or covenants
of Kid-Kart contained in the Merger Agreement or for any taxes assessed on Kid-
Kart for periods up to and including the Effective Time. However, no assurances
can be given that there will not be any post-closing adjustments to the Merger
Consideration or indemnification claims.
Conversion of Shares; Fractional Shares
On the Closing Date, in exchange for certificates representing all of the
Kid-Kart Shares (the "Certificates") and an Acknowledgment of Cancellation and
Release with respect to all stock option agreements covering Kid-Kart Stock
Options, Sunrise shall deliver certificates representing 85% of the number of
Sunrise Shares to be delivered to the Kid-Kart Holders, together with 100% of
the cash payable in respect of fractional shares. The remaining 15% of the
number of Sunrise Shares to be paid to the Kid-Kart Holders (the "Escrow
Shares") shall be retained by Sunrise for a 12 month period and, if no indemnity
claims are payable or pending, delivered to the Kid-Kart Shareholders. No
fractional shares of Sunrise Stock shall be issued, but in lieu thereof, each
Kid-Kart Shareholder or Optionholder, as the case may be, shall receive from
Sunrise an amount of cash equal to the product of (i) the fraction of a share of
Sunrise Stock to which that Kid-Kart Shareholder or Optionholder would otherwise
be entitled, multiplied by (ii) the Nominal Share Price.
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Escrow Shares
The Escrow Shares shall be retained in escrow by Sunrise for 12 months
after the Closing Date to cover any (a) Shortfall in the Net Worth Guarantee,
(b) Uncollected Accounts Receivable (as defined), or (c) other indemnification
claims determined to be valid under the Merger Agreement. See "-Adjustment of
Merger Consideration." Except to the extent of such Shortfall, Uncollected
Accounts Receivable or claims which have been made and have not yet been
determined to be invalid pursuant to the Merger Agreement, the Escrow Shares
shall be delivered to Kid-Kart Holders promptly following the 12 month
anniversary of the Closing Date, provided that the escrow period has not been
extended because of pending claims. Escrow Shares equal in value to the amount
of any Shortfall, Uncollected Accounts Receivable and Claims determined to be
valid pursuant to Section 5.6 of the Merger Agreement, will be transferred to
Sunrise by the Kid-Kart Holders. During the period in which the Escrow Shares
are retained by Sunrise, the former Kid-Kart Holders shall be entitled to vote
the Sunrise Shares held as part of the Escrow Shares until an adjustment is
conclusively determined pursuant to the provisions of the Merger Agreement.
Wayne Hanson shall be appointed the Stockholder Representative and as such serve
as and have all powers as agent and attorney-in-fact of each Kid-Kart Holder
with regard to the Escrow Shares.
Appraisal Rights
If the Merger is consummated, the holders of Dissenting Shares, if any,
shall be entitled to appraisal rights under Section 35-1-838 of Montana Law,
provided that they comply with the conditions established thereunder. See
"Dissenters' Rights of Kid-Kart Shareholders."
Kid-Kart Stock Options
At the Closing Date, each outstanding Kid-Kart Stock Option to purchase
Kid-Kart Shares, whether vested or unvested, shall be cancelled and each holder
of a Kid-Kart Stock Option (the "Kid-Kart Optionholder") shall receive, in lieu
thereof, a number of shares of Sunrise Stock, computed according to the
following formula:
PS = ($110 x OS) - EP
----------------
NSP
Where:
PS = the number of shares of Parent Stock to be
issued to the Kid-Kart Optionholder
OS = the number of Kid-Kart Shares, whether
vested or unvested, covered by the Kid-Kart
Stock Option held by the Kid-Kart
Optionholder
EP = the aggregate option exercise price, as
specified in the Kid-Kart Stock Option,
payable upon exercise of the Kid-Kart Stock
Option to purchase the Kid-Kart Shares
comprising the "OS" portion of this
foregoing formula
NSP = the Nominal Share Price;
and cash for any fractional shares; provided, however, that such number of
shares of Sunrise Stock and cash to be delivered hereunder shall be net of FICA
and other withholding taxes in the amounts determined by Kid-Kart; the
obligation to forward the amount of such taxes to the IRS and other applicable
tax authorities shall be the responsibility of the Kid-Kart, however, Sunrise
agrees to transfer to Kid-Kart the amount of FICA and withholding taxes withheld
pursuant hereto in connection with the preparation and filing of Kid-Kart's tax
return and at the request of Kid-Kart or the Stockholder Representative.
Conditions to the Merger
The respective obligations of each party to effect the Merger are subject
to the satisfaction prior to the closing of the Merger of the following
conditions, provided that no party shall be entitled to refuse to consummate the
transaction in reliance upon its failure to complete and action within its
control.
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Representations, Warranties and Covenants
All representations and warranties contained in the Merger Agreement shall
be true and correct in all material respects at and as of the Closing Date as if
such representations and warranties were made at and as of the Closing Date,
except as and to the extent that the facts and conditions upon which such
representations and warranties are based are expressly required or permitted to
be changed by the terms of the Merger Agreement and the parties shall have
performed all agreements and covenants required by the Merger Agreement to be
performed by it or them prior to or at the Closing Date, and there shall be
delivered to Sunrise Sub a written representation signed by each of the officers
of Kid-Kart to that effect; provided, however, that no party shall be entitled
to refuse to consummate the transaction in reliance upon its or their own breach
or failure to perform. See "-Representations and Warranties" and
"Covenants."
Consents
All consents, approvals and waivers from third parties and governmental
authorities necessary to the transactions as contemplated by the Merger
Agreement shall have been obtained.
Board and Stockholder Approval
The Board of Directors of Kid-Kart and Kid-Kart Shareholders shall have
duly approved the Merger and the Merger Agreement, all in accordance with
applicable law. Sunrise shall have received resolutions adopted by the Board of
Directors of Kid-Kart and Kid-Kart Shareholders approving the Merger Agreement
and the Merger (and the transactions contemplated thereby), certified by the
corporate secretary of Kid-Kart. Sunrise shall have also received the corporate
minute books, Articles of Incorporation, Bylaws and stock transfer books of
Kid-Kart.
Affiliate Agreement
Prior to the Closing Date, Kid-Kart shall cause to be delivered to the
other parties hereto a list, reviewed by its counsel, identifying all persons
who will be, in its opinion, at the time of the Special Meeting, "affiliates" of
Kid-Kart for the purposes of Rule 145 promulgated by the Commission under the
Securities Act (an "Affiliate List"). Kid-Kart shall furnish such information
and documents as the parties hereto may reasonably request for the purpose of
reviewing such Affiliate List. Prior to the Closing Date, Kid-Kart shall cause
each person who is identified as an "affiliate" of Kid-Kart in such Affiliate
List to execute an affiliate agreement, providing, among other things, that such
person will not offer or sell or otherwise dispose of any of the shares of
Sunrise Stock issued to such person pursuant to the Merger (or otherwise held by
such person) in violation of the Securities Act. The affiliate agreements shall
remain in full force and effect as of the Closing Date and for such period
thereafter as the limitations of Rule 145 shall be in effect.
Opinions of Counsel
Closing shall be contingent upon Sunrise receiving an opinion letter from
Dorsey & Whitney LLP, counsel to Kid-Kart, as to certain legal matters regarding
the organization and capitalization of Kid-Kart, the approval of the
transaction, the receipt of all necessary consents, the absence of a violation
of Kid-Kart's Charter or of law, the absence of pending litigation against Kid-
Kart and the effectiveness of the Merger. In addition, Dorsey & Whitney LLP will
issue an opinion regarding certain tax matters, including their opinion that no
gain or loss will be recognized by Kid-Kart or its shareholders for U.S. federal
income tax purposes on the exchange of Kid-Kart Common Stock for Sunrise Common
Stock (except with respect to cash, if any, in lieu of fractional interests in
Sunrise Common Stock). If such required tax opinion is not received, the Merger
will not be consummated unless the condition requiring its receipt is waived and
the approval of the Kid-Kart Shareholders is obtained following a resolicitation
by means of an updated Proxy Statement/Prospectus.
Certificates
Kid-Kart shall have furnished Sunrise or Sunrise Sub with such written
representations of the officers of Kid-Kart and others to evidence compliance
with the conditions set forth herein as may be reasonably requested by Sunrise
Sub or Sunrise.
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Ancillary Agreements
Sunrise Sub shall have entered into an employment agreement and a
noncompetition agreement with Wayne H. Hanson.
Registration of Sunrise Shares
This Registration Statement shall have been declared effective by the
Commission and shall not be the subject of any stop order or proceedings seeking
a stop order. If the Registration Statement is not declared effective, or if it
is the subject of a stop or proceeding seeking a stop order, the Merger will not
be consummated unless the conditions pertaining thereto are waived and the
approval of the Kid-Kart Shareholders is resolicited by means of an updated
Proxy Statement/Prospectus.
NYSE Listing
Sunrise shall have caused the shares of Sunrise Stock deliverable at the
Closing Date to be approved for listing, subject to notice of issuance, on the
New York Stock Exchange no later than the Closing Date.
Tax Representations
Prior to the Closing Date, Kid-Kart shall cause to be delivered to Sunrise
and Sunrise Sub written representations which Kid-Kart shall have caused to be
signed by each Kid-Kart Shareholder stating in substance that such individuals
have no pre-arranged plan to dispose of sufficient Sunrise Shares as to
disqualify the Merger as tax free pursuant to Section 368(a)(2)(D) of the
Code.
Assignment of SBA Loans
Prior to the Closing Date, Kid-Kart shall have arranged for the assignment
of the loans from the SBA (in the amounts of $228,000 and $50,000), the City of
Belgrade (in the amount of $200,000) and First Security Bank of Bozeman (in the
amounts of $500,000 and $480,000) to Sunrise Sub.
Stockholder Certificates
Prior to the Closing Date, Kid-Kart shall cause to be delivered to Sunrise
and Sunrise Sub written representations signed by each of the Holders, in form
and substance satisfactory to Sunrise and Sunrise Sub and their counsel, to the
effect that each Holder (i) adopts and commits to each of the covenants set
forth in the Merger Agreement, (ii) agrees to be bound by and authorizes Sunrise
to take actions relating to post-closing adjustments to the purchase price set
forth in the Merger Agreement; (iii) appoints Wayne Hanson as the Stockholder
Representative as set forth in Section 3.2 of the Merger Agreement; (iv)
represents such Holder's name, address and federal tax identification number
(social security number) and states that he or she is not a foreign person
within the meaning of the Code; and (v) waives and releases Sunrise, Sunrise Sub
and Kid-Kart from any and all liability, obligations or claims associated with
any and all preemptive rights with respect to the purchase and sale of stock of
Kid-Kart. Each Kid-Kart Holder shall also execute a stock power in blank
authorizing the transfer to Sunrise up to the amount of the Escrow Shares
withheld from such individual pursuant to Section 2.8 of the Merger
Agreement.
Building Variance
Prior to the Closing Date, Kid-Kart shall cause to be delivered the Sunrise
and Sunrise Sub a variance issued by the City of Belgrade, Montana pursuant to
the Belgrade Area Building Code relating to and approving the structure at 732
Cruiser Lane, Belgrade, Montana.
Termination
The Merger Agreement may be terminated at any time prior to the Closing
Date (i) by mutual consent of Sunrise, Sunrise Sub and Kid-Kart, (ii) by Sunrise
or Sunrise Sub upon the occurrence of an event which has or is reasonably likely
to have a Material Adverse Effect on Kid-Kart or (iii) by Kid-Kart upon the
occurrence of an event which has or is reasonably likely to have a Material
Adverse Effect on Sunrise.
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Representations and Warranties
The Merger Agreement contains various representations and warranties by
Kid-Kart relating to, among other things, (i) its organization and similar
corporate matters, (ii) its capital structure, (iii) authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
matters, and the absence of conflicts, violations of or defaults under its
governing documents or any loan or credit agreement, note, bond, mortgage,
indenture or other agreement, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to it, or any of its respective properties or assets, (iv) the
absence of undisclosed material liabilities, (v) the absence of defaults in any
material agreements, (vi) compliance with certain laws, (vii) compliance with
environmental laws, (viii) compliance with certain tax laws, (ix) title to real
and personal property and (x) no acts or omissions that could result in a
product liability claim.
The Merger Agreement also contains representations and warranties Sunrise
and Sunrise Sub regarding (i) their organization and similar corporate matters,
(ii) the capital structure of Sunrise, (iii) authorization, execution, delivery,
performance and enforceability of the Merger Agreement and related matters, and
the absence of conflicts, violations of or defaults under their governing
documents or any loan or credit agreement, note, bond, mortgage, indenture or
other agreement, instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to them,
or any of their respective properties or assets, (iv) the absence of undisclosed
material liabilities of Sunrise, (v) the documents and reports that Sunrise has
filed with the Commission, (vi) the valid authorization and issuance of the
Sunrise Common Stock offered hereby, (vii) the absence of further required
consents or approvals and (viii) the accuracy of the S-4 Registration Statement
of which this Prospectus forms a part.
Certain Covenants
During the period from the date of the Merger Agreement and continuing
until the Effective Time, Kid-Kart has agreed, among other things, that it will:
(i) operate its business in the ordinary course and in the manner previously
conducted and use its best efforts to keep available to Kid-Kart the services of
the present employees and to maintain the relationships between Kid-Kart and its
suppliers, customers, distributors and others having business relations with it,
(ii) promptly notify Sunrise and Sunrise Sub, within two days, of any
identifiable event and as soon as practicable in the case of other events and
conditions which constitute a material adverse development in the business of
Kid-Kart, (iii) not solicit, initiate or deliberately encourage submission of
proposals or offers from any person relating to any acquisition or purchase of
all or (other than in the ordinary course of business) a material amount of the
Assets of, or any equity interest in, Kid-Kart or any merger, consolidation or
business combination with Kid-Kart, (iv) notify Sunrise promptly (orally and in
writing) if any such written offer, or any inquiry or contact by an officer or
director of Kid-Kart (or to its knowledge by other individuals) with any person
with respect thereto, is made and provide Sunrise with a copy of such offer, (v)
except for certain transactions specifically approved by Sunrise in the Merger
Agreement, not engage in any transaction or act (a) which would have a Material
Adverse Effect on the business, operations, properties, Assets or financial
condition of Kid-Kart, (b) which would constitute a change required to be
disclosed under the Merger Agreement, (c) which would result in financial
commitments by Kid-Kart that exceed, in the aggregate, $10,000, other than the
purchase of raw materials, components and tooling which is purchased in the
ordinary course of business, consistent with past practice, or (d) which would
constitute a binding contract or agreement of material nature the term of which
extends beyond the Closing Date, (vi) not make any significant purchase or
disposal of Assets or enter into any lease agreement, the term of which would
extend beyond six months after the Closing Date, (vii) allow Sunrise, at its own
expense, during regular business hours, prior to the Closing Date, through
Sunrise's or Sunrise Sub's employees, agents and representatives, to make such
investigation of the business, properties, plants, books and records of Kid-Kart
and to conduct such examination of the condition (financial or otherwise) of
Kid-Kart as Sunrise deems necessary or advisable, (viii) as soon as practicable,
commence to take all reasonable action required to obtain all consents,
including without limitation, a consent by each party to any contract listed in
the Disclosure Letter, to the substitution of the Sunrise Sub as successor in
interest to Kid-Kart under each respective Contract and agreements, and to give
all notices and make all filings with, any third parties, including governmental
authorities, necessary to authorize, approve or permit the transactions
contemplated by the Merger Agreement, (ix) use its best efforts to take, or
cause to be taken, any action and to do or cause to be done, all things
necessary, proper or advisable under
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applicable laws and regulations to consummate and make effective the
transactions contemplated by the Merger Agreement, (ix) not make any payments
using Kid-Kart corporate funds for any purpose other than in the ordinary course
of business, (x) not declare or pay any cash or stock dividend, make any
distribution to the Holders, buy back or otherwise purchase any of its
outstanding capital stock or pay any other bonus to any shareholder, officer or
director of Kid-Kart, (xi) not issue new options for more than 1,000 shares (in
the aggregate) of Kid-Kart's common stock and keep the price of new options at
$100 per share, (xii) not take any action to induce any employee of Kid-Kart
whom Sunrise Sub or Sunrise is seeking to retain as an employee to leave the
employ of Kid-Kart, (xiii) not make any salary increases, other than increases
in hourly wages in the ordinary course of business and consistent with past
practice and in any event not to exceed 5%, or hire any management personnel
without prior approval from Sunrise, (xiv) use its best efforts to satisfy the
Conditions to Obligation of Each Party to Effect the Merger set forth in the
Merger Agreement, (xv) not make any new elections with respect to Taxes or any
changes in current elections with respect to Taxes affecting Kid-Kart without
the prior written consent of Sunrise, (xvi) furnish to Sunrise, for use in
preparation of the Registration Statement all information concerning Kid-Kart
(including financial statements) and its Holders required by Form S-4 and the
proxy rules under the Exchange Act, (xvii) following notice by the Commission of
the effectiveness of the Registration Statement, promptly notice a meeting of
its Stockholders to obtain their approval for the consummation of the Merger,
and (xviii) without the written consent of Sunrise, not approve any repayment
terms on outstanding accounts receivable which extend payment beyond 180 days
from the Closing Date.
Sunrise has agreed that it will (i) use its best efforts to maintain the
confidentiality of all information obtained from its investigation of Kid-Kart
and, subject to the provisions of Section 11.9 of the Merger Agreement, comply
with the terms of that certain Confidentiality Agreement entered into by and
between Quickie Designs, Inc., a wholly-owned subsidiary of Sunrise, and
Kid-Kart, (ii) use its best efforts to take, or cause to be taken, an action to
do or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by the Merger Agreement, (iii) use its best efforts to
satisfy the "Conditions to Obligation of Each Party to Effect the Merger" set
forth in Article X of the Merger Agreement, (iv) promptly prepare and file with
the Commission the Registration Statement and use its reasonable best efforts to
have the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing and (v) to obtain all necessary state
securities laws or "blue sky" permits, approvals and registrations in connection
with the issuance of the Sunrise Common Stock pursuant to the Merger Agreement.
The Kid-Kart Board of Directors has agreed that it will use its best
efforts to obtain the requisite Kid-Kart Shareholder approval for the
consummation of the Merger.
The Kid-Kart Holders have agreed that they will furnish to the Sunrise Sub,
on or before the Closing Date, an affidavit sworn under penalty of perjury,
setting forth such Holder's name, address, and federal tax identification number
(social security number) and stating that he or she is not a foreign person
within the meaning of the Code. The Kid-Kart Shareholders have also agreed that
none of them will sell or otherwise dispose of a number or amount of Parent
Shares which is likely to or may disqualify the Merger as tax free pursuant to
Section 368(a)(2)(D) of the Code.
Wayne H. Hanson has agreed that he will, on or before the Closing Date,
enter into an employment agreement and a noncompetition agreement with the
Sunrise Sub.
Indemnification
From and after the Effective Time, the Kid-Kart Holders, Sunrise and
Sunrise Sub have agreed to indemnify each other as follows:
By the Kid-Kart Holders. To the extent of the Escrow Fund, the Kid-Kart
-----------------------
Holders shall indemnify, save and hold harmless Sunrise, Sunrise Sub, and
Surviving Corporation from and against any and all costs, losses, liabilities,
damages, lawsuits, diminution in value, taxes, demands, assessments, fines,
deficiencies, claims and expenses, including without limitation, interest,
penalties, attorneys', accountants' and expert witness' fees and all amounts
paid in investigation, defense or settlement of any of the foregoing
(collectively referred to herein as "Claims"), incurred in connection with or
arising out of or resulting from or incident to (i) any breach of any covenant
set forth
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in Article VIII (including agreements to maintain Kid-Kart's business, not to
solicit other transactions, not to engage in certain prohibited transactions or
take certain actions with respect to its employees, tax elections or accounts
receivable, to cooperate in the investigation of Kid-Kart's business by Sunrise,
to obtain consents and use best efforts to secure a shareholder vote in favor
the Merger, to satisfy conditions to the Merger, to cooperate in the preparation
of the Registration Statement, and to obtain non-foreign affidavits and a signed
employment agreement and noncompetition agreement with Wayne Hanson) or Article
IX (including agreements relating to indemnification, cooperation and the taking
of certain additional actions, records retention, the response to tax
proceedings, liability for taxes, elimination of personal guarantees and
dispositions of Sunrise Shares) of the Merger Agreement or any representation or
warranty set forth in Article VI (relating to the due organization of Kid-Kart,
authorization of the Merger, capitalization of Kid-Kart, financial statements,
accounts receivable, no undisclosed liabilities, inventory, absence of certain
changes or events, title to assets and facilities, leases and premises,
contracts and commitments, disclosure of litigation or similar proceedings,
compliance with law, insurance, books and records, severance arrangements,
fringe benefit and pension plans, employment practices, warranty and product
liability matters, proprietary rights, taxes, certain payments, environmental
matters, the absence of conflicts or violations, material misstatements or
omissions, transactions with related parties, absence of brokers or finders fees
and payment and conversion of loans and debentures) of the Merger Agreement made
by Kid-Kart or (ii) the inaccuracy of any representation made by Kid-Kart in or
pursuant to Article XI (relating to expenses and publicity) or the Disclosure
Letter (relating to the closing balance sheet, collections of accounts
receivable, due organization of Kid-Kart, capitalization of Kid-Kart, accounts
receivable, absence of certain changes or events, title to assets and
facilities, leases and premises, contracts and commitments, disclosure,
litigation, proceedings and applicable law, compliance with law, insurance,
severance arrangements, fringe benefit and pension plans, employment practices,
warranty and product liability matters, proprietary rights, environmental
matters, the absence of conflicts or violations, transactions with related
parties, maintenance of business and use of Kid-Kart funds) to the Merger
Agreement. See "--Representations and Warranties" and "--Certain Covenants." In
addition, each Kid-Kart Holder will be jointly and severally liable for any
taxes assessed on the Company for all periods up to and including the Effective
Time, other than sales or transfer taxes due on the Merger, which will be paid
by Sunrise. Such indemnity is not limited (i) in amount by either the Escrow
Fund or the total consideration paid to the Kid-Kart Holders or (ii) in duration
during which Sunrise can bring a claim, although the statute of limitations for
the payment of unpaid taxes is three years subject to extension under certain
circumstances. See "--Indemnification" and "--Representations and Warranties"
and "Certain United States Federal Income Tax Consequences--Escrowed
Shares."
By Sunrise Sub and Sunrise. Sunrise and Sunrise Sub shall indemnify and
--------------------------
save and hold harmless each Holder from and against any and all Claims incurred
in connection with or arising out of or resulting from or incident to (i) any
breach of any covenant set forth in Article VIII (including agreements to
maintain the confidentiality of certain information and satisfy certain
conditions to consummation of the Merger, to prepare the Registration Statement
and to enter into an employment agreement and noncompetition agreement with
Wayne Hanson) or Article IX (including agreements relating to indemnification,
further assurances, cooperation and the taking of certain additional actions,
records retention, the response to tax proceedings, the payment of taxes and the
elimination of personal guarantees) of the Merger Agreement or any
representation or warranty set forth in Article VII (relating to due
organization of Sunrise and Sunrise Sub, the filing and delivery of certain
documents, the absence of certain changes, the issuance of Sunrise stock, the
absence of certain conflicts with or violation of certain documents or law, the
obtaining of consents and approvals, the adequacy of corporate powers, the
execution and delivery of the Merger Agreement and the content of the S-4
Registration Statement) of the Merger Agreement made by Sunrise or Sunrise Sub.
See "-Representations and Warranties" and "Certain Covenants."
Neither Sunrise, Sunrise Sub nor the Kid-Kart Shareholders shall make any
indemnification claim against another party to the Merger Agreement pursuant to
the provisions described above until all such claims in the aggregate exceed
$70,000, and then only to the extent claims are over $70,000.
Amendment, Waiver and Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after approval of the
matters presented in connection with the Merger by the Kid-Kart
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Shareholders, (i) by the mutual consent of Sunrise, Sunrise Sub and Kid-Kart,
(ii) by Sunrise or Sunrise Sub upon the occurrence of an event which has or is
reasonably likely to have a Material Adverse Effect on Kid-Kart, or (iii) by
Kid-Kart upon the occurrence of an event which has or is reasonably likely to
have a Material Adverse Effect on Sunrise.
Transaction Costs
Merger expenses have been allocated between Sunrise and Kid-Kart such that
Sunrise and Kid-Kart shall each pay its own attorneys', accountants' and other
fees incurred by it and associated with the transactions described in the Merger
Agreement. However, up to $35,000 payable to a consultant of Kid-Kart and up to
$18,000 payable to Kid-Kart's attorneys will not be counted against the Net
Worth Guarantee. See "--Adjustment of Merger Consideration."
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BUSINESS OF SUNRISE
Sunrise Medical Inc. ("Sunrise") designs, manufactures and markets medical
products used in institutional and homecare 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. Sunrise
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. Sunrise'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.
Sunrise'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. Sunrise 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 services; 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, Sunrise 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.
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.
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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 salesforces that call 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 by Sunrise's North American homecare products divisions
accounted for 40% of total sales in 1996.
Sunrise 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. Sunrise believes that Jay Medical is the world leader in specialty
wheelchair cushions and modular positioning products. Sunrise believes that its
Guardian/(R)/ brand of ambulatory aids and crutches holds 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 Sunrise'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.
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.
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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 SolAirisTM family
of oxygen concentrators, offering compact, light-weight three- and five-liter
units for the homecare provider. Also introduced was HorizonTM 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 Sunrise'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, Sunrise 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 Sunrise's international distribution network. Sales of Sunrise'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 Sunrise's new logistics division, SunMed Service.
Sunrise'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--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
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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 Sunrise 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 /(R)/ 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, Sunrise
decided to sell the Comfort Clinic division in order to concentrate on its core
healthcare products business. In October 1996, Sunrise sold the assets of
Comfort Clinic for $14 million in cash, subject to certain adjustments for
changes in Comfort Clinics' net book value.
European Operations
Sunrise 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 Sunrise's core businesses as well
as a number of acquisitions. European operations now account for 38% of
Sunrise'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 ComforTecTM, an all-day geriatric
wheelchair, the Sterling Classic ScootaTM, the Minivator 2000TM stairlift, and
the Quickie TriumphTM rigid wheelchair.
Sopur, Sunrise'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 MatchTM sports wheelchair and the Powertec
F60TM, an indoor/outdoor power chair also introduced in a U.K. version. An
updated YoungsterTM 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, Sunrise'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.
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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 Sunrise 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 Sunrise 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 Sunrise's larger Joerns and
Corona divisions, respectively, distribute their products directly to healthcare
institutions in those countries. Sunrise 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 Sunrise 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
Sunrise operates predominantly in the home medical equipment industry
segment. Financial information concerning Sunrise's two geographic segments,
North America and Europe, is included under "Geographic Segment Information" in
Notes to Consolidated Financial Statements.
Competition
Sunrise encounters significant competition domestically from a number of
well-established manufacturers in each of its product lines, and from foreign
sources for some products. Sunrise's primary competitors in the U.S. and
European markets are Invacare Corporation and Hillenbrand Industries, Inc. Meyra
Ortopedia (Germany) and Scandinavian Mobility are important competitors in the
European wheelchair market. Sunrise 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, Sunrise
may face competition from other manufacturers that have larger market shares or
other competitive advantages.
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Manufacturing
Sunrise's manufacturing processes include fabrication, assembly, testing
and quality assurance. Certain components used in Sunrise's products, such as
small motors and electronic controls, are manufactured by third parties.
Although Sunrise 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, Sunrise would be unable to ship certain of its
products.
During the past few years, prices paid by Sunrise for certain raw
materials, such as aluminum, foam and wood, have fluctuated. When prices have
increased, Sunrise 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.
Sunrise 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 Sunrise's Pursuit of Excellence program.
Research and Product Development
Sunrise conducts research and development at each of its manufacturing
divisions. For the year ended June 28, 1996, Sunrise 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 Sunrise tracks progress against those objectives on a regular
basis. As a result of its effort to introduce innovative new products across its
product lines, Sunrise has steadily increased research and development
expenditures at a rate consistent with its overall sales growth.
Patents
Sunrise 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. Sunrise 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
Sunrise'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 Sunrise's wheelchair products have a lifetime warranty.
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%.
Sunrise estimates that approximately 20% of its 1996 sales were ultimately
dependent for payment upon these U.S. government programs. Sunrise is not a
provider under Medicare or Medicaid, but its products are sold to HME
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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 Sunrise'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 Sunrise'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. Sunrise 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 Sunrise 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 Sunrise's ability to introduce new products
on a timely basis and impact Sunrise'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. In
particular, the FDA alleged that Quickie had failed to properly conduct and
record investigations of complaints and failed to establish proper quality
assurance procedures for components and finished goods. 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)
Sunrise 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. Sunrise has not experienced a
strike, work stoppage or labor disturbance during its thirteen-year history.
Sunrise believes that its labor relations are generally good. Sunrise refers to
its employees as Associates.
Backlog
Sunrise'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 Sunrise'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, Sunrise 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, Sunrise 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
Sunrise does not maintain inventory of its products for a significant
period of time (see "Backlog"). Most of Sunrise's products are manufactured in
connection with specific orders which are shipped in less than 30 days, and
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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.
Sunrise 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 Sunrise'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. Sunrise occasionally accepts
products for replacement upon customer request. However, returns for credit or
refund have not been a material aspect of Sunrise's business.
Foreign Operations
Sunrise 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 Sunrise'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.
Properties
Sunrise'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. Sunrise 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 eight company-owned
facilities in Europe with approximately 450,000 square feet.
Sunrise'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 Sunrise's current needs.
Legal Proceedings
On October 26, 1995 Sunrise 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. As a result of the investigation, Sunrise concluded that net sales,
operating income and assets at its Bio Clinic subsidiary had been overstated and
liabilities had been understated as a result of actions by a small group of
employees in the subsidiary's finance and management information systems
departments who falsified accounting entries and computer reports, thereby
circumventing the Company's internal accounting controls and avoiding detection.
Following this investigation, Sunrise restated its financial results for fiscal
1995 and 1994. See Note 5 of Notes to Consolidated Financial Statements of
Sunrise. During November and December 1995, Sunrise and certain of its current
and former officers, directors and employees including its chief executive
officer, president and chief financial officer were named as defendants in a
number of stockholder class action lawsuits, each alleging violations of the
federal securities laws in connection with the activities leading to the
restatement of financial results, and seeking unspecified damages. These
lawsuits were consolidated in the U. S. District Court for the Southern District
of California. In June 1996 Sunrise reached an agreement in principle to settle
the actions for $20 million. Sunrise's share of the settlement was approximately
$7 million, with the balance paid by Sunrise's insurance carriers. The
settlement is subject to final court approval. The agreement also includes
settlement of a stockholder derivative action filed in San Diego Superior Court
against certain of
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Sunrise's current and former officers and directors asserting, among other
things, breach of fiduciary duty, abuse of control, waste of corporate assets,
fraud and violations of the California Corporations Code, and seeking
unspecified damages. Two stockholder derivative actions were filed in the
Delaware Court of Chancery against Sunrise and certain of its current and former
officers, directors and employees including its chief executive officer,
president and chief financial officer. These suits alleged, among other things,
breach of fiduciary duty, gross negligence and corporate waste of assets and
sought unspecified damages. These suits were dismissed in November 1996.
The Securities and Exchange Commission ("SEC") has entered a formal order
of private investigation into the circumstances underlying the restatement of
Sunrise's 1995 and 1994 financial results. Sunrise 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, Alden
Laboratories, Inc., alleged that the activities of the defendants during and
prior to the acquisition by Sunrise 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 sought
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 to settle the
dispute, pursuant to which Sunrise has paid $350,000.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF SUNRISE
The following is a description of the capital stock of Sunrise as set forth
in its Certificate of Incorporation, as amended (the "Certificate of
Incorporation").
Preferred Stock
The Certificate of Incorporation authorizes 5,000,000 shares of Preferred
Stock, par value $1.00 per share, none of which is outstanding. The Board of
Directors of Sunrise is authorized to fix the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption and liquidation
preferences on any issue of a series of Preferred Stock, the number of shares
constituting any such series and the designation thereof. If the Board of
Directors elects to exercise its authority to issue Preferred Stock, the rights,
preferences and privileges of holders of Sunrise Common Stock may be made
subject to the rights, preferences and privileges of the Preferred Stock.
Sunrise Common Stock
The Certificate of Incorporation authorizes 40,000,000 shares of Sunrise
Common Stock, par value $1.00 per share, of which 18,858,649 shares were issued
and outstanding as of September 23, 1996. All issued and outstanding shares of
Sunrise Common Stock are validly issued, fully paid and nonassessable.
All holders of Sunrise Common Stock are entitled to one vote per share on
all matters requiring the vote of the stockholders. With respect to the election
of directors only, each stockholder is entitled to cumulate votes for any
candidate or apportion such votes, so cumulated, among as many candidates for
election and in such manner as such stockholder desires. Under cumulative voting
procedures, each stockholder is entitled to a number of votes equal to the
number of directors to be elected multiplied by the number of shares of Common
Stock the stockholder is entitled to vote. Such votes may be cast for one
nominee or distributed among two or more candidates. As a result, minority
shareholders have a better chance of electing one or more directors by casting
all their votes for a few candidates and not voting for the other
positions.
The holders of Sunrise Common Stock are entitled to receive dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of Sunrise, subject to the prior rights of any holders of Preferred
Stock. The holders of Sunrise Common Stock are entitled upon liquidation,
dissolution or winding up of Sunrise to share ratably in the net assets of
Sunrise after satisfaction in full of the prior rights of creditors of Sunrise
and holders of any Preferred Stock. The Sunrise Common Stock has no preemptive
or other subscription rights, and there are no conversion rights or redemption
or sinking fund provisions with respect to such shares.
As of August 30, 1996, there were approximately 660 holders of record of
the Sunrise Common Stock.
Common Share Purchase Rights
On April 24, 1990, the Board of Directors of Sunrise declared a
dividend-distribution of one Right for each outstanding share of Sunrise Common
Stock to stockholders of record at the close of business on May 7, 1990. The
Board of Directors also authorized the issuance of one Right with respect to
each share of Sunrise Common Stock, including the shares covered by this
Prospectus, that shall become outstanding between May 7, 1990 and the earliest
of the Distribution Date (as defined in the Rights Agreement, as amended,
between Sunrise and Chemical Trust Company of California (the "Rights
Agreement")), the date on which the rights are redeemed, and May 7, 2000. The
Rights will cause substantial dilution to a Person or group that attempts to
acquire Sunrise on terms not approved by Sunrise's Board of Directors. The
purpose of the Rights is to protect stockholders in the event of an unsolicited
attempt to acquire Sunrise by requiring bidders to negotiate with the Board,
enabling the Board to seek competing bids and giving the Board the ability to
resist offers that it determines to be inadequate or coercive. A complete
description and terms of the Rights are set forth in the Rights Agreement, as
amended, which is attached as an exhibit hereto.
Upon the occurrence of certain triggering events and until May 7, 2000 (or
the earlier redemption, exchange or termination of the Rights), each Right
entitles stockholders to purchase from Sunrise one-half of one share of
52
<PAGE>
Sunrise Common Stock at an exercise price of $27.50 per whole share, subject to
certain anti-dilution adjustments. The Rights are not exercisable or
transferable apart from the Sunrise Common Stock until the earlier of (i) the
tenth day after the public announcement that a person, company or group has
become an Acquiring Person (a person, company or group who has acquired, or
obtained the right to acquire, beneficial ownership of 25% or more of the then
outstanding Sunrise Common Stock), or (ii) the tenth day after a person, company
or group commences, or announces an intention to commence, a tender or exchange
offer, the consummation of which would result in the beneficial ownership by a
person, company or group of 25% or more of the then outstanding Sunrise Common
Stock. The earlier of (i) and (ii) is called the "Distribution Date." Sunrise's
Board of Directors has the power, under certain circumstances, to postpone the
Distribution Date. In the event that a person, company or group were to become
an Acquiring Person (except pursuant to certain cash offers for all outstanding
Sunrise Common Stock approved by the Board of Directors) or if Sunrise were the
surviving corporation in a merger with any Acquiring Person and Sunrise's
Sunrise Common Stock was not changed or exchanged, each holder of a Right, other
than Rights that are or were acquired or beneficially owned by the Acquiring
Person (which Rights would thereafter be void), will thereafter have the right
to receive upon exercise that number of shares of Sunrise Common Stock having a
market value of two times the exercise price of one Right. In the event that
Sunrise were acquired in a merger or other business combination transaction or
more than 50% of Sunrise's assets or earning power were sold, or any person
merges into Sunrise, Sunrise is the surviving corporation and all or part of the
Sunrise Common Stock of Sunrise will be changed into or exchanged for securities
of any other person, proper provision would be made so that each holder of a
Right shall thereafter have the right to receive, upon exercise thereof, that
number of shares of common stock of the acquiring company or the issuer in any
such exchange which at the time of such transaction would have a market value of
two times the exercise price of one Right.
The Rights are redeemable at $.005 per Right prior to the close of business
on the tenth day following the public announcement that a person, company or
group has become an Acquiring Person. The Board of Directors has the power,
under certain circumstances, to extend the ten-day redemption period. Until the
Rights are exercised, the holders of the Rights, as such, have no rights as a
stockholder of Sunrise including, without limitation, the right to vote as a
stockholder or receive dividends.
The exercise price, and the number of shares of Sunrise Common Stock
issuable upon exercise of the Rights, are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, Sunrise Common Stock, (ii) as a
result of the grant to holders of Sunrise Common Stock of certain rights or
warrants to subscribe for or purchase Sunrise Common Stock at a price, or
securities convertible into Sunrise Common Stock with a conversion price, less
than the then current market price of Sunrise Common Stock, or (iii) as a result
of the distribution to holders of Sunrise Common Stock of evidence of
indebtedness, securities or assets or of subscription rights or warrants (other
than those referred to above). No adjustment in the exercise price will be
required until cumulative adjustments require an adjustment of at least 1% in
such exercise price.
Upon exercise of the Rights, no fractional shares of Sunrise Common Stock
are required to be issued, and in lieu thereof an adjustment in cash will be
made.
53
<PAGE>
DIRECTORS OF SUNRISE
The following is a list of names and ages of the directors (within the
meaning of Item 401 of Regulation S-K) of Sunrise, indicating all current
positions with Sunrise held by each such person and the year in which such
person began his or her position as a director of Sunrise.
<TABLE>
<CAPTION>
Current Positions Director of
Name Age with Sunrise Sunrise Since
---- --- ------------------------------------ -----------------
<S> <C> <C> <C>
Richard H. Chandler........... 53 Chairman of the board and president 1983
Lee A. Ault III............... 60 Director 1988
Lloyd E. Cotsen............... 67 Director 1989
Babette Heimbuch.............. 48 Director 1994
Murray H. Hutchison........... 57 Director 1983
William L. Pierpoint.......... 58 Director 1985
Joseph Stemler................ 65 Director 1989
John R. Woodhull.............. 63 Director 1986
</TABLE>
The business experience, principal occupations and employment of each of
the directors for at least the past five years are as follows:
Richard H. Chandler has served as chairman of the board of directors and
chief executive officer of Sunrise since its inception in January 1983 through
the present. In January 1996 he also became president of Sunrise, a position he
previously held from January 1983 until July 1993. From 1982 to 1983, he was the
president of the Richard H. Chandler Company, a management consulting firm,
during which period he planned the formation of Sunrise. From 1979 to 1982, he
was the present and chief executive officer of Abbey Medical, Inc. From 1974 to
1979 he held senior management positions with the Sara Lee Corporation, as a
group vice president and including two years when he was president of its Abbey
Medical, Abbey Rents division. 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.
Lee A. Ault was elected a director of Sunrise on January 28, 1988. From
1968 until January 1992, Mr. Ault was chief executive officer of Telecredit,
Inc., a payment services company, serving as its president from 1968 until 1983
and as chairman from 1983 until January 1992. Following the acquisition of
Telecredit by Equifax Inc., a New York Stock Exchange ("NYSE") listed
information services company in December 1990, Telecredit became a subsidiary of
Equifax, and Mr. Ault was also named a senior vice president and a director of
Equifax. He has since retired as an executive of Equifax, but is still a member
of the board of directors of Equifax, as well as the board of directors of Alex.
Brown & Sons Incorporated and Viking Office Products, Inc. From time to time
Alex. Brown & Sons Incorporated has and may make a marked in the securities of
Sunrise and publish research reports covering Sunrise. Mr. Ault is currently a
private investor.
Lloyd E. Cotsen was elected a director of Sunrise on August 30, 1989.
Mr. Cotsen served as chief executive officer of Neutrogena Corporation, a
publicly-owned skin care and hair care products company from 1973 to 1995. He
also served as president and chairman of the board of directors of Neutrogena
for portions of this time. He retired from all positions with Neutrogena at the
end of July 1995. Mr. Cotsen is currently a private investor and also a director
of Darwin Molecular Corporation, a privately held company.
Babette Heimbuch was elected a director of Sunrise on January 21, 1994.
Since 1982 Ms. Heimbuch has held positions of increasing responsibility with
First Federal Bank of California and its parent company, FirstFed Financial
Corp., a NYSE-listed company, and has served as president and chief operating
officer of both companies since January 1989. She has been a director of
FirstFed Financial Corp. since 1987 and a director of First Federal Bank of
California since 1986. Ms. Heimbuch also serves on the board of trustees of
Santa Monica-UCLA Medical Center and the UCLA Medical Center and the board of
directors of the Western League of Savings Institutions.
54
<PAGE>
Murray H. Hutchison was elected a director of Sunrise on May 10, 1983.
Mr. Hutchison was chairman of International Technology Corporation, a
NYSE-listed environmental management company, from 1976 to 1994, and was its
chief executive officer from 1976 to 1992. Mr. Hutchison is currently a private
investor and is chairman of the board of directors for Advanced Access Inc. and
also serves on the board of directors of the Winston Tire Company, the Olson
Company and Epic Solutions, all privately held companies.
William L. Pierpoint was elected a director of Sunrise on October 30, 1985.
From 1977 to 1988, he was president and chief executive officer of Summit Health
Ltd., a publicly-owned, integrated health care company. Mr. Pierpoint is a
certified public accountant, and since 1988 has been a private investor. In 1995
he became vice chairman of Strategic Partners Inc. (dba Cherokee Uniforms), a
privately held company.
Joseph Stemler was elected a director of Sunrise on January 26, 1989.
Mr. Stemler joined the Scholle Corporation, a privately held company, on January
1, 1996. His appointment as its chief executive officer and chairman of its
board of directors was officially announced in February 1996. From 1989 through
July 1995, Mr. Stemler served as president, chief executive officer and a
director of La Jolla Pharmaceutical Company, a biotechnology company. Mr.
Stemler relinquished his title of CEO and president for La Jolla Pharmaceutical
Company at the end of July 1995, but remained as a working director through
December of 1995. Mr. Stemler became president and chief executive officer of
Quidel Corporation in 1985, chairman and chief executive officer in 1988,
chairman in 1990 and vice chairman in 1991. Mr. Stemler was president and chief
executive officer of Bentley Laboratories, Inc. from 1978 to 1985. Mr. Stemler
also serves on the board of directors of Safeskin Corporation, a publicly traded
company.
John R. Woodhull was elected a director of Sunrise on the September 29,
1986. Mr. Woodhull is chairman, president and chief executive officer of
Logicon, Inc., a NYSE-listed company which provides electronic systems and
high-technology services to industry and government. Mr. Woodhull joined Logicon
in 1964, was elected to the board of directors a year later, and attained the
position of president and chief executive officer in 1969. Mr. Woodhull also
serves on the board of directors of Adams Business Forms, Inc., FirstFed
Financial Corp., First Federal Bank of California and YMCA of Metropolitan
Los Angeles.
Meetings and Attendance
The board of directors met nine times during the fiscal year ended June 28,
1996. The executive committee did not meet in 1996, while the audit committee
met two times, and the compensation committee met three times. In addition, the
special committee met 26 times during fiscal 1996. All directors attended at
least 75% of the aggregate of (i) the total number of meetings of the board and
(ii) the total number of meetings of the committees of the board on which such
directors served.
Committees
Audit Committee. The audit committee of the board of directors is comprised
solely of outside directors. The audit committee meets periodically with the
independent auditors, the company's internal audit department and financial
management of the company 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. Members of the audit committee are Messrs. Cotsen, Pierpoint
and Stemler and Ms. Heimbuch. Mr. Pierpoint serves as chair.
Compensation, Stock Option and Nominating Committees. The compensation
committee, consisting solely of outside directors meets with management and
makes recommendations to the board concerning executive officer and key employee
compensation and concerning payments to be made under the Management Incentive
Bonus Plan and the Special Bonus Plan, as well as company contribution to be
made under the Profit Sharing/Savings Plan. The compensation committee also
functions as the stock option committee, administering the Amended and Restated
Stock Option Plan for Key Associates (the "1983 Stock Option Plan") and the 1993
Stock Option Plan. In addition, this committee functions as a nominating
committee regarding vacancies in the board of directors. Members of the
compensation committee are Messrs. Ault, Hutchison and Woodhull, with Mr.
Hutchison serving as chair.
55
<PAGE>
Executive Committee. The executive committee, consisting of Messrs.
Chandler, Hutchison and Pierpoint, meets on an as-needed basis with the
authority to make board-level decisions between regularly scheduled board
meetings. Mr. Chandler is chair of this committee.
Special Committee. The special committee, comprised of all of the outside
directors of Sunrise, was formed in October 1995 to direct an instigation into
financial reporting irregularities at Sunrise's Bio Clinic subsidiary, and to
take action with respect to the results of such investigation. Ms. Heimbuch
serves as chair of the special committee.
Director Compensation
Outside directors are paid $2,000 per year retainer and $1,000 for each
board meeting attended. In addition, committee members are paid $500 per
meeting, if a separate committee meeting is held the same day as a board
meeting, and $750 if a committee meeting is held on a day other than a scheduled
board meeting ($500 if a committee meeting is telephonic). Committee chairs also
receive a $1,500 annual retainer. Each outside director is granted an option
under Sunrise's 1993 Stock Option Plan to purchase 5,000 shares of Common Stock
upon his or her initial election to the board and every four years thereafter if
still a director. Ms. Heimbuch and Mr. Hutchison each earned an additional
$12,000 during fiscal 1996 in consideration of the additional responsibilities
they assumed in connection with special committee matters. Sunrise has no other
contracts or other arrangements pursuant to which any non-employee director was
compensation during the year.
56
<PAGE>
EXECUTIVE OFFICERS OF SUNRISE
The following is a list of names and ages of the executive officers (within
the meaning of Item 401 of Regulation S-K) of Sunrise, indicating all positions
and offices with Sunrise 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 Sunrise.
<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 Sunrise 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 Sunrise. 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.
57
<PAGE>
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.
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
Sunrise 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
Sunrise 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.
58
<PAGE>
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.
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 Sunrise 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.
59
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS OF SUNRISE
Annual Incentive Compensation
The company has used throughout its history a Management Incentive Bonus
Plan (the "MIB Plan") pursuant to which members of management are eligible to
receive annual cash bonuses. Generally, each bonus will be based on both the
achievement of individual objectives agreed upon by the manager and his or her
immediate supervisor, and upon attainment of certain earnings targets by the
company as a whole (in the case of corporate management), or by the division (in
the case of division management). With regard to the company's performance, the
two primary measures used for determining bonuses are the company's earnings per
share ("EPS") growth and its return on equity, both of which influence
stockholder value. A division's performance is measured against goals for
earnings growth (after a capital charge on any cash drawn), and levels of return
on net assets. No bonus is paid at either the corporate or divisional level
unless earnings exceed prior year results. Earnings goals are approved annually
by the board of directors and are tied to the company's operating plan. The
maximum payout that can currently be earned under the MIB Plan ranges from 10%
to 80% of a person's annual salary, depending upon his or her position.
Long-Term Incentive Compensation
The company adopted a Special Bonus Plan (the "SBP" or "SB Plan") in 1990
for the purpose of providing incentive cash bonuses to certain executives of the
company and its divisions, contingent upon their unit's consistently exceeding
its earnings targets over a moving three-year performance period. The awards are
calculated based on a percentage of the amount by which actual base year
earnings exceed the target, without a ceiling. Awards under this program for the
chief executive officer, chief financial officer, senior vice presidents and
division presidents are calculated at 10% of their base salary when on-target
earnings are reached and 20% of their base salary if maximum earnings are
achieved. All other participating executives receive awards based on a
calculation of 5% of their base salary when on-target earnings are reached and
10% of their base salary if maximum earnings are achieved. If earnings exceed
the maximum, 15% of such earnings excess will be shared with the management team
that delivered it, in the form of an additional contingent SBP award. After the
close of each of the two succeeding fiscal years, cash payouts equal to 50% of
the bonus previously accrued will be made to eligible executives still employed
on such dates, but only if the earnings goals for that year have been exceeded.
Any incentive bonus not so earned by an executive will be forfeited and used to
help make up the profit shortfall. The SBP supplements the yearly awards of the
MIB Plan and is designed to encourage multi-year, sustained growth. Because the
SBP is uncapped and rewards performance over a three-year period, the SBP
provides complementary incentives to the annual MIB Plan.
60
<PAGE>
Summary Compensation Table
The following table sets forth information concerning the compensation of
Sunrise's chief executive officer and the four other most highly-compensated
executive officers (the "Named Officers") for the fiscal years ended June 28,
1996, June 30, 1995 and July 1, 1994.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
---------------------
Annual Compensation Awards Payouts
------------------------------------ ---------------------
Stock All Other
Fiscal Bonus Other Annual Option LTIP Compensation
Name and Principal Position year Salary (1) Compensation Grants Payouts (2) (3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard H. Chandler........ 1996 $ 460,577 $ -- -- -- $ -- $ 4,243
Chairman of the board 1995 400,000 124,800 -- 20,000 64,805 10,509
and president 1994 370,000 92,593 -- 25,000 102,150 13,919
Thomas H. O'Donnell(4)..... 1996 265,192 14,432 -- 20,000 -- $ 8,458
Senior vice president, 1995 240,000 102,538 -- 5,000 65,528 8,480
North America (5) 1994 232,000 82,347 -- 5,000 74,998 13,946
Barrie Payne(4)............ 1996 231,653 32,056 -- 20,000 -- $ 3,861
Senior vice president, 1995 209,000 102,177 -- 5,000 38,834 9,841
Europe (6) 1994 200,000 52,805 -- 5,000 41,800 13,833
Richard Kollisch(7)........ 1996 201,669 24,260 -- 5,000 -- $ 11,214
President, Sopur 1995 212,738 124,242 -- 5,000 -- 10,637
Medizintechnik GmbH 1994 184,220 15,443 -- 5,000 -- --
Dennis J. McCarthy(4)...... 1996 190,633 87,813 -- 5,000 7,277 $ 9,947
President, Joerns 1995 182,150 -- -- 5,000 -- 7,858
Healthcare, Inc. 1994 168,111 78,126 -- 5,000 3,700 11,381
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The amounts reflect the bonuses accrued under the Management Incentive
Bonus Plan in the designated fiscal years.
(2) The amounts reflect contingent bonuses accrued in prior years under the
Special Bonus Plan which were earned based on performance attained in the
designated fiscal years.
(3) Includes amounts allocated by the Company for the accounts of the Named
Officers in fiscal 1996 as follows:
<TABLE>
<CAPTION>
Profit Sharing/ Life Insurance
--------------- --------------
Name Savings Plan Premiums
----------------------- ------------ --------
<S> <C> <C>
Richard H. Chandler.............. $ 400 $ 3,843
Thomas H. O'Donnell.............. 6,400 2,058
Barrie Payne..................... 400 3,461
Richard Kollisch................. 10,171 1,043
Dennis J. McCarthy............... 8,065 1,882
</TABLE>
Sunrise has no defined benefit or other actuarial plan covering the Named
Officers.
(4) Each of Messrs. O'Donnell, Payne and McCarthy have employment agreements
entitling them to receive a severance payment upon termination of
employment equal to one year's base salary, unless such termination is for
good cause (as defined in the agreements).
(5) During fiscal 1994, 1995 and the first half of fiscal 1996, Mr. O'Donnell
was president of Quickie Designs Inc., a company subsidiary. In January
1996 he was elected senior vice president, North America for Sunrise.
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<PAGE>
(6) During fiscal 1994, 1995 and the first half of fiscal 1996, Mr. Payne was
managing director of Sunrise Medical Ltd., a company subsidiary. In January
1996 Mr. Payne was elected senior vice president, Europe for Sunrise.
(7) Mr. Kollisch's compensation is denominated in German deutsche marks. For
purposes of this table, all amounts have been converted to dollars at the
exchange rate in effect as of the last day of each fiscal year. Mr.
Kollisch and Sunrise entered into an employment agreement as of March 31,
1992, pursuant to which Mr. Kollisch is entitled to receive a severance
payment in the event of the termination of his employment by Sunrise equal
to eight months of salary plus one additional month of salary for each year
he is employed by Sunrise after fiscal 1996, unless such termination is for
good cause (as defined in the agreement).
Options Granted in Last Fiscal Year
The following table sets forth information concerning options granted under
the 1993 Stock Option Plan to the Named Officers during the 1996 fiscal year.
<TABLE>
<CAPTION>
Option/SAR Grants in 1966 Fiscal Year (1)
- --------------------------------------------------------------------------------------------------------------------
Individual Grants
- ----------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rate of
Stock Price Appreciation
for Option Term (2)
Percent of ---------------------------------
Total
Options/
SARs
Granted to
Options/ Employees Exercise
SARs in or Base
Granted Fiscal Price Expiration
Name (#) Year Per Share Date 5% 10%
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Chandler.......... 0 0.0% $ -- 3/14/2006 $ -- $ --
Thomas H. O'Donnell.......... 20,000 6.2 14.50 3/14/2006 178,307 455,701
Barrie Payne................. 20,000 6.2 14.50 3/14/2006 178,307 455,701
Richard Kollisch............. 5,000 1.6 14.50 3/14/2006 44,577 113,925
Dennis J. McCarthy........... 5,000 1.6 14.50 3/14/2006 44,577 113,925
------------------------------
Totals......................................................................... $445,768 $1,139,252
Increase in Total Stock Market Capitalization of Sunrise (under
same assumptions)(3).......................................................... $229 million $577 million
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All grants were in the form of incentive stock options. No SARs have been
granted.
(2) Potential realizable value is calculated as the aggregate difference
between the market price of the Common Stock and the option exercise price
assuming that the stock price appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the option
term. These amounts are calculated based on the requirements promulgated by
the Securities and Exchange Commission and are not an estimate of future
stock price growth.
(3) This line is presented for comparative purposes and reflects, for all
outstanding shares as of June 28, 1996, the aggregate potential realizable
increase in value that would result if Sunrise's stock price were to
increase from
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the market price on June 28, 1996 ($19.25 per share) by the
same compound annual rates set forth in the table over a 10-year period
ending June 28, 2006. These amounts are not an estimate of future stock
price growth.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information with respect to the Named
Officers concerning the exercise of options during fiscal 1996 and unexercised
options held as of the end of fiscal 1996.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Fiscal 1996 and June 28, 1996 Option/SAR Values
- ----------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of In-the-Money
Unexercised Options/SARs Options/SARs
at June 28, 1996 at June 28, 1996
Shares Value -------------------------------------------------------------
Acquired On Realized
Name Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Chandler...... 0 $ -- 50,000 32,500 $126,838 $ 6,550
Thomas H. O'Donnell...... 0 -- 62,250 28,750 406,685 98,275
Barrie Payne............. 0 -- 40,085 28,750 302,109 98,275
Richard Kollisch......... 0 -- 31,250 13,750 154,825 27,025
Dennis J. McCarthy....... 0 -- 51,250 13,750 387,325 27,025
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the market value of the underlying shares on the exercise date
minus the option exercise price per share.
(2) Calculated on the basis of the fair market value of the underlying shares
as of June 28, 1996 ($19.25 per share) minus the exercise price.
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<PAGE>
Long-Term Incentive Plan
The following table sets forth information with respect to the Named
Officers concerning the awards made under Sunrise's Special Bonus Plan during
fiscal 1995 and 1996.
<TABLE>
<CAPTION>
Long-Term Incentive Plan
- ------------------------------------------------------------------------------------------------
Estimated Future Payouts under
Non-Stock Price-Based Plans
from 1995 and 1996 Accruals
Performance or ------------------------------------
Other Period Until
Maturation or
Name Payout (fiscal year) Threshold Target Maximum
- ----------------------------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Richard H. Chandler................ 1997 $0 -- $ 0
1998 0 -- 0
Thomas H. O'Donnell................ 1997 0 -- 3,921
1998 0 -- 0
Barrie Payne....................... 1997 0 -- 22,300
1998 0 -- 0
Richard Kollisch................... 1997 0 -- 39,880
1998 0 -- 0
Dennis J. McCarthy................. 1997 0 -- 18,487
1998 0 -- 18,487
</TABLE>
(1) Represents accruals for fiscal 1995 and 1996 that would be earned assuming
applicable financial performance goals are exceeded. Under the Special
Bonus Plan, the designated amounts will be paid in full if the performance
goals for the designated fiscal year are exceeded, or forfeited if
performance falls short of the goals for that fiscal year. Amounts
reflected for fiscal 1998 may increase by additional accruals in fiscal
1997 if certain fiscal 1997 performance targets are exceeded. Amounts
previously accrued for corporate office executives during fiscal years 1994
and 1995 were adjusted to zero to reflect the restatement of financial
results for these prior years.
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<PAGE>
BUSINESS OF KID-KART, INC.
General
Kid-Kart is in the business of designing, manufacturing and marketing
strollers, push wheelchairs, positioning systems and other adaptive medical
equipment for the pediatric rehabilitation market.
In September 1990, Wayne and Lee Hanson formed Kid-Kart, Inc. to develop,
produce and market an active stroller line. During 1991, the Company developed
and introduced the Kid-E-Kart to address the needs of children with
disabilities. At this time, Kid-Kart began to focus its entire effort on the
emerging pediatric rehabilitation market.
Through interaction with nationally recognized therapists specializing in
pediatric rehabilitation and early intervention, Kid-Kart continued to develop
and introduce new products and designs every year which more fully addressed the
needs of children with disabilities. The Kid-E-Plus was released in 1992, the
Kid-EZ in 1993, the Kid-Kart Care Chair and Kid-EZ Indy Spica in 1994, the
Kid-T-Rex in 1995 and the Kid-T-Racer in Spring of 1996.
The Market
A large proportion of physical deformation for children with disabilities
can occur between infancy and age four when proportional body growth is rapid.
Physical deformation can be strongly limited or eliminated through proper
seating and positioning during these critical years. From age five to ten proper
seating and positioning remains important for therapeutic purposes. The parents
of these children are often looking for a lightweight compact system like a
stroller to address their mobility needs instead of a wheelchair. For children
of these ages who cannot propel themselves in wheelchairs, a dependent mobility
base that performs like a stroller can be a very viable option. Funding sources
were reluctant to reimburse for seating and mobility products which could
accommodate a year or less of growth in the child. Kid-Kart's systems provide
from three to six years growth through easy adjustments. A census taken in 1993
revealed approximately 3 million children in the United States who have
disabilities requiring a mobility and positioning system.
Since 1991 when the pediatric rehabilitation and early intervention market
began emerging, this once tiny niche market has grown to be recognized as a
significant market segment within the rehabilitation industry. Europe, Canada,
Australia, New Zealand and now the Pacific Rim are responding to the trend
opening new market opportunities.
The Products
Kid-Kart develops its products in response to therapists and specialists in
the industry who provide a continual stream of desired improvements to better
meet the needs of the child with disabilities and the parents. As a result, the
products have features such as adjustable seating systems which will grow with
the child, tilt-in-space to allow repositioning of the chair while maintaining
the desired hip angle, recline to allow for varying the hip angle, butterfly
harness which provides restraint but allows significant freedom of movement of
the head and extremities, swing-away lateral supports for maintaining good trunk
posture, micro-adjustable head supports to allow precise positioning and fitting
to the head, and firm seating components for therapeutic purposes.
Numerous components and accessories have been developed to enable each
stroller and wheelchair to be assembled to fit a prescription for each child.
The prescription is completed by therapists using Kid-Kart's Order and
Measurement Form which allows the therapist to choose or specify the necessary
components, accessories, sizes, adjustments, colors and any unlisted custom
requirements to properly position or provide for the needs of the child. Minor
adjustments are easily made after the customer receives the unit, if needed,
through the use of a single tool which is provided with each unit.
Each of Kid-Kart's primary product lines include units which are designed
to be transportable by bus. All Kid-Kart mobility and seating systems which have
been designed for bus
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<PAGE>
transportability have passed bus crash testing at the University of Michigan.
Bus transport models are modified to include tie downs and required
harnesses.
For ease of use and versatility, each product line is manufactured using
high strength, light weight materials. All units fold to a compact size for
transport or storage. Bright colors, sunshades and therapeutic trays are
available with each unit.
The Kid-EZ Indy Spica was developed to fill the void for children who spend
months in a spica cast. A large platform replaces the normal foot rests on the
seating system providing a place to rest for the spread-leg cast.
For acutely ill children, accessories such as IV poles, battery and
ventilator trays and oxygen tank holders are available accessories.
Competition
In addressing the child with moderate to severe involvement, the primary
competitors are Snug Seat in the United States and Otto Bock in Europe. Otto
Bock is presently attempting to enter the U.S. market. For children with mild to
moderate involvement, the primary competitor is Convaid. Due to the growth seen
in the pediatric early intervention market, larger companies such as Invacare
and Sunrise Medical will introduce products to this arena. The acquisition of
Kid-Kart by Sunrise Medical represents Sunrise Medical's entry into this
dependent mobility market.
Marketing
Kid-Kart currently markets it products throughout the United States through
approximately 1,500 dealers and 39 manufacturers' representatives.
Manufacturers' representatives provide their services under a written contract
and cover exclusive territories. They receive a 10% commission based on monthly
sales and are responsible for setting up, training and servicing dealers in
their area. Each territory is subject to performance quotas which are set and
agreed to each year between the Company and each manufacturers' representative.
The contracts can be terminated for nonperformance or for any reason with 90
days' notice. A penalty equal to the last six months of commissions may be
payable to the manufacturers' representative for termination under certain
circumstances other than for nonperformance.
Manufacturer's representatives who work with Kid-Kart generally focus a
significant portion of their business on rehabilitation. They work closely with
physical and occupational therapists, physicians and specialists who prescribe a
seating and mobility system for a child. Manufacturer's representatives receive
a discount of 40% off the suggested retail price and are responsible for
servicing the product and customer. In connection with the Merger, Kid-Kart has
notified certain of its manufacturers' representatives that their services will
be terminated and notified certain others that their services will be
restructured under the terms of existing contracts with Sunrise.
Kid-Kart also markets its products internationally through eight
distributors. Each distributor is responsible for purchasing, transportation,
customs, language translation and distribution to dealers in the country(ies)
covered by the distributor. All distributors conduct their business subject to a
written contract with Kid-Kart. In connection with the Merger, Kid-Kart has
notified certain of its distributors that their services will be terminated and
notified certain others that their services will be restructured under the terms
of existing contracts with Sunrise. International sales represent less than 10%
of total sales of Kid-Kart.
Kid-Kart supports the manufacturers' representatives and dealers through
brochures and through advertising in magazines targeted to parents and
therapists working with children with disabilities.
Customers
Kid-Kart does not depend on any significant customers and does not believe
that the loss of any one or more of its customers would have a material adverse
effect on Kid-Kart.
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<PAGE>
Government Regulations
Kid-Kart is registered with the Food and Drug Administration (FDA) as a
medical device manufacturer and its products are listed as regulatory Class 1
products.
Manufacturing
Kid-Kart manufactures and assembles most of the parts, components and
accessories internally or through outsourcing. Outside processing is used for
some machined parts and plastic parts requiring injection molding processes. Raw
materials consist primarily of high strength aluminum tubing, molded plastic
parts, foam and plastic sheet stock, fasteners, fabric and miscellaneous
hardware. Manufacturing equipment includes cut saws, drill presses, milling
machines, table saws, bending machines, rivet guns, fabric cutters, grinders,
sanders, basic hand tools and a new CNC router machine. Items such as wheels,
fasteners and miscellaneous hardware are purchased in bulk from a number of
vendors. Subassemblies and major components are produced using a "Min/Max" level
system with quality assurance checks being performed at key points along the
manufacturing process. A perpetual inventory and work order system is being
completed to accurately track and recognize costs of production. Final assembly
is completed one unit at a time at individual buildup stations. At these
stations, the necessary manufactured components and accessories are assembled
and adjusted to fill prescriptions unique to each child.
Liability Insurance
Kid-Kart manufactures products which are used to seat and provide mobility
to children who have disabilities ranging from moderate to severe. As such, many
of these children are high risk with regard to injury or death. While this risk
is largely independent of the seating or mobility base, if the injury and/or
death occurs while the child is seated in the seating system, the manufacturer
would be subject to exposure to potentially significant liability exposure.
Kid-Kart maintains product liability insurance providing coverage in a maximum
amount of $1,000,000 per claim, subject to a limitation of $3,000,000 for all
claims in any single year. Each claim requires payment of a $10,000 deductible.
Kid-Kart is currently insured through MedMarc, the recognized leader in
providing insurance to the medical device manufacturing industry. To date, no
claim has been asserted against Kid-Kart.
Employees
Kid-Kart currently has 34 regular employees. In addition, Kid-Kart has
contracted with independent contractors to manufacture sewn items using fabric
which is cut and provided to them by the Company. All independent contractors
are subject to a written agreement that requires them to submit a certificate of
exemption from the State of Montana and informs them of Kid-Kart policies with
regard to release of work to independent contractors. Kid-Kart has no union
contracts with any of its employees and believes that its relationship with its
employees and independent contractors is good.
Description of Properties
Kid-Kart owns its manufacturing facilities which consist of approximately
9,100 square feet constructed in the fall of 1994 and an addition of
approximately 11,000 square feet which will be completed October, 1996. The six
acre tract is located in Belgrade North Business Park which is subject to
Business Park zoning requirements administered by the City of Belgrade, Montana.
With the completion of the additional space, Kid-Kart believes that its office
space, research and development space and manufacturing space is sufficient for
its present and reasonably foreseeable needs.
Legal Proceedings
There are no legal proceedings to which Kid-Kart is currently a party or to
which any of its property is subject, and Kid-Kart knows of no legal proceeding
pending or threatened against either Kid-Kart or any director or officer of
Kid-Kart in his or her capacity as such.
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<PAGE>
MARKET PRICES OF KID-KART SHARES
Volume of Sales. The Kid-Kart Shares are not listed on any national
securities exchange or quoted in the over the counter market, and there is no
established public trading market for the Kid-Kart Shares. Secondary sales
activity for the Kid-Kart Shares has been limited and sporadic. While the
Kid-Kart Board of Directors receives some information regarding the prices at
which secondary sale transactions in the Kid-Kart Shares have been effectuated,
they do not receive or maintain comprehensive information regarding the
activities of all Kid-Kart Shareholders. It should be noted that some
transactions may not be reflected on the records of Kid-Kart.
Because no assurances can be given that the prices reflected in the tables
below represent the true value of the Kid-Kart Shares, such information should
not be relied upon as indicative of the ability of the Kid-Kart Shareholders to
sell their Kid-Kart Shares in secondary sale transactions or as to the prices at
which such Kid-Kart Shares may be sold. Therefore, the information presented
should not necessarily be relied upon by a Kid-Kart Shareholder in determining
whether to vote to approve the Merger.
<TABLE>
<CAPTION>
Transaction Price Number of
----------------- ----------
Calendar Year Low High Shares
----- ---- ------
<S> <C> <C> <C>
1994
Quarter 1.................. $45.00 $46.00 3,756
Quarter 2.................. 41.00 43.00 729
Quarter 3.................. 43.00 43.00 1,527
Quarter 4.................. -- -- --
1995
Quarter 1.................. 40.00 52.00 1,750
Quarter 2.................. -- -- --
Quarter 3.................. 70.00 70.00 70
Quarter 4.................. -- -- --
1996
Quarter 1.................. -- -- --
Quarter 2.................. 90.00 90.00 1,500
Quarter 3.................. -- -- --
</TABLE>
The number of holders of record of Kid-Kart common stock as of September
30, 1996 was 65. Kid-Kart estimates it has approximately 65 beneficial holders
of its common stock.
Kid-Kart has not paid cash dividends to holders of its common stock and has
no plans to do so in the foreseeable future.
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<PAGE>
COMPARATIVE RIGHTS OF SHAREHOLDERS
The rights of Kid-Kart shareholders are governed by the Restated Articles
of Incorporation of Kid-Kart, as amended (the "Kid-Kart Articles"), the Bylaws
of Kid-Kart (the "Kid-Kart Bylaws") and the laws of the State of Montana. The
rights of Sunrise stockholders are governed by the Restated Certificate of
Incorporation of Sunrise, as amended (the "Sunrise Certificate"), the Bylaws of
Sunrise (the "Sunrise Bylaws") and the laws of the State of Delaware. After the
Merger becomes effective, the rights of Kid-Kart shareholders who become Sunrise
stockholders will be governed by the Sunrise Certificate, the Sunrise Bylaws and
the laws of the State of Delaware. In certain respects, rights of Kid-Kart
shareholders and Sunrise stockholders are similar. While it is not practical to
describe all changes in the rights of Kid-Kart shareholders that will result
from the application of Delaware law in lieu of Montana law and the differences
between the Kid-Kart Articles and Bylaws and the Sunrise Certificate and Bylaws,
the following is a summary of certain significant differences.
Capital Stock
The Kid-Kart Articles authorize the issuance of 1,000,000 shares of capital
stock, no par value per share, and do not authorize the issuance of preferred
stock. Kid-Kart currently has outstanding only one class of capital stock.
Accordingly, all Kid-Kart shareholders have equal rights and preferences with
respect to dividends and distributions upon liquidation. The Sunrise Certificate
authorizes the issuance of 40,000,000 shares of common stock, par value $1.00
per share (the "Sunrise Common Stock"), of which 18,858,649 shares were
outstanding at September 23, 1996, and 5,000,000 shares of preferred stock (the
"Sunrise Preferred Stock"), none of which is outstanding.
All or any portion of the authorized but unissued Sunrise Preferred Stock
may be issued by the Board of Directors of Sunrise without further action by
Sunrise stockholders. The relative rights and preferences of any Sunrise
Preferred Stock issued in the future may be established by the Sunrise Board of
Directors without stockholder action. Although management has no current plans
for the issuance of any shares of Sunrise Preferred Stock, except as disclosed
in this Proxy Statement/Prospectus, such shares of Sunrise Preferred Stock, when
and if issued, could have dividend, liquidation, voting and other rights
superior to those of Sunrise Common Stock.
Rights to Purchase Sunrise Preferred Stock
On April 24, 1990, the Board of Directors of Sunrise declared a
dividend-distribution of one Right for each outstanding share of Sunrise Common
Stock to stockholders of record at the close of business on May 7, 1990. The
Board of Directors also authorized the issuance of one Right with respect to
each share of Sunrise Common Stock, including the shares covered by this
Prospectus, that shall become outstanding between May 7, 1990 and the earliest
of the Distribution Date (as defined in the Rights Agreement, as amended,
between Sunrise and Chemical Trust Company of California (the "Rights
Agreement")), the date on which the rights are redeemed, and May 7, 2000. A
complete description and terms of the Rights are set forth in the Rights
Agreement, as amended by that First Amendment to the Rights Agreement, each
attached as an exhibit hereto.
Upon the occurrence of certain triggering events and until May 7, 2000 (or
the earlier redemption, exchange or termination of the Rights), each Right
entitles stockholders to purchase from Sunrise one-half of one share of Sunrise
Common Stock at an exercise price of $27.50 per whole share, subject to certain
anti-dilution adjustments. The Rights are not exercisable or transferable apart
from the Sunrise Common Stock until the earlier of (i) the tenth day after the
public announcement that a person, company or group has become an Acquiring
Person (a person, company or group who has acquired, or obtained the right to
acquire, beneficial ownership of 25% or more of the then outstanding Sunrise
Common Stock), or (ii) the tenth day after a person, company or group commences,
or announces an intention to commence, a tender or exchange offer, the
consummation of which would result in the beneficial ownership by a person,
company or group of 25% or more of the then outstanding Sunrise Common Stock.
The earlier of (i) and (ii) is called the "Distribution Date." Sunrise's Board
of Directors has the power, under certain circumstances, to postpone the
Distribution Date. In the event that a person, company or group were to become
an Acquiring Person (except pursuant to certain cash offers for all outstanding
Sunrise Common Stock approved by the Board of Directors) or if Sunrise were the
surviving corporation in a merger with any Acquiring Person and Sunrise's
Sunrise Common Stock was not changed or exchanged, each holder of a Right, other
than Rights that are or were acquired or beneficially owned by the Acquiring
Person (which Rights would thereafter be
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<PAGE>
void), will thereafter have the right to receive upon exercise that number of
shares of Sunrise Common Stock having a market value of two times the exercise
price of one Right. In the event that Sunrise were acquired in a merger or other
business combination transaction or more than 50% of Sunrise's assets or earning
power were sold, or any person merges into Sunrise, Sunrise is the surviving
corporation and all or part of the Sunrise Common Stock of Sunrise will be
changed into or exchanged for securities of any other person, proper provision
would be made so that each holder of a Right shall thereafter have the right to
receive, upon exercise thereof, that number of shares of common stock of the
acquiring company or the issuer in any such exchange which at the time of such
transaction would have a market value of two times the exercise price of one
Right.
The Rights are redeemable at $.005 per Right prior to the close of business
on the tenth day following the public announcement that a person, company or
group has become an Acquiring Person. The Board of Directors has the power,
under certain circumstances, to extend the ten-day redemption period. Until the
Rights are exercised, the holders of the Rights, as such, have no rights as a
stockholder of Sunrise including, without limitation, the right to vote as a
stockholder or receive dividends.
The exercise price, and the number of shares of Sunrise Common Stock
issuable upon exercise of the Rights, are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, Sunrise Common Stock, (ii) as a
result of the grant to holders of Sunrise Common Stock of certain rights or
warrants to subscribe for or purchase Sunrise Common Stock at a price, or
securities convertible into Sunrise Common Stock with a conversion price, less
than the then current market price of Sunrise Common Stock, or (iii) as a result
of the distribution to holders of Sunrise Common Stock of evidence of
indebtedness, securities or assets or of subscription rights or warrants (other
than those referred to above). No adjustment in the exercise price will be
required until cumulative adjustments require an adjustment of at least 1% in
such exercise price.
Upon exercise of the Rights, no fractional shares of Sunrise Common Stock
are required to be issued, and in lieu thereof an adjustment in cash will be
made.
Election of Directors
All holders of Kid-Kart Common Stock have the right of cumulative voting,
that is, the right to vote the number of shares held, multiplied by the number
of directors to be elected, and to cast such votes for one director or
distribute such votes among as many nominees as desired. Stockholders of Sunrise
also have the right of cumulative voting with respect to the election of
directors only. Under Delaware law, directors are elected by a plurality of
votes.
Required Vote for Authorization of Certain Actions
The Montana Business Corporation Act (the "MBCA") generally requires the
affirmative vote of the holders of two-thirds of the outstanding shares of each
class entitled to vote to approve a merger, consolidation, share exchange, or
sale, lease, exchange or other disposition of all or substantially all of a
corporation's property not made in the regular course of business. In certain
circumstances, the holders of outstanding shares of a class of capital stock of
a Montana corporation are entitled to vote as a separate voting group,
regardless of whether the articles of incorporation provide that such shares of
capital stock are entitled to vote. However, no vote of shareholders of a
Montana corporation is required to approve a merger if (i) that corporation is
the surviving corporation of the merger, (ii) the related plan of merger does
not amend the corporation's articles of incorporation in a manner that would
require a shareholder vote, (iii) each shareholder of the surviving corporation
whose shares are outstanding immediately before the merger will hold the same
number of shares, with identical designations, preferences, limitations and
relative rights, immediately after the merger, and (iv) the number of voting
shares or shares entitled to participate without limitation in distributions of
the corporation to be issued in the merger, or to be issuable upon conversion of
any convertible instruments to be issued in the merger, does not exceed 20% of
the voting shares or participating shares, as the case may be, of that
corporation outstanding immediately before the merger.
Under Delaware law, the vote of a simple majority of the outstanding shares
of Sunrise Common Stock entitled to vote thereon is required to approve a merger
or consolidation, or the sale, lease or exchange of substantially all of
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<PAGE>
Sunrise's corporate assets. With respect to a merger, no vote of the
stockholders of Sunrise is required if Sunrise is the surviving corporation and
(i) the related agreement of merger does not amend the Sunrise Certificate,
(ii) each share of stock of Sunrise outstanding immediately before the merger is
an identical outstanding or treasury share of Sunrise after the merger, and
(iii) the number of shares of Sunrise stock to be issued in the merger (or to be
issuable upon conversion of any convertible instruments to be issued in the
merger) does not exceed 20% of the shares of Sunrise Common Stock outstanding
immediately before the merger.
Amendment of Corporation Charter
Under the MBCA, the Board of Directors can establish conditions for the
amendment of the Articles of Incorporation (e.g., super-majority vote, no more
than a given percentage dissent, etc.). The Board of Directors is required to
make a recommendation on the desirability of any amendment (unless a conflict of
interest prohibits them from doing so). The MBCA provides that certain
significant amendments to articles of incorporation, but not all amendments,
must be approved by the shareholders. Pursuant to Section 35-1-227 of the MBCA,
the vote of shareholders needed to approve an amendment depends in part on the
voting groups entitled to vote separately on the amendment and in part on
whether any of those voting groups would be entitled to dissenter's rights if
the amendment were adopted. Generally, if dissenter's rights would not arise in
connection with the amendment, Section 35-1-528 of the MBCA provides that if a
quorum exists, action on a matter other than the election of directors is
approved if the votes cast within the voting group favoring the action exceed
the votes cast opposing the action, unless the articles of incorporation or the
MBCA require a greater number of affirmative votes. If the amendment would give
rise to dissenters' rights under the MBCA, the amendment must be approved by the
holders of a majority of the outstanding shares of each voting group that will
have dissenters' rights if the amendment were adopted, unless the articles of
incorporation, the board of directors or the MBCA specifies a greater quorum or
voting requirement for a voting group to approve an amendment of any type.
Delaware law requires the vote of a simple majority of the outstanding
shares of Sunrise Common Stock in order to amend the Sunrise Certificate.
Dissenters' Rights
Under the MBCA, any shareholder of a corporation is entitled to receive
payment of the fair market value of such shareholder's share of capital stock if
such shareholder properly dissents from (i) any merger, share exchange or
consummation of a sale or exchange of all or substantially all of the property
of the corporation not made in the regular course of business for which a vote
of such shareholder is required, (ii) any corporate action that results in an
amendment of the articles of incorporation that materially and adversely affects
rights with respect to a dissenter's shares because it alters or abolishes a
preferential right of the shares, creates, alters or abolishes a right in
respect of redemption, alters or abolishes a preemptive right of the holder of
the shares, excludes or limits the right of the shares to be voted on any matter
or to cumulate votes, or reduces the number of shares owned by a shareholder to
a fraction of a share if the fractional share so created is to be acquired for
cash, or (iii) any other corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws or resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and to obtain payment for their shares. See the more detailed discussion
below under "Dissenters' Rights" of Kid-Kart Shareholders.
Under Delaware law, a stockholder is generally entitled to receive payment
of the appraised value of such stockholder's shares if the stockholder dissents
from a merger or consolidation. However, appraisal rights are not available to
holders of (i) shares listed on a national securities exchange or held of record
by more than 2,000 persons or (ii) shares of the corporation surviving a merger,
if the merger did not require the approval of the stockholders of such
corporation, unless in either case the holders of such stock are required by the
terms of the merger to accept anything other than (a) shares of stock of the
surviving corporation, (b) shares of stock of another corporation which are also
listed on the national securities exchange or held by more than 2,000 holders,
or (c) cash in lieu of fractional shares of such stock. Appraisal rights are not
available for a sale of assets or an amendment to the Sunrise Certificate.
Because shares of Sunrise Common Stock are listed on the NYSE, its stockholders
are not, subject to the aforementioned exceptions, entitled to any rights of
appraisal in connection with mergers or consolidations involving Sunrise.
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Special Meetings
Under the MBCA, a special meeting of the Kid-Kart shareholders may be
called by the Chairman, the President or the Board of Directors, and must be
called by the President at the request of holders of not less than 10% of all
outstanding shares of the corporation entitled to vote at the meeting. The
Kid-Kart Bylaws provide that special meetings of the shareholders may be called
at any time by the Board of Directors or by the President, and shall be called
by the President or the Secretary at the written request of the holders of ten
percent (10%) of the shares then outstanding and entitled to vote thereat, or as
otherwise required under the provisions of the MBCA. Under Delaware law a
special meeting of stockholders may be called only by the Chairman of the Board,
a Vice Chairman, the President, or a majority of the Board of Directors. The
Sunrise Bylaws provide that special meetings of the stockholders may be called
by the President and shall be called by the President or the Secretary at the
request in writing of a majority of the Board of Directors, or at the request in
writing of stockholders owning a majority in amount of the entire capital stock
of Sunrise issued and outstanding, and entitled to vote.
Anti-Takeover Statutes
Montana does not have an anti-takeover statute. The Delaware anti-takeover
statute governs "business combinations" between a publicly held Delaware
corporation having certain numbers of stockholders or listed on certain
exchanges and an "interested stockholder." This statute is designed primarily to
regulate the second step of a two-tiered takeover attempt. Delaware law broadly
defines a "business combination" as including a merger, sale of assets, issuance
of voting stock, and various other types of transactions with an interested
stockholder and other related parties. An "interested stockholder" is defined as
any person who beneficially owns, directly or indirectly, 15% or more of the
outstanding voting stock of a corporation. Delaware law prohibits a corporation
from engaging in a business combination with an interested stockholder for a
period of three years following the date on which the stockholder became an
interested stockholder, unless (i) the board of directors approved the business
combination before the stockholder became an interested stockholder, (ii) upon
consummation of the transaction which resulted in a stockholder becoming an
interested stockholder, such stockholder owned at least 85% of the voting stock
outstanding when the transaction began, excluding in computing such percentage
shares held by certain types of stockholders, or (iii) the board of directors
approved the business combination after the stockholder became an interested
stockholder and the business combination was approved by at least two-thirds of
the outstanding voting stock not owned by such stockholder. Dividends and
Distributions
Distributions to shareholders of a Montana corporation, including
redemptions, repurchases and dividends, may not be made if any such distribution
would render the corporation unable to meet its liabilities in the ordinary
course of business or, if as a result of such distribution, the excess of the
corporation's assets over its liabilities would be less than the liquidation
preference of all shares having a preference on liquidation over the class or
series to which the distribution is made.
A Delaware corporation may make repurchases or redemptions that do not
impair capital and may pay dividends out of any surplus account (generally the
stockholders' equity of the corporation less the par value of the capital stock
outstanding) or, if there exists no surplus, out of net profits of the current
and preceding fiscal years (provided that certain provisions must be made for
preferences of outstanding stock having a liquidation preference). Dividends may
not be paid out of net profits if, after the payments of the dividend, capital
is less than the capital represented by the outstanding stock of all classes
having a preference upon the distribution of assets.
Sunrise and Kid-Kart are subject to the same Federal Reserve Board policies
regarding payment of dividends, which generally limit dividends to operating
earnings.
Action Without a Meeting
Under the MBCA, any action required or permitted to be taken at a
shareholders' meeting may be taken without a meeting if the action is taken by
all the shareholders entitled to vote on the action and is evidenced by written
consents. Delaware law permits any action required or permitted to be taken at a
stockholders' meeting to be taken
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by written consent, signed by the holders of a number of shares that would have
been required to effect the action at an actual meeting of the stockholders at
which all shares entitled to vote were present and voted. Generally, holders of
a majority of outstanding shares can effect such an action. Delaware law also
provides that a corporation's certificate of incorporation may restrict or
prohibit stockholders' action without a meeting. The Sunrise Certificate does
not restrict or prohibit stockholders' action without a meeting.
Removal of Directors
Under the MBCA and the Kid-Kart Articles, the shareholders of a Montana
corporation may remove one or more directors with or without cause. In addition,
pursuant to Section 35-1-424 of the MBCA any director or the entire Board of
Directors may be removed by a vote of the holders of a majority of the shares
entitled to vote at an election of directors. A director may not be removed if
the votes cast against the removal of such director would be sufficient to elect
him or her if cumulatively voted at an election of the entire board of
directors. Under Delaware law, any director or the entire Board of Directors of
Sunrise may be removed with or without cause, by the holders of a majority of
the shares then entitled to vote in an election of directors.
Limitation of Director Liability and Indemnification in Certain Circumstances
Under the MBCA, a director of a Montana corporation is not liable for any
action taken as a director or for any failure to take any action if he or she
performed the duties of a director's office (i) in good faith, (ii) with the
care an ordinarily prudent person in a similar position would exercise under
similar circumstances, and (iii) in a manner the director reasonably believes to
be in the best interests of the corporation.
The Kid-Kart Articles provide that Kid-Kart, acting though its Board of
Directors, has the authority to indemnify or advance expenses to any director,
officer, employee or agent of Kid-Kart, when the director, officer, employee or
agent has incurred expenses or liabilities (including attorneys' fees), which,
in the absolute discretion of the Board of Directors, are considered to have
been incurred on behalf of Kid-Kart. The Kid-Kart Articles further provide that
Kid-Kart may purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of Kid-Kart, or who is or was serving
at the request of Kid-Kart as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity or arising out of his or her status as such, whether or not Kid-Kart
could indemnify him or her against liability under the provisions of the
Kid-Kart Articles. The Kid-Kart Articles specifically state that the
indemnification rights expressed therein shall be in addition to any rights for
indemnification contained in any applicable law.
Under the MBCA, Kid-Kart must indemnify its officers and directors made a
party to any action, suit or proceeding, whether civil or criminal, from any
judgments, penalties and reasonable expenses, including attorneys' fees, if such
person was made a party to the action by reason of the fact that he or she was
an officer or director of Kid-Kart and he or she conducted himself or herself in
good faith and reasonably believed (i) in the case of conduct in his or her
official capacity with Kid-Kart, that his or her conduct was in the best
interests of Kid-Kart; (ii) in all other non-criminal cases that his or her
conduct was at least not opposed to Kid-Kart's best interests; and (iii) in the
case of criminal proceedings that he or she had no reasonable cause to believe
the conduct was unlawful.
If the action was by or in the right of Kid-Kart (a "derivative action"),
indemnification is only available for any reasonable expenses incurred. No
indemnification is available where the officer or director is adjudged liable to
Kid-Kart or in which the officer or director has been adjudged liable on the
basis that he or she improperly received a personal benefit. The board of
directors of Kid-Kart or a court of competent jurisdiction must determine, prior
to any indemnification, that the director or officer has met the applicable
standard of conduct set forth in the Kid-Kart Articles or Bylaws.
Expenses incurred in defending any action may be paid by Kid-Kart in
advance of the final disposition of such action upon receipt of an undertaking
by a director or officer to repay such amount unless it is ultimately determined
that he or she is entitled to be indemnified. The indemnification provided by
the Kid-Kart Articles incorporates the indemnification provisions in the MBCA
and the MBCA provides that the indemnification provisions in a corporation's
articles, bylaws, resolutions or contracts are invalid to the extent they are
inconsistent with the statute.
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Under Delaware law, absent a provision in the certificate of incorporation
to the contrary, directors can be held liable for gross negligence in connection
with the decisions made on behalf of the corporation and the performance of
their duty of care, but will not be liable for simple negligence. As permitted
under Delaware law, the Sunrise Certificate provides that a director (including
an officer who is also a director) of Sunrise shall not be liable personally to
Sunrise or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability arising out of (i) any breach of a director's
duty of loyalty to Sunrise or its stockholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) payment of a dividend or approval of a stock repurchase in violation
of Section 174 of the Delaware General Corporation Law, or (iv) any transaction
from which the director derives personal liability for monetary damages from
breaches of their duty of care. However, it does not eliminate the director's
duty of care. For example, this provision in the Sunrise Certificate has no
effect on the availability of equitable remedies, such as an injunction or
rescission, based upon a director's breach of his duty of care.
Delaware law provides that directors, officers and other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than a derivative action) if they acted in good faith and
in a manner they reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, regarding any criminal action or proceeding,
had no reasonable cause to believe their conduct was unlawful. A similar
standard is applicable in the case of derivative actions, except this
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such actions. In the case of
derivative actions, Delaware law requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. To the extent that a person otherwise eligible to be
indemnified is successful on the merits of any claim or defense described above,
indemnification for expenses (including attorneys' fees) and reasonably incurred
is mandated by Delaware law.
The Sunrise Bylaws provide that Sunrise must indemnify, to the fullest
extent authorized by Delaware law, each person who was or is made a party to, is
threatened to be made a party to, or is involved in, any action, suit or
proceeding because he is or was a director or officer of Sunrise (or was serving
at the request of Sunrise as a director, trustee, officer, employee or agent of
another entity) while serving in such capacity against all expenses, liabilities
or loss incurred by such person in connection therewith, provided that
indemnification in connection with a proceeding brought by such person will be
permitted only if the proceeding was authorized by the Sunrise Board of
Directors. The Sunrise Bylaws also provide that Sunrise must pay expenses
incurred in defending the proceedings specified above in advance of their final
disposition, provided that if so required by Delaware law, such advance payments
for expenses incurred by a director or officer may be made only if he undertakes
to repay all amounts so advanced if it is ultimately determined that the person
receiving such payments is not entitled to be indemnified.
The Sunrise Bylaws authorize Sunrise to provide similar indemnification to
employees or agents of Sunrise.
Pursuant to the Sunrise Bylaws, Sunrise may maintain insurance, at its
expense, to protect itself and any directors, officers, employees or agents of
Sunrise or another entity against any expenses, liability or loss, regardless of
whether Sunrise has the power or obligation to indemnify that person against
such expense, liability or loss under Delaware law.
The right to indemnification is not exclusive of any other right which any
person may have or acquire under any statute, provision of the Sunrise
Certificate or Bylaws, agreement, vote of stockholders or disinterested
directors, or otherwise.
Shareholder Derivative Proceedings
Under Delaware and Montana law, before a shareholder may bring an action by
or on behalf of the corporation (a "derivative action"), a shareholder must make
a demand on the corporation's Board of Directors to remedy the situation about
which the shareholder complains. Under Delaware law, the demand requirement may
be excused if the shareholder can show that such demand would be futile because
the alleged wrongdoers comprised or controlled
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a majority of the Board of Directors. Under the MBCA, the futility exception to
the demand requirement has been eliminated. Therefore, a shareholder bringing a
derivative action on behalf of a Montana corporation will be required in all
instances to make a demand on the corporation's Board of Directors.
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DISSENTERS' RIGHTS OF KID-KART SHAREHOLDERS
The following is a summary of the rights of Kid-Kart Shareholders who
dissent from the Merger. It does not purport to be complete and is qualified in
its entirety by reference to Sections 35-1-826 through 35-1-839 of Montana Law
(the "Dissenters' Rights Statute," a copy of which is attached as Appendix B to
this Proxy Statement/Prospectus). Holders of Sunrise Common Stock will not be
entitled to dissenters' rights as a result of the Merger because they are not
entitled to vote on the Merger.
Any shareholder of Kid-Kart may, as an alternative to receiving a
consideration specified in the Merger Agreement, dissent from the Merger and
obtain payment of the fair value of such shareholder's Kid-Kart Common Stock
pursuant to Sections 35-1-826 through 35-1-839 of the MBCA. "Fair Value" with
respect to a dissenter's shares means the value of the shares immediately before
the Effective Time of the Merger, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable. Any
Kid-Kart shareholder contemplating exercising the right to demand such payment
should carefully review Sections 35-1-826 through 35-1-839 of the MBCA, a copy
of which is included as Appendix B to this Proxy Statement-Prospectus, and in
particular the required procedural steps. A SHAREHOLDER WHO FAILS TO COMPLY WITH
THESE PROCEDURAL REQUIREMENTS MAY LOSE THE RIGHT TO DISSENT.
Set forth below, to be read in conjunction with the full text of Sections
35-1-826 through 35-1-839 of the MBCA, is a summary of the procedures relating
to the exercise of dissenters' rights. The following summary does not purport to
be complete and is qualified in its entirety by reference to Appendix B. As used
in the following discussion, "Kid-Kart" means Kid-Kart before the Effective Time
of the Merger and Sunrise as Kid-Kart's successor after the Effective Time of
the Merger.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if such shareholder dissents with respect to
all shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf such shareholder
asserts dissenters' rights. In that event, such shareholder's rights shall be
determined as if the shares as to which such shareholder dissents and such
shareholder's other shares were registered in the name of different
shareholders. A beneficial shareholder may assert dissenters' rights as to
shares held on such shareholder's behalf only if such shareholder submits to the
corporation a written consent by the record holder to the dissent not later than
the time the beneficial shareholder asserts dissenters' rights and such
shareholder does so with respect to all shares of which the shareholder is the
beneficial owner or over which such shareholder has power to direct to the vote.
Any Kid-Kart shareholder who wishes to dissent must deliver to Kid-Kart,
prior to the vote on the Merger Agreement, a written notice of intent to demand
payment for such shareholder's shares if the Merger is effectuated. In addition,
the shareholder must refrain from voting in favor of the Merger Agreement. A
shareholder who fails to deliver the notice on time or who votes in favor of the
Merger Agreement will not have any dissenters' rights. If a shareholder returns
a signed proxy but does not specify a vote against approval of the Merger
Agreement or a direction to abstain, the proxy will be voted for approval of the
Merger Agreement, which will have the effect of waiving the shareholder's
dissenters' rights.
If the Merger Agreement is approved by the required vote, Kid-Kart is
required to deliver a written dissenters' notice to all shareholders who gave a
timely notice of intent to demand payment and who did not vote in favor of the
Merger Agreement. The notice must be sent no later than 10 days after the Merger
Agreement is approved and must (i) state where the payment demand must be sent
and where and when certificates for certificated shares must be deposited,
(ii) inform shareholders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment is received, (iii) supply a form for
demanding payment that includes the date of the first announcement to the news
media or to shareholders of the terms of the proposed corporate action and that
requires the person asserting dissenters' rights to certify whether or not such
shareholder acquired beneficial ownership of the shares before that date,
(iv) set a date by which Kid-Kart must receive the payment demand, which may not
be fewer than 30 nor more than 60 days after the date the required dissenters'
notice is delivered, and (v) be accompanied by a copy of Sections 35-1-826
through 35-1-839 of the MBCA.
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A shareholder who is sent the dissenters' notice described above must
demand payment, certify whether the shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice,
and deposit such shareholder's certificates in accordance with the terms of the
notice. A shareholder who does not demand payment or deposit certificates where
and when required is not entitled to payment for such shareholder's shares. A
shareholder who demand payment and deposits his certificates as requested by the
dissenters' notice retains all other rights of a shareholder until such rights
are canceled by the consummation of the Merger. Kid-Kart may restrict the
transfer of uncertificated shares from the date of the demand for payment until
the Merger is consummated; however, the holder of uncertificated shares retains
all other rights of a shareholder until those rights are canceled by the
consummation of the Merger.
Except as provided in the following paragraph, as soon as the Merger is
effectuated or upon receipt of the payment demand, Kid-Kart must pay each
dissenter who complied with the foregoing requirements the amount Kid-Kart
estimates to be the Fair Value of the dissenters' shares plus accrued interest.
The payment must be accompanied by certain financial information concerning
Kid-Kart, a statement of Kid-Kart's estimate of the Fair Value of the shares, an
explanation of how the interest was calculated, a statement of the dissenter's
right to demand payment if the dissenter is dissatisfied with the payment offer
(as further described in the next paragraph), and a copy of Sections 35-1-826
through 35-1-839 of the MBCA. If the Merger does not occur within 60 days after
the date set in the dissenters' notice for demanding payment and depositing
certificates, Kid-Kart must return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares. Notwithstanding the
foregoing, Kid-Kart may elect to withhold payment from any dissenter with
respect to shares of which the dissenter or the person on whose behalf the
dissenter acts was not the beneficial owner before September 14, 1993, the date
of the first announcement to the news media of the terms of the Merger. If
Kid-Kart elects to withhold such payments, after the consummation of the Merger,
Kid-Kart must estimate the Fair Value of the shares plus accrued interest and
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. Kid-Kart must send with its offer a statement of its estimate of
Fair Value of the shares, an explanation of how interest was calculated and a
statement of the dissenter's right to demand payment if he is dissatisfied with
the offer.
A dissenter may notify Kid-Kart in writing of the dissenter's own estimate
of the Fair Value of the dissenter's shares and the amount of interest due with
respect thereto and may demand payment of the dissenter's estimate, less any
previous payment, or reject Kid-Kart's offer and demand payment of the Fair
Value of the dissenter's shares and the interest due if (i) the dissenter
believes that the amount paid or offered is less than the Fair Value of the
dissenter's shares or that the interest due is incorrectly calculated,
(ii) Kid-Kart fails to make payment within 60 days after the date set for
demanding payment, or (iii) Kid-Kart, having failed to effectuate the Merger,
does not return the deposited certificates or release the transfer restrictions
on uncertificated shares within 60 days after the date set for demanding
payment. A dissenter waives the right to demand payment unless the dissenter
notifies the corporation of his demand in writing within 30 days after Kid-Kart
made or offered payment for the dissenter's shares.
Within 60 days after any such subsequent demand is submitted by a
shareholder, if such demand remains unsettled, Kid-Kart is required to file in
an appropriate court in Montana, a petition to determine the Fair Value of the
shares and accrued interest. If Kid-Kart does not commence the proceeding within
the 60-day period, it is to pay each dissenter whose demand remains unsettled
the amount demanded. Each dissenter made a party to the proceeding is entitled
to judgment for the amount, if any, by which the court finds the Fair Value of
the dissenter's shares plus interest exceeds the amount paid by Kid-Kart or for
the Fair Value plus accrued interest of his after-acquired shares for which
Kid-Kart elected to withhold payment. The cost and expenses of any such court
proceedings will be assessed against Kid-Kart except that the court may assess
any part of those costs as an expense against all or some dissenters who are
parties to the proceeding and whose action in demanding a payment in addition to
that offered by Kid-Kart the court finds to be arbitrary, vexatious or not in
good faith. The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable,
against Kid-Kart and in favor of any or all dissenters if the court finds that
Kid-Kart failed to comply substantially with the statutory requirements or
against either Kid-Kart or a dissenter, in favor of any other party, if the
court finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith. If the court finds that the
services of counsel for any dissenter were of substantial benefit to other
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dissenters similarly situated and should not be assessed against Kid-Kart, it
may award to the counsel reasonable fees to be paid out of the amount awarded to
the dissenters who were benefited.
Kid-Kart shareholders considering exercising dissenters' rights should bear
in mind that the Fair Value of their Kid-Kart Common Shares determined under
Sections 35-1-826 through 35-1-839 could be more than, the same as or less than
the value of the consideration they will receive pursuant to the Merger
Agreement if they do not exercise dissenters' rights.
Any Kid-Kart Shareholder contemplating the exercise of dissenters' rights
is urged to review the full text of the Dissenters' Rights Statute. The
procedures set forth in such Statute must be followed exactly or dissenters'
rights may be lost.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences to Sunrise, Kid-Kart and their respective stockholders of the
Merger. The discussion below of the tax consequences of the Merger to the
Kid-Kart Holders applies only to Kid-Kart Holders who are United States persons
for United States federal income tax purposes or who are otherwise subject to
United States federal income tax on their income. In the opinion of Dorsey &
Whitney, LLP, counsel to Kid-Kart, the following discussion, insofar as it
relates to matters of law and legal conclusions, and based on the assumptions
and subject to the qualifications set forth herein and therein, accurately
describes the material U.S. federal income tax consequences to Sunrise, Kid-Kart
and their respective stockholders of the Merger.
Opinions
Prior to the consummation of the Merger, Kid-Kart will obtain and rely upon
an opinion from Dorsey & Whitney LLP to the effect that, if the Merger is
consummated in accordance with the terms of the Merger Agreement, (i) the Merger
will be treated as a reorganization within the meaning of Section 368(a) of the
Code, (ii) each of Sunrise and Kid-Kart will be a party to such reorganization
within the meaning of Section 368(b) of the Code and (iii) no gain or loss will
be recognized for federal income tax purposes by a stockholder of Kid-Kart as a
result of the Merger upon the conversion of shares of Kid-Kart Common Stock into
shares of Sunrise Common Stock except with respect to cash, if any, received in
lieu of fractional shares of Sunrise Common Stock. Each of those opinions will
be based upon such counsel's review of those documents and materials it
considers to be relevant, including this Proxy Statement/Prospectus and the
Merger Agreement. In addition, in rendering those opinions, such counsel will
rely upon certain assumptions and representations that will be made by Kid-Kart
and Sunrise, including, but not limited to, the representation that Kid-Kart
Shareholders do not have any plan or intention to sell, exchange or otherwise
dispose of a number of shares of Sunrise Common Stock received pursuant to the
Merger that would reduce the Kid-Kart Shareholders' ownership of Sunrise Common
Stock to a number of shares having a value, as of the Effective Time, which is
less than 50 percent of the value of all of the formerly outstanding Kid-Kart
Shares held by Kid-Kart Shareholders as of the Effective Time.
If such tax opinion is not received, the Merger will not be consummated
unless the condition requiring its receipt is waived and the approval of the
Kid-Kart Shareholders is resolicited by means of an updated Proxy Statement/
Prospectus.
An opinion of counsel is not binding on the Internal Revenue Service
("IRS") or on the courts. Therefore, there can be no assurance that the Merger
will constitute a reorganization or that any of the tax consequences of a
reorganization that are described herein will be available to the Kid-Kart
Shareholders. Because of the complexity of the tax laws and because the tax
consequences to any particular Kid-Kart Shareholder may be affected by matters
not discussed herein, each Kid-Kart Shareholder is advised to consult his or her
own tax advisor concerning the federal income tax consequences of the Merger.
General Tax Consequences
Assuming qualification of the Merger is a reorganization under Section
368(a) of the Code, for federal income tax purposes, (i) no gain or loss will be
recognized by Kid-Kart, Sunrise Sub, Sunrise or Sunrise's Shareholders as a
result of the Merger, (ii) no gain or loss will be recognized by a Kid-Kart
Shareholder upon the receipt of Sunrise Common Stock in the Merger solely in
exchange for shares of Kid-Kart Common Stock (except for cash in lieu of a
fractional share), (iii) the aggregate basis of the shares of Sunrise Common
Stock to be received by a Kid-Kart
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Shareholder in the Merger (including the Escrowed Shares allocable to such
Kid-Kart Shareholders) will be the same as the aggregate basis of the shares of
Kid-Kart Common Stock exchanged therefor and (vi) the holding period for the
shares of Sunrise Common Stock to be received by a Kid-Kart Shareholder in the
Merger (including the Escrowed Shares allocable to such Kid-Kart Shareholder)
will include the holding period of shares of Kid-Kart Common Stock exchanged
therefor, provided that such Sunrise Common Stock was held as a capital asset by
such Kid-Kart Shareholder as of the Effective Time.
Cash in Lieu of Fractional Shares
A Kid-Kart Holder who receives cash in lieu of a fractional share of
Sunrise Common Stock in accordance with the Merger Agreement will recognize gain
or loss for federal income tax purposes equal to the difference between the cash
received in lieu of such fractional share and the basis of such fractional
share. Such gain or loss will be capital gain or loss, provided that the
Kid-Kart Common Stock was held as a capital asset. Any such capital gain or loss
will be long-term capital gain or loss if the Kid-Kart Shareholder's holding
period for such Kid-Kart Common Stock exceeds one year as of the Effective Time.
Escrowed Shares
Escrow Shares held in escrow by Sunrise on behalf of Kid-Kart Holders
pursuant to the Merger Agreement will be treated as having been transferred to
such Holders as of the Effective Time. If any Escrow Shares allocable to
Kid-Kart Holders are distributed to such Kid-Kart Holders, such Kid-Kart Holders
will not recognize income, gain or loss for federal income tax purposes upon
such distribution.
The return of any Escrow Shares to Sunrise pursuant to an adjustment of the
Merger Consideration based upon the Net Worth Guarantee of Kid-Kart or
Uncollected Accounts Receivable will be based upon a valuation of the Escrow
Shares at the Nominal Share Price. Such return will consequently not cause a
Kid-Kart Holder to recognize gain or loss for federal income tax purposes and
the basis of such returned shares will be added to the basis of the remaining
shares of Sunrise Common Stock received by such Kid-Kart Holder in connection
with the Merger.
However, the return of any Escrow Shares to Sunrise pursuant to an
indemnity claim will be based upon a valuation of the Escrow Shares at fair
market value on the date of the claim (the "Adjustment Price") and will
consequently result in the recognition of gain or loss by the Kid-Kart Holders
at such time. Such gain or loss will be measured by the difference between the
fair market value of the returned Escrow Shares and the Kid-Kart Holder's
adjusted basis in the returned Escrow Shares. The basis of the Kid-Kart Holder
in his or her remaining Sunrise Shares will be increased by the amount of the
claims satisfied. Thus, if Escrow Shares are returned to Sunrise as a result of
an indemnity claim and the adjusted basis of such shares is less than the
Adjustment Price, Kid-Kart Holders will still have to pay federal income tax on
the differences between the adjusted basis and the Adjustment Price even though
the return of such Escrow Shares to Sunrise will not generate cash for the
Kid-Kart Holders.
Filing Requirements
Kid-Kart Shareholders will be required to file a notice of such exchange
with the IRS along with such Kid-Kart Shareholder's federal income tax return
for the taxable year in which such exchange occurs. The failure to file such a
notice could result in such gain being recognized by the stockholder for federal
income tax purposes.
Kid-Kart Stock Options
Regardless of whether the Merger qualifies as a reorganization, the
cancellation of each outstanding Kid-Kart Stock Option, and the receipt by each
Kid-Kart Optionholder, in lieu thereof, of Sunrise Common Stock, will result in
taxable ordinary compensation income equal to the fair market value of such
Sunrise Common Stock. The number of shares of Sunrise Common Stock received by
each Kid-Kart Optionholder will be reduced by the FICA and other withholding
taxes payable with respect to such Optionholder in an amount determined by
Kid-Kart. The basis of each Kid-Kart Optionholder in the shares of Sunrise
Common Stock received in lieu of such holder's Kid-Kart Options will be equal to
the fair market value of such shares. The holding period of such shares will
begin at the time such shares are received.
79
<PAGE>
Dissenting Shareholders
In the case of a Kid-Kart Shareholder who exercises dissenters' rights with
respect to such Shareholder's shares of Kid-Kart Common Stock and who receives
payment for such shares in cash, the IRS can be expected to take the position
that such Kid-Kart Shareholder received such cash as a distribution in
redemption of such shares subject to the provisions and limitations of Section
302 of the Code. Therefore, such a dissenting Kid-Kart Shareholder will
generally recognize gain or loss for federal income tax purposes equal to the
difference between the cash received and the basis of such shares. Such gain or
loss generally would be capital gain or loss, provided such shares were held as
a capital asset. Any such capital gain or loss would be long-term capital gain
or loss if such stockholder's holding period for such shares exceeds one year as
of the Effective Time. In certain circumstances, however, the provisions of
Section 302 or 306 of the Code might cause all or some of the cash received by
such a dissenting stockholder to be treated for federal income tax purposes as
ordinary dividend income.
The discussion set forth above does not address the state, local or foreign
tax aspects of the Merger. In addition, the discussion does not address tax
consequences related to plans, contracts or arrangements with respect to
employee compensation. Except as otherwise stated above, the discussion is based
on currently existing provisions of the Code, existing provisions of the Code,
existing Treasury regulations under the Code, the legislative history of the
Code, current rulings and pronouncements of the IRS and court decisions. All of
the foregoing are subject to change and any such change could affect the
continuing validity of the discussion. The discussion may not be applicable to
certain Kid-Kart Holders, including Holders who acquired their shares through
the exercise of employee stock options or otherwise as compensation for
employment. Each Sunrise Stockholder and Kid-Kart Holder should consult his or
her own tax advisor with respect to the specific tax consequences of the
Transaction to him or her.
LEGAL MATTERS
Latham & Watkins, Costa Mesa, California has delivered an opinion to the
effect that, upon the consummation of the Merger, the Shares offered pursuant to
this Proxy Statement/Prospectus will be validly issued, fully paid and
nonassessable. Dorsey & Whitney LLP is acting as counsel for Kid-Kart in
connection with certain legal matters relating to the Merger and the
transactions contemplated thereby.
EXPERTS
The consolidated financial statements of Sunrise Medical Inc. as of June
28, 1996 and June 30, 1995, and for each of the years in the three-year period
ended June 28, 1996, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Kid-Kart, Inc. as of and for the year ended
December 31, 1995, have been included herein and in the registration statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Index to Consolidated Financial Statements of Sunrise
<TABLE>
Page
----
<S> <C>
Report of Management............................................................................... F-2
Independent Auditors' Report....................................................................... F-3
Consolidated balance sheets as of June 28, 1996 and June 30, 1995.................................. F-4
Consolidated statements of operations for the years ended June 28, 1996,
June 30, 1995 and July 1, 1994................................................................ F-5
Consolidated statements of cash flows for the years ended June 28, 1996,
June 30, 1995 and July 1, 1994................................................................ F-6
Consolidated statements of stockholders' equity for the years ended June 28, 1996,
June 30, 1995 and July 1, 1994................................................................ F-7
Notes to consolidated financial statements......................................................... F-8
Condensed consolidated balance sheets as of September 27, 1996 (unaudited) and June 28, 1996....... F-18
Condensed consolidated statements of operations for the thirteen weeks ended September 27, 1996
(unaudited) and September 29, 1995 (unaudited)................................................ F-19
Condensed consolidated statements of cash flows for the thirteen weeks ended September 27, 1996
(unaudited) and September 29, 1995 (unaudited)................................................ F-20
Notes to condensed consolidated financial statements............................................... F-21
Index to Financial Statements of Kid-Kart
Independent Auditors' Report....................................................................... F-23
Balance sheets as of December 31, 1994 (unaudited), December 31, 1995 and
June 30, 1996 (unaudited)..................................................................... F-24
Statements of operations for the years ended December 31, 1993 (unaudited), 1994 (unaudited)
and 1995 and the nine months ended September 30, 1995 (unaudited) and 1996 (unaudited)........ F-25
Statements of stockholders' equity for the years ended December 31, 1993 (unaudited),
1994 (unaudited) and 1995 and the nine months ended September 30, 1996 (unaudited)............ F-26
Statements of cash flows for the years ended December 31, 1993 (unaudited), 1994 (unaudited)
and 1995 and the nine months ended September 30, 1995 (unaudited) and 1996 (unaudited)........ F-27
Notes to financial statements...................................................................... F-28
</TABLE>
F-1
<PAGE>
SUNRISE MEDICAL INC.
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.
F-2
<PAGE>
SUNRISE MEDICAL INC.
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. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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.
KPMG Peat Marwick LLP
Los Angeles, California
August 16, 1996
F-3
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
June 28, June 30,
1996 1995
-------- ------
<S> <C> <C>
Assets
------
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
======== ========
Liabilities and Stockholders' Equity
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
======== ========
See accompanying notes to consolidated financial statements
</TABLE>
F-4
<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 tangibles.................. 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) (9,157) (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
======== ========= ========
See accompanying notes to consolidated financial statements
</TABLE>
F-5
<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 in or by 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 years......... 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
F-6
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
------------
Foreign Total
Additional Currency Stock-
Number paid-in Retained translation holders
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, 1996 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
========= ========= ========= ========= =========== =========
See accompanying notes to consolidated financial statements
</TABLE>
F-7
<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 homecare 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 are five to 42 years for
buildings and improvements and two to 15 years for machinery and equipment.
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, depending on the nature and type of business
acquired. 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 that 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 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 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.
F-8
<PAGE>
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.
Installment Receivables Installment receivables consist of the following:
<TABLE>
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.
F-9
<PAGE>
The fair market value of interest rate swap agreements (Note 7) 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.
3. BALANCE SHEET ITEMS
Inventories consist of the following:
<TABLE>
<CAPTION>
June 28, June 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 ids, for 222,266 shares of common stock
(valued at $5.9 million) and cash of $2.5 million. On October 6, 1995 the
F-10
<PAGE>
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 1995, 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 homecare,
nursing home and hospital markets in France.
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 primarily over 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.
F-11
<PAGE>
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).
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 litigation
(Note 11), including attorneys' fees; $27.6 million related to Bio Clinic and
Comfort Clinic, consisting of loss on the sale of businesses of $5.8 million,
goodwill writedowns of $13.8 million and other asset adjustments of $8.0 million
to reflect revised estimates of net asset realizations; and $19.0 million
related to the company's reorganization and cost reduction program, including
severance costs ($3.2 million), facility closing costs ($5.4 million), and
product line discontinuance and other expenses ($10.4 million). 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>
F-12
<PAGE>
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 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 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.
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 following table summarizes the company's interest rate swap agreements:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
U.S.
Notional Dollar Swap
Amount Currency Amount Rate Effective Period
---------- -------- -------- ------ ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
30,000 U.S. dollars $30,000 5.63% September 1995-- September 2000
25,000 German marks $16,405 8.05% February 1992-- February 1997
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The U.S. dollar equivalent is based on exchange rates in effect at June 28,
1996.
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.
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 (0.5) (0.9) (1.1)
Foreign income tax rates 1.9 0.5 0.2
Excludable foreign sales corporation income (0.3) (0.4) (0.3)
Other, net 1.0 1.2 (0.9)
----- ----- ------
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
------ ------- -------
Deferred income tax liabilities: 17,802 4,203 5,433
------ ------- -------
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.
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
F-15
<PAGE>
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.
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
In August 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.
F-16
<PAGE>
13. GEOGRAPHIC SEGMENT INFORMATION
Selected geographic information is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------
June 28, June 30, July 1,
Net sales 1996 1995 1994
- --------- -------- -------- ------
<S> <C> <C> <C>
United States* $412,361 $437,331 $358,259
Europe 254,769 164,596 108,683
-------- -------- --------
Total $667,130 $601,927 $466,942
======== ======== ========
Corporate operating income (loss)
- --------------------------------
United States* $ (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
- ----------------------------------
United States* $307,511 $336,040 $320,054
Europe 312,905 268,703 151,613
-------- -------- --------
Total $620,416 $604,743 $471,667
======== ======== ========
</TABLE>
*Includes immaterial amounts from the Company's subsidiaries in Canada and
Australia.
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
1996 Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net sales $157,172 $173,710 $169,574 $166,674 $667,130
Corporate operating income (loss) 9,562 (32,331) 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>
F-17
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 27, June 28,
1996 1996
-------------- ----------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,095 $ 1,785
Trade receivables, net 122,177 123,924
Installment receivables, net 11,666 10,312
Inventories 84,040 80,937
Income tax refunds receivable 10,608 12,535
Deferred income taxes 17,908 17,802
Other current assets 9,142 5,016
-------- --------
Total current assets 259,636 252,311
Property and equipment, net of accumulated
depreciation of $79,107 and $75,151,
respectively 80,984 82,246
Goodwill and other intangible assets, net 277,851 278,857
Other assets, net 6,540 7,002
-------- --------
Total assets $625,011 $620,416
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 5,437 $ 5,748
Trade accounts payable 45,522 42,861
Accrued compensation and other expenses 88,250 88,331
Income taxes 12,497 10,380
-------- --------
Total current liabilities 151,706 147,320
Long-term debt, less current installments 204,248 207,446
Deferred income taxes 5,336 5,096
Stockholders' equity:
Preferred stock, $1 par. Authorized
5,000 shares; none issued -- --
Common stock, $1 par. Authorized
40,000 shares; 18,860 and
18,847 shares, respectively, issued
and outstanding 18,860 18,847
Additional paid-in capital 196,003 195,906
Retained earnings 48,469 45,409
Cumulative foreign currency
translation adjustment 389 392
-------- --------
Total stockholders' equity 263,721 260,554
-------- --------
Total liabilities and stockholders'
equity $625,011 $620,416
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
F-18
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------
September 27, September 29,
1996 1995
--------------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $165,353 $157,172
Cost of sales 110,899 102,472
-------- --------
Gross profit 54,454 54,700
Marketing, selling and administrative 37,270 37,010
expenses
Research and development expenses 3,759 3,724
Corporate expenses 2,994 2,363
Amortization of goodwill and other 2,040 2,041
intangibles -------- --------
46,063 45,138
-------- --------
Corporate operating income 8,391 9,562
-------- --------
Other (expense) income:
Interest expense (4,002) (3,530)
Interest income 779 683
Other income and expense, net 715 (25)
-------- --------
(2,508) (2,872)
-------- --------
Income before income taxes 5,883 6,690
Income taxes 2,823 2,896
-------- --------
Net income $ 3,060 $ 3,794
======== ========
Net income per share $.16 $.20
======== ========
Weighted average number of shares outstanding 19,023 19,147
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
F-19
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------
September 27, September 29,
1996 1995
--------------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,060 $ 3,794
Non-cash charges 6,826 8,361
Changes in assets and liabilities,
net of effect of acquisitions
Receivables, net 393 272
Inventories (3,103) (2,923)
Other current assets (4,700) (5,212)
Income taxes 4,044 4,513
Accounts payable and other 2,580 (5,667)
liabilities -------- --------
Net cash provided by operating activities 9,100 3,138
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,390) (6,671)
Net cash invested in acquisition of businesses -- (2,463)
-------- --------
Net cash used for investing activities (3,390) (9,134)
-------- --------
Cash flows from financing activities:
Borrowings of long-term debt 29,500 51,561
Repayments of long-term debt (33,009) (44,175)
Proceeds from issuance of common stock 110 70
-------- --------
Net cash (used for) provided by
financing activities (3,399) 7,456
-------- --------
Effect of exchange rate changes on cash (1) 23
-------- --------
Net increase in cash and cash
equivalents 2,310 1,483
Cash and cash equivalents at beginning
of period 1,785 1,740
-------- --------
Cash and cash equivalents at end of
period $ 4,095 $ 3,223
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
F-20
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The information contained in the consolidated financial statements and footnotes
is condensed from that which would appear in the annual consolidated financial
statements. Accordingly, the condensed consolidated financial statements
included herein should be reviewed in conjunction with the consolidated
financial statements and related notes thereto contained in the Annual Report on
Form 10-K for the fiscal year ended June 28, 1996, filed by Sunrise Medical Inc.
(the "company") with the Securities and Exchange Commission. The unaudited
condensed consolidated financial statements as of September 27, 1996 and for the
thirteen-week periods ended September 27, 1996 and September 29, 1995 include
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation. The results of operations for interim
periods are not necessarily indicative of the results which may be expected for
the entire year. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. 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 the first-in,
first-out (FIFO) cost or market value. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 27, June 28,
1996 1996
------------- --------
<S> <C> <C>
Raw material $37,393 $33,980
Work-in-progress 10,374 9,629
Finished goods 36,273 37,328
------- -------
$84,040 $80,937
======= =======
</TABLE>
Interim period inventory classifications involve a degree of estimation due to
the timing of physical inventories throughout the fiscal year.
3. Sale of Comfort Clinic
On October 18, 1996 the company sold its Comfort Clinic division for cash of $14
million. The sales price is subject to post-closing adjustment based on changes
in book value as of the closing date. Following a strategic review of its
businesses, the company had previously decided to focus on the homecare and
extended care markets and to sell this consumer-oriented division. Comfort
Clinic had sales of $10 million in the first quarter of fiscal 1997, or 6% of
total sales, compared to $13 million or 8% of sales in the first quarter of
fiscal 1996. The proceeds from the sale were used to reduce borrowings on the
company's bank credit facility.
F-21
<PAGE>
4. Acquisition of Kid-Kart, Inc.
In September 1996 the company entered into an agreement to acquire Kid-Kart,
Inc., a manufacturer of innovative pediatric positioning and dependent mobility
products. Completion of the acquisition, which is subject to the satisfaction
of various conditions, including the approval of the transaction by Kid-Kart,
Inc. stockholders, is expected by the end of calendar year 1996.
5. Contingencies
The company announced in October 1995 that it had commenced an internal
investigation of its financial controls and financial statements for previously
reported periods. The investigation 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. As a result,
the company restated its financial statements for the years ended June 30, 1995
and July 1, 1994. Following the October 1995 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 settlement is subject to final court approval. The agreement also
includes settlement of a stockholder derivative action filed in San Diego
Superior Court. Two derivative actions filed in Delaware state courts against
many of the same defendants were dismissed in November 1996.
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.
F-22
<PAGE>
KID-KART, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sunrise Medical Inc.
We have audited the accompanying balance sheet of Kid-Kart, Inc. as of
December 31, 1995, and the related statement of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kid-Kart, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Billings, Montana
August 9, 1996
F-23
<PAGE>
KID-KART, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
----------- ------------
1994 1995 1996
---- ---- ----
(unaudited) (unaudited)
Assets
Current assets:
<S> <C> <C> <C>
Cash.............................................................. $ 22,778 $ 15,782 $ 13,671
Accounts receivable, net of allowance of $92,678 (unaudited),
$164,538 and $136,429 (unaudited).............................. 646,414 822,151 997,554
Inventories....................................................... 300,342 627,551 745,127
Prepaid expenses and other........................................ 2,528 12,462 14,896
Deferred tax asset................................................ 52,000 86,300 86,300
------------ ------------ ------------
Total current assets........................................... 1,024,062 1,564,246 1,857,548
Property and equipment, net............................................ 384,497 395,681 769,144
Other.................................................................. 2,600 275 2,046
------------ ------------ ------------
Total assets................................................... $ 1,411,159 $ 1,960,202 $ 2,628,738
============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt............................ $ 67,959 $ 47,168 $ 52,244
Note payable...................................................... 30,000 -- 702,626
Accounts payable.................................................. 233,746 80,149 115,796
Accrued expenses and other liabilities............................ 109,918 108,430 103,208
Income taxes payable.............................................. 16,444 131,900 36,537
------------ ------------ ------------
Total current liabilities...................................... 458,067 367,647 1,010,411
Long-term debt, excluding current installments......................... 445,578 384,359 342,233
Note payable........................................................... -- 260,000 --
Deferred tax liability................................................. 6,000 10,200 10,200
------------ ------------ ------------
Total liabilities.............................................. 909,645 1,022,206 1,362,844
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, no par 1,000,000 shares authorized; 50,879 shares issued at
December 31, 1994 (unaudited); 53,574 shares at
</TABLE>
F-24
<PAGE>
<TABLE>
<S> <C> <C> <C>
December 31, 1995 and at September 30, 1996 (unaudited)........ 307,132 423,080 423,080
Additional paid-in capital........................................... 144,756 144,756 144,756
Notes receivable - stockholder....................................... (20,099) (21,552) (14,491)
Retained earnings.................................................... 69,725 391,712 712,549
------------ ------------ ------------
Total stockholders' equity........................................ 501,514 937,996 1,265,894
------------ ------------ ------------
Total liabilities and stockholders' equity..................... $ 1,411,159 $ 1,960,202 $ 2,628,738
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
KID-KART, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------ -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales $ 918,791 $ 2,004,412 $ 3,209,713 $ 2,391,939 $ 3,165,348
Costs of goods sold......................... 563,116 1,166,230 1,694,902 1,376,359 1,770,907
------------ ------------ ------------ ------------ ------------
Gross profit............................ 355,675 838,182 1,514,811 1,015,580 1,394,441
Selling, general and administrative......... 253,931 550,067 730,748 499,699 704,245
Depreciation................................ 6,773 15,117 32,509 21,178 30,795
Research and development.................... 37,326 44,257 108,741 80,399 95,867
Provision for doubtful accounts............. -- 92,678 71,860 -- --
------------ ------------ ------------ ------------ ------------
298,030 702,119 943,858 601,276 830,907
------------ ------------ ------------ ------------ ------------
Operating income........................ 57,645 136,063 570,953 414,304 563,534
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income........................... 3,134 704 1,485 1,085 909
Interest expense.......................... (7,475) (18,803) (47,203) (34,509) (56,225)
Other, net................................ 168 (363) 2,552 1,672 1,601
------------ ------------- ------------ ------------ ------------
(4,173) (18,462) (43,166) (31,752) (53,715)
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes.... 53,472 117,601 527,787 382,552 509,819
Income tax expense.......................... 14,164 11,088 205,800 127,680 188,982
------------ ------------ ------------ ------------ ------------
Net income.............................. $ 39,308 $ 106,513 $ 321,987 $ 254,872 $ 320,837
=========== =========== =========== =========== ===========
Net income per share.................... $ 0.91 $ 2.16 $ 5.73 $ 4.55 $ 5.12
=========== =========== =========== =========== ===========
</TABLE>
F-26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted average number of shares
outstanding........................... 43,211 49,367 56,214 55,999 62,612
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
KID-KART, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------------
Retained
Additional Notes Earnings
Treasury Paid-in Receivable- (Accumulated
Shares Amount Stock Capital Stockholder Deficit) Total
---------- -------- ---------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31 1992
(unaudited)................... 41,213 $ 83,782 $ (1,583) $ 99,519 $ (11,726) $ (76,096) $ 93,896
Purchase of shares for treasury
(unaudited)................... (1,200) -- (21,600) -- -- -- (21,600)
Issuance of stock (unaudited)... 3,992 48,040 23,183 45,237 -- -- 116,460
Notes receivable-stockholder
(unaudited)................... -- -- -- -- 4,429 -- 4,429
Net income (unaudited).......... -- -- -- -- -- 39,308 39,308
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1993
(unaudited)................... 44,005 131,822 -- 144,756 (7,297) (36,788) 232,493
Issuance of stock (unaudited)... 6,874 175,310 -- -- -- -- 175,310
Notes receivable-stockholder
(unaudited)................... -- -- -- -- (12,802) -- (12,802)
Net income (unaudited).......... -- -- -- -- -- 106,513 106,513
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1994... 50,879 307,132 -- 144,756 (20,099) 69,725 501,514
Issuance of stock for cash...... 320 18,198 -- -- -- -- 18,198
Exercise of stock option........ 375 12,750 -- -- -- -- 12,750
Conversion of debentures........ 2,000 85,000 -- -- -- -- 85,000
Notes Receivable-stockholder.... -- -- -- -- (1,453) -- (1,453)
Net income...................... -- -- -- -- -- 321,987 321,987
--------- --------- --------- --------- --------- --------- ---------
Balances at December 31, 1995... 53,574 423,080 -- 144,756 (21,552) 391,712 937,996
Notes receivable-stockholder
(unaudited)................... -- -- -- -- 7,061 -- 7,061
Net income (unaudited).......... -- -- -- -- -- 320,837 320,837
--------- --------- --------- --------- --------- --------- ---------
Balances at September 30, 1996
(unaudited)................... 53,574 $ 423,080 $ -- $ 144,756 $ (14,491) $ 712,549 $1,265,894
========= ======== ======== ======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
KID-KART, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 39,308 $ 106,513 $ 321,987 $ 254,872 $ 320,837
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation............................. 6,773 15,117 32,509 21,178 30,795
Changes in operating assets and liabilities:
Accounts receivable..................... (176,770) (348,789) (175,737) (296,391) (175,403)
Inventories............................. (53,537) (159,671) (298,288) (90,770) (117,576)
Prepaid expenses and other.............. (1,669) 2,780 (7,610) -- (4,205)
Accounts payable........................ 40,739 158,149 (182,517) (88,375) 35,647
Accrued expenses and other liabilities.. 20,896 53,167 3,116 (19,796) (5,222)
Accrued interest on notes receivable -
shareholder........................... -- (802) (1,453) (715) (719)
Income taxes............................ 14,060 2,384 115,456 18,417 (95,363)
Deferred income taxes................... -- (46,000) (30,100) -- --
------------ ------------- ------------- ------------ ------------
Net cash used in operating
activities.............................. (110,200) (217,152) (222,637) (201,580) (11,209)
------------- ------------- ------------- ------------- ------------
Cash flows from investing activities -
Capital expenditures...................... (23,009) (365,100) (43,693) (24,985) (404,258)
------------- ------------- ------------- ------------- ------------
Cash flows from financing activities:
Advances on note payable.................. 136,000 375,000 625,410 410,000 1,512,626
Principal payments on note payable........ (126,000) (355,000) (395,410) (250,000) (1,070,000)
Borrowings on long-term debt.............. 75,000 419,659 49,167 51,380 --
Principal payments on long-term debt...... (50,429) -- (135,781) (83,939) (37,050)
Issuance of common stock.................. 120,889 163,310 115,948 77,479 --
Payments by stockholder................... -- -- -- -- 7,780
Purchase of treasury stock................ (21,600) -- -- -- --
------------- ------------ ------------ ------------ ------------
Net cash provided by financing activities 133,860 602,969 259,334 204,920 413,356
------------ ------------ ------------ ------------ ------------
</TABLE>
F-29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash................. 651 20,717 (6,996) (21,645) (2,111)
Cash at beginning of period................. 1,410 2,061 22,778 22,778 15,782
------------ ------------ ------------ ------------ ------------
Cash at end of period....................... $ 2,061 $ 22,778 $ 15,782 $ 1,133 $ 13,671
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
KID-KART, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for dates and periods other than December 31, 1995
and the year then ended is unaudited)
(1) Summary of Significant Accounting Policies
Operations. Kid-Kart, Inc. (the Company) was incorporated on August 23,
1990, and is engaged in the design, manufacture and marketing of strollers,
wheelchairs and other medical equipment for the pediatric rehabilitation market.
Sales are accomplished through direct sales, regional manufacturer's
representatives, medical equipment dealers and international distributors.
Revenue Recognition. Revenues from the sale of the Company's products are
recognized when the products are shipped to customers.
Inventories. Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Cost is based on the actual costs
associated with producing the inventories, which include direct labor and
materials.
Allowance for Doubtful Accounts. The Company has established an allowance
for estimated losses associated with accounts receivable. The allowance is
determined with consideration of aging of the receivables and prospects of
collection.
Property and Equipment. Property and equipment are stated at cost and
depreciated on a straight-line basis over estimated useful lives of 32 years for
buildings and improvements and 3 to 10 years for equipment, furniture and
fixtures. Maintenance and repairs are charged to expense as incurred.
Warranty. The Company provides a five year warranty on all mobility bases
and a two year warranty on all seating and fabric components. The warranty
covers any defect in materials or workmanship for the indicated periods. At
December 31, 1995 the Company has accrued $14,000 for possible warranty claims.
Research and Development Costs. Research and development costs related to
both present and future products and are expensed in the year incurred.
Income Taxes. The Company provides for income taxes using the asset and
liability method whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates for the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates will be recognized in operations in the
period that includes the enactment date.
Net Income Per Share. Net income per share is computed using the weighted
average number of common shares and common share equivalents which have a
dilutive effect when using the treasury stock method.
Use of Estimates. Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statement in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------- September 30,
1994 1995 1996
---------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C>
Raw materials......................................... $ 271,024 $ 260,772 $ 604,083
Finished goods........................................ 4,294 269,430 28,620
</TABLE>
F-31
<PAGE>
<TABLE>
<S> <C> <C> <C>
Demonstration goods................................... 25,024 97,349 112,424
------------ ------------ ------------
$ 300,342 $ 627,551 $ 745,127
============ ============ ============
(3) Property and Equipment
Property and equipment consists of the following:
<CAPTION>
December 31,
-------------------------- September 30
1994 1995 1996
---------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C>
Land.................................................. $ 42,000 $ 42,000 $ 42,000
Buildings and improvements............................ 261,370 262,589 262,589
Equipment, furniture and fixtures..................... 108,450 150,924 319,258
Construction in progress.............................. -- -- 235,924
------------- ------------ -------------
411,820 455,513 859,771
Less accumulated depreciation..................... 27,323 59,832 90,627
------------- ------------- -------------
$ 384,497 $ 395,681 $ 769,144
============ ============ ============
<CAPTION>
(4) Accrued Expenses and Other Liabilities
A summary of accrued expenses and other liabilities follows:
December 31,
---------------------------- September 30,
1994 1995 1996
---------- ---------- --------
(unaudited) (unaudited)
<S> <C> <C> <C>
Payroll, payroll taxes and benefits................... $ 74,642 $ 64,975 $ 82,535
Commissions payable................................... 19,072 24,947 4,000
Other................................................. 16,204 18,508 16,673
------------- ------------- -------------
$ 109,918 $ 108,430 $ 103,208
============= ============ =============
</TABLE>
(5) Note Payable
The note payable consists of a revolving line of credit ("Line of
Credit") with a borrowing capacity of $400,000. The Line of Credit bears
interest at prime plus 2% (11% at December 31, 1995). During July 1996, the
Company refinanced the Line of Credit increasing the maximum balance to
$480,000. The Line of Credit now bears interest at prime plus 1.5%. Interest on
the Line of Credit is payable monthly, with the principal due April 15, 1997.
The Line of Credit is secured by all inventory, accounts receivable and
equipment of the Company and is guaranteed by a major stockholder of the
Company.
(6) Long-Term Debt
<TABLE>
<CAPTION>
December 31, September 30,
----------------------------- -----------------
1994 1995 1996
---------- ---------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C>
6% note to City of Belgrade; due in monthly installments of $3,867,
including interest, through February 2000...................... $ 154,833 $ 171,313 $ 143,635
</TABLE>
F-32
<PAGE>
<TABLE>
<S> <C> <C> <C>
75% fixed/25% variable rate note to bank (8.937% and 11.5% at
December 31, 1995); due in monthly installments of $2,324, including
interest, through January 2010; secured by real
property including premises of the Company..................... 228,000 222,060 216,842
Variable rate note to bank (11.25% at December 31, 1995); due in
monthly installments of $790 including interest, through
August 2000, secured by all machinery, equipment, furniture,
fixtures, inventory and accounts receivable of the Company..... 43,028 38,154 34,000
Convertible debentures............................................. 87,676 -- --
----------- ----------- -----------
513,537 431,527 394,477
Less current installments.......................................... 67,959 47,168 52,244
----------- ----------- -----------
Long-term debt, excluding current installments..................... $ 445,578 $ 384,359 $ 342,233
=========== =========== ===========
</TABLE>
In September 1994, the Company borrowed $200,000 from the City of Belgrade
under a community development program loan agreement. The loan agreement
requires, among other things, the Company to increase its workforce in
accordance with a specified hiring and training plan and assignment of life
insurance proceeds on the Company's president. In addition, the Company has
agreed not to remove the business facilities or relocate more than 10% of its
workforce from the Lender's jurisdictional area during the term of the loan. The
loan is secured by a second priority interest in the equipment, accounts
receivable and inventory of the Company. Compliance with the hiring and training
plan may result in a reduction in the interest rate to not less than 4%. A major
stockholder of the Company has personally guaranteed all long-term debt.
The aggregate maturities of long-term debt at December 31, 1995 are as
follows:
Year ending December 31,
1996............................... $ 47,168
1997............................... 50,647
1998............................... 54,329
1999............................... 58,303
2001 and thereafter................ 221,080
---------------
$ 431,527
===============
Cash paid for interest was approximately $7,475 (unaudited), $18,825
(unaudited) and $52,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
(7) Notes Receivable - Stockholder
The notes represent two notes with William J. Senecal for common stock
purchased. The first note originated in November 1992 and bears interest at 7%.
The second note originated in December 1994 and bears interest at 7%. There are
no stated maturities or collateral on either note. The notes receivable and
accrued interest thereon are presented as a reduction of stockholders' equity.
(8) Fair Value of Financial Instruments
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial
Instruments," effective December 31, 1995. SFAS No. 107 requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate fair value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements.
F-33
<PAGE>
The following methods and assumptions were used to estimate the fair
value of each class of the Company's financial instruments:
Cash. The carrying amounts of cash approximate fair value due to the liquid
nature of cash.
Accounts Receivable. The fair value was estimated based on the aging of the
receivables using current interest rates available to the Company. The carrying
value of accounts receivable at December 31, 1995, net of the allowance,
approximates the estimated fair value.
Accounts Payable, Accrued Expenses and Other Liabilities. The carrying
amounts approximate fair value because of the short maturity of those
instruments.
Notes Receivable - Stockholder. The carrying amount of the notes receivable
- - stockholder approximates fair value due to the short-term nature of the
instruments.
Notes Payable. The carrying amounts of notes payable approximate fair value
as the existing rates of interest approximates the Company's expected borrowing
rate for agreements with similar characteristics.
Long-Term Debt. The carrying amounts of long-term debt approximate fair
value as the rate of interest associated with payments under the agreements
approximates the Company's current borrowing rate for agreements with similar
characteristics.
(9) Income Taxes
<TABLE>
<CAPTION>
The provision for income taxes includes the following components:
Years Ended December 31,
--------------------------------------
1993 1994 1995
---------- ---------- -------
(unaudited) (unaudited)
<S> <C> <C> <C>
Current:
Federal................................. $ 11,364 $ 45,688 $ 194,500
State................................... 2,800 11,400 41,400
----------- ----------- -----------
14,164 57,088 235,900
----------- ----------- -----------
Deferred:
Federal................................. -- (37,900) (24,800)
State................................... -- (8,100) (5,300)
----------- ------------ -----------
-- (46,000) (30,100)
$ 14,164 $ 11,088 $ 205,800
========== ========== ==========
<CAPTION>
The following is a reconciliation of the "expected" income tax expense,
computed by applying the Federal income tax rate of 34% to income before income
taxes, to "actual" tax expense:
Years Ended December 31,
-----------------------------------------------
1993 1994 1995
---------- ---------- -------
(unaudited) (unaudited)
<S> <C> <C> <C>
Computed "expected" tax expense............. $ 18,164 $ 39,988 $ 179,448
Benefit of lower rates on income below
$75,000................................. (9,800) (10,900) --
State taxes, net of Federal impact.......... 1,100 4,800 23,840
Other....................................... 4,700 (22,800) 2,512
----------- ------------ -----------
$ 14,164 $ 11,088 $ 205,800
========== ========== ==========
</TABLE>
F-34
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1993 1994 1995
---------- ---------- -------
<S> <C> <C> <C>
Deferred tax assets: (unaudited) (unaudited)
Allowance for doubtful accounts........... -- $ 35,600 $ 63,200
Other..................................... 10,000 16,400 23,100
----------- ----------- -----------
Total gross deferred assets.............. 10,000 52,000 86,300
Deferred tax asset valuation allowance... ( 7,000) -- --
Deferred tax liabilities:
Premises and equipment, principally due to
differences in depreciation............. 3,000 6,000 10,200
----------- ----------- -----------
Total gross deferred liabilities......... 3,000 6,000 10,200
----------- ---------- -----------
Net deferred tax asset................... $ -- $ 46,000 $ 76,100
========== ========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the existence of, or generation of, taxable income
in the periods which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, taxes paid in
carryback years, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projection for future taxable income over the periods which the deferred tax
assets are deductible, at December 31, 1995, management believes it is more
likely than not the Company will realize benefits of these deductible
differences.
Cash paid for income taxes, net of refunds received, was $104
(unaudited) in 1993, $54,704 (unaudited) in 1994 and $120,444 (unaudited) in
1995.
(11)Employee Benefits
The Company provides employee benefits including health insurance for
employees who are actively employed. Charges against income for health insurance
were approximately $6,000 (unaudited) in 1993, $10,000 (unaudited) in 1994 and
$17,000 in 1995.
On December 18, 1992, the Board of Directors approved the Kid-Kart,
Inc. 1993 Stock Option Plan (the "Plan") to be effective on January 1, 1993. The
Plan provides for the granting of stock options to personnel, consultants and
members of the Board of Directors of the Company. The total number of shares
authorized for issuance under the Plan is 400,000. At September 30, 1996, the
number of shares available for issuance under the Plan was 385,575 (unaudited).
The Company has a right of first refusal on stock purchased under the Plan.
Options granted under the Plan are designated as either incentive stock
options or as non-incentive stock options. The term of the option may not exceed
10 years from the date the option is granted or 15 years in the case of
non-incentive stock options. The option price for all incentive stock options
granted under the Plan and the fair market value of the common stock shall be
determined by the Board of Directors of the Company or its appointees. The
option price shall not be less than 100% of the fair market value of the common
stock at the date of granting such option. The option price for options not
qualifying as incentive stock options shall not be less than 85% of the fair
market value of the common stock at the date of granting such option. All
options currently outstanding are 100% exercisable no later than five years
after grant date. At September 30, 1996, options to purchase 9,740 shares
(unaudited) were exercisable.
<TABLE>
<CAPTION> Exercise
Options Price
------- -----
January 1, 1993
<S> <C> <C>
Granted (unaudited)............... 7,600 $25.50-$34.00
Outstanding, December 31, 1993
</TABLE>
F-35
<PAGE>
<TABLE>
<S> <C> <C>
(unaudited)....................... 7,600 $25.50-$34.00
Granted (unaudited)............... 4,100 $35.70-$36.55
---------------
Outstanding, December 31, 1994...... 11,700 $25.50-$36.55
Granted........................... 2,700 $40.80-$85.00
Canceled.......................... (200) $59.50-$63.75
Exercised......................... (375) $34.00
---------------
Outstanding, December 31, 1995...... 13,825 $25.50-$85.00
Granted (unaudited)............... 1,500 $94.00-$100.00
Canceled (unaudited).............. (900) $36.55-$44.20
---------------
Outstanding, September 30, 1996
(unaudited)....................... 14,425 $25.50-$100.00
==============
</TABLE>
(12)Leases
The Company leases certain facilities and equipment on a month-to-month
basis. The Company has leased a vehicle under an operating lease. The future
minimum rental commitments under this lease is $3,144 in 1996 and $2,620 in
1997. Total rent expense was $12,197 (unaudited) in 1993, $12,245 (unaudited) in
1994 and $15,080 (unaudited) in 1995.
(13)Risk Concentrations
Suppliers. The Company has entered into purchase commitments with several
vendors. The terms of these commitments is traditionally three months. The
Company does, however, have two purchase commitments with a single vendor with a
term of one year. The total annual commitment for these agreements was
approximately $100,000 at December 31, 1995. In addition, the Company obtains a
significant amount of specialized raw materials from four suppliers. The total
raw material purchased from the suppliers is approximately $300,000 in 1995. The
Company believes these supplier relationships can be replaced, if necessary,
without a significant adverse effect on operating results.
Major Customers. During 1993, 1994 and 1995, the Company did not have
revenues from any individual customer or distributor which accounted for more
than 10% of the Company's revenues.
Export Sales. The Company had total export sales from the United States of
approximately $21,000 (unaudited) in 1994 and $70,000 in 1995, primarily to
England and New Zealand. Export sales in 1993 were not significant.
(14)Stock Purchase Agreement
The Company has entered into a stock purchase agreement (Agreement)
with Wayne H. Hanson, the Company's president and a major stockholder
("Hanson"). The Agreement stipulates that, upon the death of Hanson, all
Hanson's shares of Company stock will be offered for sale to the Company. The
Company shall accept such offer and agree to buy such shares of the stock at a
price stipulated in the Agreement, adjusted annually to the current fair market
value. The Company is only required to purchase those shares from Hanson's
estate that are represented by the total proceeds available from the life
insurance proceeds on a $1,000,000 term life insurance policy insuring Hanson.
The life insurance policy premiums are paid by the Company and the Company is
the beneficiary.
(15)Accounting Pronouncements Not Yet Adopted
A new method of accounting for stock-based compensation arrangements
with employees is established by SFAS No. 123, "Accounting for Stock Based
Compensation". The new method is a fair value based method rather than the
intrinsic value based method that is contained in Accounting Principles Board
Opinion No. 25 ("Opinion 25"). However, SFAS No. 123 does not require an entity
to adopt the new fair value based method for purposes of preparing its basic
financial statements. Entities are allowed (1) to continue to use the Opinion 25
method or (2) to adopt the SFAS No. 123 fair value based method. The SFAS No.
123 fair value based method is considered by the FASB to be preferable to the
Opinion 25 method, and thus, once the fair value based method is adopted, an
entity
F-36
<PAGE>
cannot change back to the Opinion 25 method. Also, the selected method
applies to all of an entity's compensation plans and transactions.
SFAS No. 123 is effective for financial statements issued for fiscal
years beginning after December 31, 1995. The Company will be required to adopt
the provisions of SFAS No. 123 on January 1, 1996. Management's current
intention is to not adopt the fair value based method of accounting.
(16)Subsequent Events
On June 2, 1996, the Company's majority stockholders entered into a
letter of intent on behalf of the Company to exchange common stock of the
Company for stock of the acquiring company ("acquirer"). The exchange price
would be $110 for each outstanding share of Company stock to be paid in the form
of registered shares of the acquirer's common stock valued at the nominal share
price set forth in the letter of intent. The closing date is scheduled on or
about September 30, 1996 but is subject to various conditions, including
completion of due diligence.
F-37
<PAGE>
APPENDIX A
AGREEMENT
AND
PLAN OF MERGER
AMONG
SUNRISE MEDICAL, INC.,
JAY MEDICAL, LTD., AND
KID-KART, INC.
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TABLE OF CONTENTS
-----------------
<TABLE>
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<S> <C> <C>
ARTICLE I Definitions....................................................6
1.1 Adjustment Price...............................................6
1.2 Assets.........................................................6
1.3 Closing Balance Sheet..........................................6
1.4 Closing Date...................................................7
1.5 Code...........................................................7
1.6 Company Stock Options..........................................7
1.7 Contract.......................................................7
1.8 Contract Rights................................................7
1.9 Disclosure Letter..............................................7
1.10 Dissenting Shares..............................................7
1.11 Employment Agreement...........................................7
1.12 Encumbrances...................................................7
1.13 Facilities.....................................................7
1.14 Fixtures and Equipment.........................................7
1.15 Holders........................................................7
1.16 IRS............................................................8
1.17 Knowledge......................................................8
1.18 Material Adverse Effect........................................8
1.19 Net Worth......................................................8
1.20 Nominal Share Price............................................8
1.21 Noncompetition Agreement.......................................8
1.22 Peat Marwick...................................................8
1.23 Returns........................................................8
1.24 Securities Act.................................................8
1.25 Shortfall......................................................8
1.26 Stockholder Representative.....................................8
1.27 Stockholders...................................................8
1.28 Taxes..........................................................8
1.29 Other Defined Terms............................................9
ARTICLE II The Merger....................................................10
2.1 Approval of Transaction.......................................10
2.2 Registration Statement and Proxy Statement....................10
2.3 The Merger....................................................10
2.4 Effect of the Merger..........................................10
2.5 Consummation of the Merger....................................11
2.6 Conversion of Securities......................................11
2.7 Company Stock Options.........................................11
2.8 Conveyances of the Parent Stock to Stockholders and
Optionholders.................................................12
2.9 Exchange of Certificates......................................12
2.10 Fractional Shares.............................................12
2.11 Dissenting Shares.............................................13
2.12 Tax-Free Reorganization.......................................13
ARTICLE III Escrow Shares.................................................13
3.1 Escrow Shares.................................................13
3.2 Stockholder Representative....................................13
ARTICLE IV Closing.......................................................14
4.1 The Closing...................................................14
4.2 Other Deliveries at Closing...................................14
</TABLE>
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TABLE OF CONTENTS (CONT'D)
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<TABLE>
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<S> <C> <C>
ARTICLE V Adjustment of Merger Consideration.............................15
5.1 Adjustment of Merger Consideration.............................15
5.2 Determination of Net Worth.....................................15
5.3 Collections of Accounts Receivable.............................15
5.4 Adjustment of Merger Consideration based on Net Worth
of the Company and Uncollected Accounts Receivable.............15
5.5 Indemnification Adjustment.....................................16
5.6 Determination of Validity......................................16
ARTICLE VI Representations and Warranties of the Company..................16
6.1 Due Organization of the Company................................16
6.2 Authorization..................................................16
6.3 Capitalization of the Company..................................17
6.5 Financial Statements...........................................17
6.6 Accounts Receivable............................................17
6.7 No Undisclosed Liabilities.....................................17
6.8 Inventory......................................................18
6.9 Absence of Certain Changes or Events...........................18
6.10 Title to Assets; Facilities....................................18
6.11 Leases, Premises...............................................19
6.12 Contracts and Commitments; Disclosure..........................19
6.13 Litigation, Proceedings and Applicable Law.....................20
6.14 Compliance with Law............................................20
6.15 Insurance......................................................20
6.16 Books and Records..............................................21
6.17 Severance Arrangements.........................................21
6.18 Fringe Benefit and Pension Plans...............................21
6.19 Employment Practices...........................................23
6.20 Consents and Approvals.........................................23
6.21 Warranty and Product Liability Matters.........................23
6.22 Proprietary Rights.............................................23
6.23 Taxes..........................................................24
6.24 Payments.......................................................25
6.25 Environmental Matters..........................................26
6.26 No Conflict or Violation.......................................26
6.27 Material Misstatements or Omissions............................27
6.28 Transactions with Related Parties..............................27
6.28 No Brokers or Finders Fees.....................................27
6.29 Payment and Conversion of Loans and Debentures.................27
ARTICLE VII Representations and Warranties of Purchaser and Parent.........27
7.1 Due Organization of Parent and Purchaser.......................27
7.2 Parent Documents...............................................28
7.3 Absence of Changes.............................................28
7.4 Issuance of Parent Stock.......................................28
7.5 No Conflict or Violation.......................................28
7.6 Consents and Approvals.........................................28
7.7 Due Authorization..............................................28
7.8 S-4 Registration Statement.....................................28
ARTICLE VIII Covenants Prior to the Closing Date............................29
8.1 Maintenance of Business........................................29
8.2 No Solicitation of Transactions................................29
8.3 Certain Prohibited Transactions................................29
8.4 Investigation by the Parent....................................30
8.5 Consents and Best Efforts Agreement to Vote
in Favor of the Merger.........................................30
8.6 Use of Company Funds...........................................30
8.7 Employees......................................................30
</TABLE>
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TABLE OF CONTENTS (CONT'D)
--------------------------
<TABLE>
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<S> <C> <C>
8.8 Satisfaction of Conditions.....................................30
8.9 Tax Elections..................................................30
8.10 Preparation of Registration Statement..........................30
8.11 Accounts Receivable............................................31
8.12 Non-Foreign Affidavit..........................................31
8.13 Employment Agreement...........................................31
8.14 Noncompetition Agreement.......................................31
ARTICLE IX Covenants After the Closing Date...............................31
9.1 Indemnification................................................31
9.2 Limitation on Indemnification..................................32
9.3 Further Assurances.............................................32
9.4 Cooperation and Records Retention..............................32
9.5 Tax Proceedings................................................32
9.6 Liability for Taxes............................................33
9.7 Elimination of Personal Guarantees.............................33
ARTICLE X Conditions to Obligation of Each Party to Effect the Merger....33
10.1 Representations, Warranties and Covenants......................33
10.2 Consents.......................................................33
10.3 Board and Stockholder Approval.................................33
10.4 Affiliate Agreement............................................34
10.5 Due Diligence Review...........................................34
10.6 Opinion of Counsel.............................................34
10.7 Corporate Documents............................................34
10.8 Certificates...................................................34
10.9 Ancillary Agreements...........................................34
10.10 Registration of Parent Shares..................................34
10.11 NYSE Listing...................................................34
10.12 Amounts Owed by Bill Senecal...................................35
10.13 Tax Representations............................................35
10.14 Assignment of SBA Loans........................................35
10.15 Termination of Kid-Kart, Inc. Stock Purchase Agreement.........35
10.16 Stockholder Certificates.......................................35
ARTICLE XI Miscellaneous..................................................35
11.1 Survival of Representations and Warranties.....................35
11.2 Expenses.......................................................36
11.3 Assignment.....................................................36
11.4 Notices........................................................36
11.5 Entire Agreement...............................................36
11.6 Arbitration....................................................36
11.7 Multiple Counterparts..........................................37
11.8 Headings and Table of Contents.................................37
11.9 Publicity......................................................37
11.10 Governing Law..................................................37
11.11 Construction...................................................37
11.12 Attorneys' Fees................................................37
</TABLE>
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EXHIBITS TO THE AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<C> <S>
Exhibit A Disclosure Letter
Exhibit B Form of Employment Agreement between Wayne H. Hanson and Purchaser
Exhibit C Form of Noncompetition Agreement between Wayne H. Hanson and
Purchaser
Exhibit D List of holders of Company Stock Options, along with other
material information such as the number of options held,
the exercise price, and the date issued
Exhibit E 1995 Financial Statements of the Company
Exhibit F Interim Financial Statements of the Company
Exhibit G Form of Affiliate Letter
Exhibit H Form of Opinion to be Delivered by Counsel for the Company
Exhibit I Form of Acknowledgment of Cancellation and Release
Exhibit J Form of Tax Representation Certificate
</TABLE>
A-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Agreement"), dated as of
September 24, 1996, is entered into among Sunrise Medical Inc., a Delaware
corporation ("Parent"), Jay Medical, Ltd., a Delaware corporation and a wholly
owned subsidiary of Parent ("Purchaser"), and Kid-Kart, Inc., a Montana
corporation (the "Company").
RECITAL
-------
The Boards of Directors of Parent, Purchaser, and the Company desire
to enter into this Agreement providing for the merger of the Company with and
into the Purchaser (the "Merger") as a result of which the separate existence of
the Company shall cease and the Purchaser shall continue as the surviving
corporation, all in accordance with the General Corporation Law of the State of
Delaware (the "Delaware Law") and the Business Corporation Act of the State of
Montana (the "Montana Law").
AGREEMENT
---------
In consideration of the foregoing and the respective representations,
warranties and covenants contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used herein, the following terms shall have the following meanings:
1.1 Adjustment Price. The term "Adjustment Price" shall mean the
----------------
closing sales price of the Parent Stock on the New York Stock Exchange as
printed in The Wall Street Journal (West Coast Edition) on the date a claim is
asserted pursuant to Section 5.5 hereof for purposes of adjustments for
indemnification claims.
1.2 Assets. The term "Assets" shall mean any right, title and interest
------
of the Company in and to the business, properties, assets and rights of any
kind, whether tangible or intangible, real or personal, and constituting, or
used in connection with, the Company or in which the Company has any interest.
1.3 Closing Balance Sheet. The term "Closing Balance Sheet" shall mean
---------------------
the balance sheet of the Company as of the Closing Date but immediately prior to
the effectiveness of the Merger which shall have been audited by KPMG Peat
Marwick LLP and prepared in accordance with generally accepted accounting
principles consistently applied ("GAAP"). Property, machinery and equipment
shall be valued at its depreciated book value, consistent with the Company's
historical depreciation policies, but any equipment which is unusable for its
intended purpose will be marked down to its disposable value, as is normal in
GAAP accounting.
A-6
<PAGE>
Inventory will be valued at the lower of historical cost or market value
(estimated based on a bill of materials for each product) in accordance with
GAAP on a first-in, first-out ("FIFO") basis, (except as otherwise agreed in a
writing signed by each of the parties hereto), so as to include materials, labor
and overhead expenses, as well as reserves for slow moving, excess and obsolete
inventories.
The Closing Balance Sheet shall include accruals for actual and estimated
liabilities incurred as of the date of the Closing Balance Sheet in accordance
with GAAP, including, but not limited to, (i) vacation earned and not taken by
employees, (ii) costs to satisfy expected warranty claims in excess of any
related repairs revenue, and (iii) Taxes expected to be paid currently or some
time in the future through the applicable Closing Balance Sheet date.
1.4 Closing Date. The term "Closing Date" shall mean the date on which
------------
the Merger becomes effective as determined pursuant to Section 2.5.
1.5 Code. The term "Code" shall refer to the Internal Revenue Code of
----
1986, as amended, and the rules and regulations thereunder.
1.6 Company Stock Options. The term "Company Stock Options" shall mean
---------------------
the outstanding options to purchase shares of the Company's Common Stock (the
"Company Shares"), a list of which is set forth in Exhibit D attached hereto.
1.7 Contract. The term "Contract" shall mean any agreement, contract,
--------
note, loan, evidence of indebtedness, purchase, order, letter of credit,
indenture, security or pledge agreement, franchise agreement, covenant not to
compete, employment agreement, license, instrument, obligation or commitment to
which the Company is a party or is bound or to which any of the Assets are
subject.
1.8 Contract Rights. The term "Contract Rights" shall mean all of the
---------------
rights and obligations under the Contracts.
1.9 Disclosure Letter. The term "Disclosure Letter" shall mean the
-----------------
schedule provided by the Company to the Parent and the Purchaser and attached
hereto as Exhibit A, stating any and all exceptions to the representations and
warranties of the Company, including those set forth in Article VI, and
providing a complete list of all material agreements and documents as further
described in Section 6.12.
1.10 Dissenting Shares. The term "Dissenting Shares" shall mean shares
-----------------
held by any stockholder who becomes entitled to the payment of the fair value
for his shares under the Montana Law, which number shall not be greater than
10% of the total number of Company Shares.
1.11 Employment Agreement. The term "Employment Agreement" shall mean that
--------------------
certain Employment Agreement, dated as of the Closing Date by and between the
Purchaser and Wayne H. Hanson, substantially in the form of Exhibit B attached
hereto.
1.12 Encumbrances. The term "Encumbrances" shall mean any claim, lien,
------------
pledge, option, charge, easement, security interest, mortgage, right-of-way,
encumbrance, restriction, reservation or other rights or interests of any nature
of third parties.
1.13 Facilities. The term "Facilities" shall mean the offices,
----------
manufacturing facilities, warehouses and administration buildings, and all other
real property and related facilities which are owned or leased by the Company.
1.14 Fixtures and Equipment. The term "Fixtures and Equipment" shall mean
----------------------
all of the furniture, fixtures, furnishings, machinery and equipment owned or
leased by the Company and located in, at or upon the Facilities or at an
off-site location as of the Closing Date.
1.15 Holders. The term "Holders" shall mean the Stockholders and the
-------
Optionholders.
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<PAGE>
1.16 IRS. The term "IRS" shall mean the Internal Revenue Service.
---
1.17 Knowledge. The term "knowledge", the phrase "to the knowledge of the
---------
Company" or similar language, shall mean that neither Wayne H. Hanson nor
William Senecal have knowledge of, or following investigation and inquiry of
persons reasonably likely to have relevant information could have uncovered, the
relevant facts or facts which would cause a reasonable person to draw the
relevant conclusions.
1.18 Material Adverse Effect. The term "Material Adverse Effect" shall
-----------------------
mean changes, developments or occurrences which, individually or in the
aggregate, have materially and adversely affected or could reasonably be
expected to have a material adverse effect on the business, prospects, assets,
liabilities, working capital, reserves, earnings or condition (financial or
otherwise) of the entity concerned.
1.19 Net Worth. The term "Net Worth" shall mean the total shareholder's
---------
equity of the Company as it appears on the Closing Balance Sheet.
1.20 Nominal Share Price. The term "Nominal Share Price" shall mean the
-------------------
average of the closing sale prices of the Parent Stock on the New York Stock
Exchange as printed in The Wall Street Journal (West Coast Edition) for the five
(5) trading days ending on the business day preceding the tenth business day
prior to the stockholder meeting set forth in the Proxy Statement delivered to
the Stockholders pursuant to Section 2.2 hereof.
1.21 Noncompetition Agreement. The term "Noncompetition Agreement" shall
------------------------
mean that certain Noncompetition Agreement, dated as of the Closing Date, by and
between the Purchaser and Wayne H. Hanson, substantially in the form of Exhibit
C attached hereto.
1.22 Peat Marwick. The term "Peat Marwick" shall mean the independent
------------
public accounting firm of KPMG Peat Marwick LLP.
1.23 Returns. The term "Returns" shall mean all returns, declarations,
-------
reports, statements and other documents required to be filed in respect of
Taxes, and the term "Return" shall mean any one of the foregoing Returns.
1.24 Securities Act. The term "Securities Act" shall mean the Securities
--------------
Act of 1933, as amended.
1.25 Shortfall. The term "Shortfall" shall mean the amount, if any, by
---------
which the Net Worth of the Company is less than $1,375,000.
1.26 Stockholder Representative. The term "Stockholder Representative"
--------------------------
shall mean Wayne H. Hanson.
1.27 Stockholders. The term "Stockholder Representative" shall mean Wayne
------------
H. Hanson.
1.28 Taxes. The term "Taxes" shall mean any and all federal, state,
-----
local, and foreign taxes, including without limitation, other net income, gross
income, gross receipts, sales, use, ad valorem, business and occupation,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, real and
personal property, windfall profits, customs, duties or other taxes, fees,
assessments or charges of any kind whatever, together with any interest and any
penalties, additions to tax, supplemental or retroactive assessments or
additional amounts with respect thereto, and the term "Tax" shall mean any one
of the foregoing taxes.
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1.29 Other Defined Terms.
-------------------
<TABLE>
<CAPTION>
TERM SECTION REFERENCE
---- -----------------
<S> <C>
1995 Financial Statements 6.5
Acknowledgment 2.8
Affiliate List 10.4
Benefit Arrangement 6.18
Certificates 2.8
Claims 9.1
Closing 4.1
Commission 2.2
Company Auditors 5.2
Company Shares 1.6
Constituent Corporations 2.3
Delaware Law Recital A
Determination Date 5.4
Employee Plan 6.18
Environmental Laws 6.25
ERISA 6.18
ERISA Affiliate 6.18
Escrow Shares 2.8
Excess 5.6
Exchange Act 7.2
FDA 6.14
FIFO 1.2
GAAP 1.2
Hazardous Materials 6.25
Interim Financial Statements 6.5
Leases 6.11
Liabilities 6.7
Merger Recital A
Merger Consideration 5.1
Montana Law Recital A
Multiemployer Plan 6.18
Optionholder 2.7
Parent Stock or Parent Shares 2.2
Pension Plan 6.18
Principals 5.2
Proprietary Rights 6.22
Proxy Statement 2.2
Registration Statement 2.2
Related Persons 6.28
Release Date 5.5
Stockholders' Meeting 2.1
Structures 6.11
Surviving Corporation 2.3
Uncollected Accounts Receivable 5.3
Welfare Plan 6.18
</TABLE>
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ARTICLE II
THE MERGER
----------
2.1 Approval of Transaction. The transaction and the transaction
-----------------------
documents set forth in this Agreement shall be submitted for adoption and
approval to the Stockholders at a meeting to be duly held for this purpose by
the Company (the "Stockholders' Meeting"). The Parent, the Purchaser and the
Company shall coordinate and cooperate with respect to the timing of such
Stockholders' Meeting. At such Stockholders' Meeting, the Board of Directors of
the Company shall recommend that the Stockholders approve this Agreement, the
other transaction documents, the Merger and the other transactions set forth in
this Agreement.
2.2 Registration Statement and Proxy Statement. The Parent's common stock
------------------------------------------
to be issued in the Merger (the "Parent Stock" or "Parent Shares") will be
registered under the Securities Act pursuant to a registration statement on Form
S-4 (the "Registration Statement"). The Registration Statement shall be
prepared jointly by the Parent and the Company and shall include a proxy
statement (the "Proxy Statement") to be provided to the Stockholders in
connection with the Stockholders' Meeting. The Parent shall use its best efforts
to file the Registration Statement with the Securities and Exchange Commission
(the "Commission") prior to September 30, 1996, and each of the Parent and the
Company shall use its best efforts to respond to the comments of the Commission
and to cause the Registration Statement to be declared effective and the Proxy
Statement to be mailed to the Stockholders, as soon as reasonably practicable.
The Company shall provide the Parent any information concerning the Company for
inclusion in the Registration Statement and the Proxy Statement which may be
required under applicable law. The Parent and the Company shall promptly notify
the other of the receipt of the comments of the Commission and of any request
from the Commission for amendments or supplements to the Registration Statement
or the Proxy Statement or for additional information, and will promptly supply
the other with copies of all correspondence between it or its representatives,
on the one hand, and the Commission or members of its staff, on the other hand,
with respect to the Registration Statement or the Merger. If any time prior to
the Stockholders' Meeting with respect to the Proxy Statement or its effective
date with respect to the Registration Statement, any event should occur which is
required by applicable law to be set forth in an amendment of, or a supplement
to, the Proxy Statement or the Registration Statement, the party with knowledge
of such event will promptly inform the other parties to this Agreement. In such
case, the Parent and the Company will, upon learning of such event, promptly
prepare such amendment or supplement and shall file such amendment or supplement
with the Commission. The Company will notify the Parent at least twenty-four
(24) hours prior to the mailing of the Proxy Statement, or any amendment or
supplement thereto, to the Stockholders.
2.3 The Merger. At the Closing Date, in accordance with this Agreement,
----------
the Delaware Law and the Montana Law, the Company shall be merged with and into
the Purchaser, the separate existence of the Company (except as may be continued
by operation of law) shall cease, and the Purchaser shall continue as the
surviving corporation under the corporate name it possesses, and with the same
articles of incorporation as in effect, immediately prior to the Closing Date.
Hereinafter, the Purchaser is sometimes referred to as the "Surviving
Corporation" and the Purchaser and the Company are sometimes referred to as the
"Constituent Corporations."
2.4 Effect of the Merger. When the Merger has been effected, the
--------------------
Surviving Corporation shall thereupon and thereafter possess all the rights,
privileges, immunities, powers and franchises, of a public as well as of a
private nature, of the Constituent Corporations; all property, real, personal
and mixed (including the Assets), and all debts due on whatever account and all
choses in action, and all and every other interest, of or belonging to or due
each of the Constituent Corporations shall be taken and deemed to be transferred
to and vested in the Surviving Corporation without further act or deed; and the
title to any real estate, or any interest therein, vested in the Purchaser, the
Company or the Surviving Corporation shall not revert or be in any way impaired
by reason of the Merger. The Surviving Corporation shall thenceforth be
responsible and liable for all the liabilities and obligations of each of the
Constituent Corporations so merged; any claim existing or action or proceeding
pending by or against any of the Constituent Corporations may be substituted in
its place. The Surviving Corporation shall have all the rights, privileges,
immunities, powers and franchises, and shall be subject to all the duties and
liabilities of a corporation organized under the Delaware Law, and neither the
rights of creditors nor any liens upon the respective properties of
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<PAGE>
the Constituent Corporations and the Surviving Corporation shall be impaired by
the Merger; all with the effect set forth in the Delaware Law.
2.5 Consummation of the Merger. Subject to the satisfaction or waiver of
--------------------------
the conditions hereinafter set forth, the appropriate party hereto will cause
the Merger to be consummated at the Closing Date, as defined herein, by filing
all appropriate filings with the Secretaries of State of Delaware and Montana,
to be effective on the date following the Stockholders' Meeting, or as soon
thereafter as practicable, in such form as required by, and executed in
accordance with, the relevant provisions of the Montana Law and the Delaware Law
(when accepted by the Secretary of State of Delaware on the date following the
Stockholders' Meeting, or as soon thereafter as practicable, being the "Closing
Date").
2.6 Conversion of Securities. By virtue of the Merger and without any
------------------------
action on the part of the Parent, the Purchaser, the Company or the Surviving
Corporation, other than the exchange of securities as set forth in Section 2.8
hereof, the Stockholders, except for holders of Dissenting Shares, shall receive
$110 for each outstanding Company Share, to be paid in the form of shares of
Parent Stock, valued at the Nominal Share Price and distributed subject to and
in accordance with Section 2.8 hereof and cash for any fractional shares
pursuant to Section 2.10 hereof.
2.7 Company Stock Options. At the Closing Date, each outstanding Company
---------------------
Stock Option to purchase Company Shares, a list of which is attached hereto as
Exhibit D, whether vested or unvested, shall be cancelled and each holder of a
Company Stock Option (the "Optionholder") listed in Exhibit D hereto shall
receive, in lieu thereof, a number of shares of Parent Stock, distributed
subject to and in accordance with Section 2.8 hereof, computed according to the
following formula:
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<PAGE>
PS = ($110 x OS) - EP
----------------
NSP
Where:
PS = the number of shares of Parent Stock to be issued to the
Optionholder
OS = the number of Company Shares, whether vested or unvested,
covered by the Company Stock Option held by the
Optionholder
EP = the aggregate option exercise price, as specified in the
Company Stock Option, payable upon exercise of the Company
Stock Option to purchase the Company Shares comprising the
"OS" portion of this foregoing formula
NSP = the Nominal Share Price;
and cash for any fractional shares pursuant to Section 2.10 hereof; provided,
however, that such number of shares of Parent Stock and Cash to be delivered
hereunder shall be net of FICA and other withholding taxes in the amounts
determined by the Company and set forth on Exhibit D hereto; the obligation to
forward the amount of such taxes to the IRS and other applicable tax authorities
shall be the responsibility of the Company, however, Sunrise agrees to transfer
to the Company the amount of FICA and withholding taxes withheld pursuant hereto
in connection with the preparation and filing of the Company's tax return and at
the request of the Company or the Stockholder Representative.
2.8 Conveyances of the Parent Stock to Stockholders and Optionholders.
------------------------------------------------------------------
Subject to the terms and conditions of this Agreement, on the Closing Date, in
exchange for certificates representing all of the Company Shares (the
"Certificates") and an Acknowledgment of Cancellation and Release in the form
attached hereto as Exhibit I (the "Acknowledgment") with respect to all stock
option agreements covering Company Stock Options, Parent shall deliver
certificates representing 85% of the number of Parent Shares to be delivered to
the Holders as provided in this Agreement, together with 100% of the cash
payable in respect of fractional shares as provided in Section 2.10 hereof. The
remaining 15% of the number of Parent Shares to be paid to the Holders (the
"Escrow Shares") shall be issued in the name of the Holders and retained by the
Parent pursuant to Article III hereof and paid or delivered, if applicable, to
the Holders in accordance with Article V hereof.
2.9 Exchange of Certificates. Subject to the provisions of Sections 2.8
------------------------
hereof, each holder of a Certificate shall be entitled to receive in exchange
therefor, upon surrender thereof, and each Optionholder shall be entitled to
receive upon delivery of an Acknowledgment with respect to all stock option
agreements covering Company Stock Options held by the Optionholder, a
certificate or certificates representing the number of whole Parent Shares into
which such holder's Company Shares were converted pursuant to Section 2.6 hereof
or which the Optionholder shall be entitled to receive pursuant to Section 2.7
hereof, and a check representing any cash payable in lieu of any fractional
Parent Share pursuant to Section 2.10 hereof. If any certificate for Parent
Shares is to be issued in a name other than that in which the Certificate for
Company Shares, surrendered in exchange therefor, is registered or, in the case
of Optionholders, in a name other than the name of the Optionholder, it shall be
a condition of such issuance that the person requesting such issuance shall pay
any transfer or other tax required by reason of the issuance of certificates for
such Parent Shares in a name other than that of the registered holder of the
certificate surrendered or the name of the Optionholder, or shall establish to
the satisfaction of the Parent or its agent that such tax has been paid or is
not applicable. Notwithstanding the foregoing, neither the Parent nor the
Purchaser shall be liable to any Stockholder or any Optionholder for any number
of Parent Shares (or dividends or distributions with respect thereto) or cash in
lieu of fractional shares delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
2.10 Fractional Shares. No fractional shares of Parent Stock shall be
-----------------
issued, but in lieu thereof, each Stockholder or Optionholder, as the case may
be, shall receive from the Parent an amount of cash equal to the product of (i)
the fraction of a share of Parent Stock to which such Stockholder or
Optionholder would otherwise be entitled, multiplied by (ii) the Nominal Share
Price.
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(DENNIS, PLEASE READ NEW UP UNTIL 3.2)
2.11 Dissenting Shares. The holders of Dissenting Shares, if any, shall
-----------------
be entitled to payment for such shares only to the extent permitted by and in
accordance with the provisions of Sections 35-1-826 through 35-1-839, or their
successors, of Montana Law. Notwithstanding the foregoing, if, in accordance
with such sections of the Montana Law, any holder of Dissenting Shares shall
forefeit such right to payment of the fair value of such shares, such shares
shall thereupon be converted into, as of the Closing Date, the right to receive
that number of shares of Parent Stock as specified in and in accordance with
Section 2.6 hereof. In the event of such a forfeiture, such holder of
Dissenting Shares shall, as of the later of the Closing Date or the occurrence
of such event, deliver his Certificate or Certificates representing such
Dissenting Shares to the Parent, and upon surrender of such Certificate or
Certificates, the Parent shall issue and deliver to such holder the number of
shares of Parent Stock which such holder would have been entitled under Section
2.6 hereof and any cash payment in lieu of fractional shares as specified in
Section 2.10 hereof (less the number of Escrow Shares to be retained by
Purchaser pursuant to Section 2.8 and Article III hereof).
2.12 Tax-Free Reorganization. The Merger is intended to be a
-----------------------
reorganization within the meaning of Section 368(a)(2)(D) of the Code, and this
Agreement is intended to be a "plan of reorganization" within the meaning of the
regulations promulgated under Section 368 of the Code.
ARTICLE III
ESCROW SHARES
-------------
3.1 Escrow Shares. The Escrow Shares shall be issued in the name of the
-------------
Holders and retained in Escrow by the Parent for 12 months after the Closing
Date to cover any (a) Shortfall in the Net Worth guarantee, (b) any Uncollected
Accounts Receivables (as defined), or (c) any other indemnification Claims
determined to be valid pursuant to Section 5.6 hereof. Except to the extent of
such Shortfall, Uncollected Accounts Receivable or Claims which have been made
pursuant to Section 5.5 hereof, the Escrow Shares shall be delivered to Holders
promplty following the twelve (12) month anniversary of the Closing Date. The
amount of any Shortfall, Uncollected Accounts Receivable and Claims determined
to be valid pursuant to Section 5.6 hereof will be transferred to the Parent by
the Holders on a dollar for dollar basis out of the Escrow Shares (valued for
purposes of any Shortfall or Uncollected Accounts Receivable at the Nominal
Share Price and for purposes of any Claims at the Adjustment Price) as provided
in Sections 5.4 and 5.5 hereof. During the period in which the Escrow Shares
are retained by the Parent, the Holders shall be entitled to vote the Parent
Sahres held as part of the Escrow Shares until an adjustment is conclusively
determined pursuant to Sections 5.4 and 5.5 hereof.
3.2 Stockholder Representative.
--------------------------
(a) Wayne Hanson shall be appointed by and constitute the Stockholder
Representative and as such serve as and have all powers as agent and attorney-
in-fact of each Holder, for and on behalf of such Holders: to give and receive
notices and communications; to have authority to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to any disputes involving any
Claims made by the Parent and the retaining of Escrow Shares by the Parent
thereunder; to sign receipts, consents, or other documents to effect the
transactions contemplated hereby; to vote the Escrow Shares as directed by the
Holders; and to take all actions necessary or appropriate in the judgment of the
Stockholder Representative for the accomplishment of the foregoing. If the
Stockholder Representative ceases to act as a Stockholder Representative for any
reason, such Stockholder Representative or his agent shall notify the Parent of
such Stockholder Representative's intent to resign as Stockholder
Representative, and Holders entitled to receive a majority of the Escrow Shares
(assuming no claim by the Parent has been made for any such Escrow Shares)
shall, by written notice to the Parent, appoint a successor Stockholder
Representative within 30 days. Notice or communications to or from any
Stockholder Representative shall constitute notice to or from each of the
Holders.
(b) The Stockholder Representative shall not be liable for any action
taken or not taken as a Stockholder Representative in the absence of such
Stockholder Representative's gross negligence or willful misconduct.
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<PAGE>
(c) A decision, act, consent or instruction of the Stockholder
Representative shall constitute a decision of all the Holders, and shall be
final, binding and conclusive upon each of the Holders, and the Purchaser,
Parent, and the Company may rely upon any decision, act, consent or instruction
of the Stockholder Representative as being the decision, act, consent or
instruction of each and all of the Holders. Parent, Purchaser and the Company
are relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction. Although the
Stockholder Representative shall not be obligated to obtain instructions from
the Holders prior to any decision, act, consent or instruction, if, and to the
extent that, the Stockholder Representative receives any written instructions
from Holders entitled to receive a majority of the Escrow Shares held by the
Parent, the Stockholder Representative shall comply with such instructions.
(d) The Holders shall share, on a pro rata basis in relation to their
holdings of Company Stock and Company Stock Options, the cost of any attorney,
accountants or other advisors retained by the Stockholder Representative in
connection with any action taken or not taken as a Stockholder Representative.
The Stockholder Representative shall be entitled to request in writing and the
Parent shall withhold from any escrow payments to the Holders, upon such
request, amounts payable to attorney, accountants or other advisors which
amounts shall be paid to such individuals or the Stockholder's Representative,
as set forth in the request submitted by the Stockholder Representative.
ARTICLE IV
CLOSING
-------
4.1 The Closing. The Closing of the transactions provided for in this
-----------
Agreement (the "Closing") shall take place at the office of Latham & Watkins,
650 Town Center Drive, Costa Mesa, California 92626 at 9:00 a.m. on the Closing
Date. If the parties mutually agree, all parties need not be present at the
Closing and telefax copies of signatures of parties not present may be treated
as originals.
4.2 Other Deliveries at Closing. At the Closing, the documents referred
---------------------------
to in Article X shall be exchanged by the parties, including but not limited to:
(a) Delivery of Shares. The Parent shall deliver Parent Shares, the
------------------
number of which is determined in Section 2.6 hereof, less the Escrow Shares, and
cash payable pursuant to Section 2.10 hereof, to be issued in the Merger in
exchange for delivery of the Company Shares to be delivered by the Stockholders,
the Acknowledgments to be delivered by the Optionholders and a blank stock power
relating to the Escrow Shares, executed by the Stockholder Representative each
of the Holders.
(b) Certificate of Merger. The Certificate of Merger shall be
---------------------
filed with the Secretary of State of Delaware.
(c) Articles of Merger. The Articles of Merger shall be filed
------------------
with the Secretary of State of Montana.
(d) Noncompetition Agreement. The Purchaser and Wayne H. Hanson
------------------------
shall enter into a Noncompetition Agreement;
(e) Employment Agreement. The Purchaser and Wayne H. Hanson
--------------------
shall enter into an Employment Agreement.
(f) Company Certificates; Opinions. The Company shall deliver the
------------------------------
certificates, opinions of counsel and other items described in Article X or as
otherwise reasonably required by the Purchaser or Parent and such other evidence
of the performance of all the covenants and the satisfaction of all conditions
required of the Company by this Agreement and as the Purchaser or Parent shall
reasonably require.
(g) The Purchaser Certificates; Opinions. The Purchaser and the
------------------------------------
Parent shall deliver the certificates, opinions of counsel and other items
described in Article X or as otherwise reasonably
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required by the Company and such other evidence of the performance of all the
covenants and the satisfaction of all conditions required of the Purchaser and
the Parent by this Agreement and as the Company shall reasonably require.
ARTICLE V
ADJUSTMENT OF MERGER CONSIDERATION
----------------------------------
5.1 Adjustment of Merger Consideration. The total consideration to be paid
----------------------------------
pursuant to Sections 2.6 and 2.7 hereof (the "Merger Consideration") shall be
reduced by:
(a) the amount, if any, by which the Company's consolidated audited Net
Worth determined in accordance with GAAP, consistently applied, as of the
Closing Date is less than $1,375,000;
(b) the amount of Uncollected Accounts Receivable (as defined in
Section 5.3 hereof) which are uncollected on the date which is 6 months
following the Closing Date; and
(c) the amount of any indemnification claims made by Purchaser or
Parent pursuant to Section 9.1 hereof and determined to be valid pursuant to
Section 5.6 hereof.
5.2 Determination of Net Worth. The Closing Balance Sheet shall be
--------------------------
prepared in accordance with GAAP and audited at the Parent's expense by the
Parent's independent accounting firm, Peat Marwick, according to generally
accepted auditing standards, with a report of the Net Worth to be issued within
seventy-five (75) days after the Closing Date. The Parent shall deliver the
Closing Balance Sheet to the stockholder Representative, reflecting all
adjustments deemed appropriate by Peat Marwick and Peat Marwick's final report
considering the Net Worth of the Company. The Stockholder Representative, at the
expense of the Stockholders, may cause independent certified public accountants
(the "Company Auditors") to prepare its own independent opinion of Closing
Balance Sheet and the Net Worth of the Company, with full access to Peat
Marwick's final report and back-up work papers. The opinion of Company Auditors
shall be delivered to the Parent no later than the thirty (30) days following
the date on which the Peat Marwick report of the Net Worth is delivered to the
Stockholder Representative. In the event there is a disagreement between the two
audit firms which affects the Merger Consideration, a senior management
representative of the Parent and the Stockholder Representative (the
"Principals") shall then have an additional thirty (30) days following the
delivery of the independent opinion by Company Auditors to resolve the dispute.
If the Principals are unable to resolve the issue, it shall then be turned over
to a third mutually acceptable major accounting firm, who shall act as
arbitrator and whose decision shall be binding as to Net Worth. The arbitration
costs of the arbitrating accountants shall be borne on a pro rata basis
according to the degree to which the positions of the respective parties are not
accepted by the arbitrating accounts so selected. For purposes of determining
the Net Worth of the Company, the Parent's auditors shall use the accounting
methods, principles, and practices already utilized by the Company to prepare
its financial statements, so long as such accounting methods, principles, and
practices represent GAAP. See Section 8.3(b) hereof.
5.3 Collections of Accounts Receivable. Within five (5) business days
----------------------------------
prior to the six (6) month anniversary of the Closing Date, the Stockholder
Representative shall notify the Purchaser and the Parent of the amount that
remains outstanding and unpaid on any (i) accounts receivable listed on the
Closing Balance Sheet, net of any bad debt reserve and the amount of the
receivables for which the Company has negotiated terms extending beyond 180 days
from the Closing Date, as specified in the Disclosure Letter to the extent not
already reflected in the foregoing bad debt reserve, all as properly reflected
on the Closing Balance Sheet, and (ii) the amount of any accounts receivable
that were incorrectly overstated on the Closing Balance Sheet (together, the
"Uncollected Accounts Receivable").
5.4 Adjustment of Merger Consideration based on Net Worth of the
------------------------------------------------------------
Company and Uncollected Accounts Receivable. The Merger Consideration shall be
- -------------------------------------------
adjusted as follows: The Parent shall be entitled to transfer to itself, out of
the Escrow Shares, by operation of the stock power delivered pursuant to Section
4.2 (a) hereof, on a pro rata basis a number of the Parent Shares (valued at the
Nominal Share Price):(i) on the Determination Date (the date on which the Net
Worth of the Company is finally determined pursuant to Section 5.2
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<PAGE>
being the "Determination Date") equal in total value to the Shortfall as
determined pursuant to Section 5.2 hereof, and (ii) on the six (6) month
anniversary of the Closing Date equal in value to the Uncollected Accounts
Receivable as determined pursuant to Section 5.3 hereof.
5.5 Indemnification Adjustment. The Merger Consideration set forth in
--------------------------
Section 2.6 shall be further adjusted as follows: Prior to the date that is
twelve (12) months following the Closing Date (the "Release Date"), the Parent
may notify the Stockholder Representative in writing that it elects not to have
disbursed from the Escrow Shares any amount owed for any Claim relating to
indemnification hereunder (as described in Section 9.1 hereof). Parent shall be
under no obligation to release such Escrow Shares until the validity of such
Claim or Claims has been determined pursuant to Section 5.6 hereof. Parent
shall be entitled to transfer to itself out of the Escrow Shares, by operation
of the stock power delivered pursuant to Section 4.2(a) hereof, on a pro rata
basis a number of the Parent Shares (valued at the Adjustment Price) included in
the Escrow Shares having a value equal to the amount of any Claim or Claims
determined to be valid under Section 5.6 hereof. All Escrow Shares having a
value in excess of such Claims shall be disbursed on the Release Date to the
Holders.
5.6 Determination of Validity. In the event that the Parent or Purchaser
-------------------------
elects to make a Claim under Section 9.1 hereof or Section 5.5 hereof which may
be offset against the Escrow Shares, the Parent or Purchaser shall provide
notice of such Claim to the Stockholder Representative. Thereafter, if the Claim
is disputed by the Stockholder Representative and notice of such objection is
received by the Parent and Purchaser within fifteen (15) days following the date
on which the Stockholder Representative receives the Parent's or Purchaser's
notice, a senior management representative of the Parent and the Stockholder
Representative (the "Principals") shall have fifteen (15) days following receipt
of the Parent's or Purchaser's notice to resolve the dispute. If the Principals
are unable to resolve the Claim, the validity of the Claim shall be determined
by arbitration in San Diego, California, as set forth in Section 11.6 hereof. If
the Parent or Purchaser do not timely receive an objection notice, then the
Claim in the amount alleged by the Parent and the Purchaser shall be deemed to
be valid and correct. No offset (other than an adjustment as set forth in
Sections 5.4 above) shall be permitted if the relevant Claim is properly
disputed as set forth in the second sentence of this Section 5.6 unless and
until its validity is finally determined in such arbitration proceedings and
evidenced by a written finding or order. Notwithstanding the foregoing, a claim
pursuant to Section 6.22(m) or Section 9.8 hereof, if based on Parent's or
Purchaser's reasonable belief that the IRS might disqualify the Merger as a tax-
free reorganization within the meaning of Section 368(a)(2)(D) of the Code,
shall entitle Parent or Purchaser to make a Claim under Section 9.1 hereof or
Section 5.5 hereof, the validity of which shall not be subject to determination
pursuant to this Section 5.6 prior to a final ruling by the IRS or mutual
agreement of the Parent and the Stockholder Representative.
There shall be no increase in Merger Consideration if Net Worth exceeds
$1,375,000 or if the amount of Accounts Receivables collected exceeds that set
forth on the Closing Balance Sheet.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
As of the date of this Agreement, except as set forth in the Disclosure
Letter, the Company hereby represents and warrants to the Purchaser and to the
Parent as follows:
6.1 Due Organization of the Company. The Company is a corporation duly
-------------------------------
organized, validly existing and in good standing under the laws of the State of
Montana, and has all requisite power and authority to own, lease and operate its
properties and conduct its business as it is presently being conducted and
contemplated to be conducted. The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which such
qualification is necessary under the applicable law as a result of the conduct
of its business or the ownership of its properties except where the failure to
be so qualified would not have a Material Adverse Effect on the Company.
6.2 Authorization. The Company has all requisite power and authority to
--------------
own, lease, and operate the Assets, to conduct its business as it is presently
being conducted and to execute and deliver the documents called for in this
Agreement to which it is a party. The Company has all necessary corporate power
and
A-16
<PAGE>
authority to enter into this Agreement and has taken all corporate action
necessary to consummate the transactions contemplated hereby and to perform its
obligations hereunder, provided that the consummation of the merger shall be
subject to approval of the Stockholders. This Agreement has been duly executed
and delivered by the Company and is a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
6.3 Capitalization of the Company. The authorized capital stock of the
-----------------------------
Company consists of 1,000,000 shares of common stock, no par value per share.
Currently, there are 53,574 shares of such common stock outstanding. Except for
the Company Stock Options, which in the aggregate entitle the holders thereof to
purchase 14,625 Company Shares, as set forth on Exhibit D hereto, there are no
other outstanding subscriptions, calls, commitments, warrants or options for the
purchase of shares of any capital stock or other securities of the Company or
any securities convertible into or exchangeable for shares of capital stock or
other securities issued by the Company, or any other commitments of any kind for
the issuance of additional shares of capital stock or other securities issued by
the Company. All of the outstanding shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
were not issued in violation of the preemptive rights of any of any person. The
Company has no wholly or partially-owned subsidiaries, and has no equity or debt
investment in any corporation, partnership, joint venture or other entity.
6.4 Financial Statements.
--------------------
(a) The financial statements as of and for the period ended December
31, 1995 as set forth in Exhibit E attached hereto and the balance sheet of the
Company included therewith (collectively, the "1995 Financial Statements") have
been prepared in accordance with GAAP consistently applied, as at the date and
for the periods covered thereby. The interim financial statements, dated as of
June 30, 1996, included therewith, including a balance sheet dated as of the
same date (the "Interim Financial Statements"), have been prepared in accordance
with GAAP, consistently applied as of the date and for the periods covered
thereby. Each of the 1995 Financial Statements and the Interim Financial
Statements fairly presents the financial condition and results of operations of
the Company as at the dates and for the periods then ended. At the respective
dates of the financial statements, there were no Liabilities (as defined in
Section 6.7 hereof) of the Company, which in accordance with GAAP, should have
been shown or reflected in such financial statements or the notes thereto, which
are not shown or reflected in such financial statements or the notes thereto.
(b) The Assets set forth in the Financial Statements are valued at
actual cost less an adequate and proper depreciation charge. The Company has
not depreciated any of the Assets on an accelerated basis or in any other
manner, inconsistent with applicable IRS and state guidelines, if any.
(c) The Company has made and kept books, records and accounts, which,
in reasonable detail, accurately and fairly reflect its activities and the
transactions and dispositions of its Assets.
6.5 Accounts Receivable. The accounts receivable reflected on the Interim
-------------------
Balance Sheet and all accounts receivable arising since the Interim Balance
Sheet represent bona fide claims of the Company against debtors for sales,
services performed or other charges arising on or before the date hereof, and
all the goods delivered and services performed which gave rise to said accounts
were delivered or performed in accordance with the applicable orders, contracts
or customer requirements. Said accounts receivable are subject to no defenses,
counterclaims or rights of setoff and are fully collectible in the ordinary
course of business without cost in collection efforts therefor, except to the
extent of the appropriate reserves for bad debts on accounts receivable as set
forth on the Interim Balance Sheet and, in the case of accounts receivable
arising since the Interim Balance Sheet, to the extent of a reasonable reserve
for bad debts on accounts receivable which is not proportionately greater than
the reserve for bad debts reflected on the Interim Balance Sheet. No
indemnification claims shall be made in reliance on the representations and
warranties of this Section 6.5 to the extent that the amounts claimed are
reflected in a purchase price adjustment made pursuant to Section 5.4 hereof.
6.6 No Undisclosed Liabilities. The Company has no liabilities,
--------------------------
obligations or commitments of any nature (absolute, accrued, contingent or
otherwise), matured or unmatured (herein "Liabilities"), which individually or
in the aggregate, are material except (i) Liabilities which are adequately
reflected or reserved against
A-17
<PAGE>
in the Interim Financial Statements, (ii) Liabilities which have been incurred
in the ordinary course of business and consistent with past practice since the
date of the Interim Financial Statements, and (iii) Liabilities disclosed in the
Disclosure Letter.
6.7 Inventory. All inventory reflected on the 1995 Financial Statements
---------
and the Interim Financial Statements at the dates thereof were, and all
inventory to be reflected on the Closing Balance Sheet as of the Closing Date
(except to the extent in each case of reserves reflected thereon), is and will
be, of a quality and quantity usable or salable in the ordinary course of
business. All such inventory to be reflected on the Closing Balance Sheet will
be reflected with adequate provisions or adjustments for excess inventory,
slow-moving inventory and inventory obsolescence at the lower of cost or market
value using the FIFO method of valuation.
6.8 Absence of Certain Changes or Events. Since the date of the 1995
------------------------------------
Financial Statements, and except as disclosed in the Interim Financial
Statements or in the Disclosure Letter:
(a) There has not been (i) to the knowledge of the Company any
material adverse change in the business, operations, properties, Assets,
technology, condition (financial or otherwise), Liabilities, employee relations,
customer, supplier, distributor or franchise relations, if any, or prospects of
the Company, (ii) any failure to operate the Company in the ordinary course of
business or failure to use reasonable efforts to preserve the business intact,
to keep available to the Company the services of personnel, and to preserve for
the Company the goodwill of the suppliers, customers, distributors, consultants,
contract manufacturers and others having business relations with the Company,
(iii) any delay or failure to repay when due any material obligation of the
Company, (iv) any revaluation by the Company of any of the Assets, including
without limitation, any write off of notes or accounts receivable other than in
the ordinary course of business, or (v) any damage, destruction or loss (whether
or not covered by insurance) materially and adversely affecting the business,
operations, properties, assets, condition (financial or otherwise) or prospects
of the Company.
(b) The Company has not (i) incurred, or become subject to, any
obligation or Liability greater than $10,000, except for Liability resulting
from raw materials, tooling, and components purchased in the ordinary course of
business and consistent with past practice, (ii) except in the ordinary course
of business and consistent with past practice, sold, transferred, leased,
pledged or mortgaged or agreed to sell, transfer, lease, pledge, or mortgage any
of the Assets, property or rights, or canceled, waived or compromised or agreed
to cancel, waive or compromise, any debts, claims or rights, (iii) made any
significant change in any method of management, operation or accounting, (iv)
granted any increase in the compensation of its officers or employees
(including, without limitation, any such increase pursuant to any bonus,
pension, profit-sharing or other plan or commitment) or any increase in the
compensation payable or to become payable to any of its officers or employees,
except for the normal periodic increases made pursuant to established
compensation policies applied on a basis consistent with that of the prior two
(2) years, (v) paid any bonus or extraordinary compensation to any employee,
(vi) made or set aside any distribution of any kind or character to its Holders,
(vii) issued or committed to issue any capital stock or any securities
convertible into capital stock, except for the issuance of the Company Shares
pursuant to the exercise of outstanding Company Stock Options, as listed and
attached hereto in Exhibit D, in accordance with the terms thereof, (viii)
purchased or acquired capital Assets costing more than $10,000 in any one
instance, or (ix) entered into any other material transaction other than in the
ordinary course of business and consistent with past practice.
6.9 Title to Assets; Facilities. The Company has good and marketable
----------------------------
title (and in the case of its real property fee simple title) to all of its
material assets, including real property, and does not lack good and marketable
title to any combination of its assets which together are material except for
Assets sold since the date of the 1995 Financial Statements or the Interim
Financial Statements, as the case may be, in the ordinary course of business and
consistent with past practice.
(a) None of the Assets is subject to any mortgage, deed of trust,
pledge, lien, security interest, encumbrance, claim or charge of any kind or
character except (i) liens for taxes or other amounts not yet due and payable,
and (ii) liens and encumbrances which in the aggregate are not substantial in
amount, do not materially impair the usefulness or value of such Assets, and
have not arisen other than in the ordinary course of business. There are no
liens on the Assets for any taxes, except as disclosed in the Disclosure Letter.
A-18
<PAGE>
(b) All material assets (considered singly or in a combination) are
and have been maintained in good working condition and repair subject to normal
wear and tear, in accordance with normal industry practice. The Assets include
(without limitation) all assets necessary for the conduct of the Company's
business in the ordinary course and are sufficient for the operation of the
Company's business as currently conducted and to the knowledge of the Company
conform in all material respects to all applicable regulations (including
Environmental Laws, as defined in Section 6.24) relating to their construction,
use and operation.
(c) The Company has in all material respects performed all the
obligations required to be performed by it with respect to all Assets leased by
it through the date hereof, except where the failure to perform would not in any
material respect interfere with or impair the present and continued use thereof
in the usual and normal conduct of the business of the Company.
(d) The Company enjoys peaceful and undisturbed possession of all
Facilities owned or leased by it, and such Facilities are not subject to any
Encumbrances, encroachments, building or use restrictions, exceptions,
reservations or limitations which in any material respect interfere with or
impair the present and continued use thereof in the usual and normal conduct of
the business of the Company.
(e) To the Company's knowledge, all Facilities have received all
required approvals of governmental authorities (including without limitation
permits and a certificate of occupancy or other similar certificate permitting
lawful occupancy of the Facilities) required in the connection with the
operation thereof and have been operated and maintained in all material respects
in accordance with applicable regulations. The Disclosure Letter contains a
complete list of all approvals of governmental authorities (including without
limitation permits and a certificate of occupancy or other similar certificate
permitting lawful occupancy of the Facilities) which have been obtained by the
Company.
(f) There are no pending or, to the Company's knowledge, threatened
condemnation proceedings relating to any of the Facilities. The Company has
received no notice and is not aware of any special assessment relating to any
Facility or any portion thereof and there is no pending or threatened (in
writing) special assessment.
(g) The real property improvements (including leasehold improvements),
equipment and other tangible assets owned or used by the Company at the
Facilities are (i) adequately insured to the extent and in a manner customary in
the industry, (ii) structurally sound with no known material defects, (iii) in
good operating condition and repair, subject to ordinary wear and tear, (iv) not
in need of maintenance, repair or correction except for ordinary routine
maintenance and repair, the cost of which would not be material, (v) sufficient
for the operation of the Company's business as presently conducted, (vi) in
conformity, in all material respects, with all applicable regulations, and (vii)
supplied with and anticipated to continue to be supplied with utilities and
services necessary for their operation as presently operated. None of said
improvements, equipment or other assets is subject to any commitment or other
arrangement for their sale or use by any affiliate of the Company or any third
party.
6.10 Leases, Premises. The Company has provided to the Purchaser or the
----------------
Parent true, correct and complete copies of all real property leases, subleases,
amendments, options and other leasehold interests to which the Company is a
party (the "Leases"). There is no existing default or event of default (or event
which with notice or lapse of time or both would constitute a default or an
event of default) under, or material breach by the Company, by any other party
thereto, of any of the Leases. Except as set forth in the Disclosure Letter, the
Company has not made any modification or alteration to any Structure or property
subject to any Lease, prior to or after the expiration of such Lease, which was
not approved by the relevant landlord, and which could result in the imposition
of any Liability, assessment or charge against the Company. No consent need be
obtained from any person in respect of any Leases in connection with the
transactions contemplated by this Agreement. No reserves are required in the
1995 Financial Statements or the Interim Financial Statements to provide for the
restoration of the properties or structures thereon subject to the Leases at the
end of the respective lease terms.
6.11 Contracts and Commitments; Disclosure. The Company is not in breach
-------------------------------------
of violation of, or default under, and there is no valid basis for a claim
that the Company is in breach or violation of, or default
A-19
<PAGE>
under, any material agreement, instrument, indenture, deed of trust, commitment,
Contract or other obligation of any type to which the Company is a party (or is
bound), and no event has occurred which constitutes or, with the lapse of time
or the giving of notice, or both, would constitute such a breach, violation or
default by the Company thereunder. In the Disclosure Letter, the Company has
listed all of its material Contracts, including but not limited to, its
employment contracts and the purchase or sale or raw materials. To the best
knowledge of the Company, there is no default by any party to any of the
Contracts, which default could have a Material Adverse Effect on the business or
operations of the Company.
6.12 Litigation, Proceedings and Applicable Law. As of the Closing Date,
------------------------------------------
there are no actions pending at law or in equity or before or by any
governmental authority or instrumentality or before any arbitrator of any kind,
or to the knowledge of the Company, threatened (in writing) or expected:
(a) against, related to or affecting (i) the Company, its business or
the Assets (including with respect to Environmental Laws), (ii) any employee
plan of the Company or any trust or other funding instrument, fiduciary or
administrator thereof, (iii) any officers or directors of the Company in their
capacity as such,
(b) seeking to delay, limit or enjoin, or that would have the effect
of delaying, limiting or enjoining the consummation of the transactions
contemplated hereby, or
(c) in which the Company is a plaintiff, including any derivative
suits brought by or on behalf of the Company.
To the knowledge of the Company, there is no valid basis for any such
action, proceeding or investigation. The Company is not aware of any facts that
may provide a reasonable basis for any such action, proceeding or investigation
in the future. The Company is not in default with respect to or subject to any
court order, and there are no unsatisfied judgments against the Company, its
business or the Assets which individually or in the aggregate may be expected to
have a Material Adverse Effect on the Company. There are no court orders or
agreements with, or liens by, any governmental authority or quasi-governmental
entity relating to any Environmental Law which regulate, obligate, bind or in
any way affect the Company or any Facility or Facility formerly occupied,
managed or owned by the Company.
6.13 Compliance with Law. To the Knowledge of the Company, the
--------------------
Company and the conduct of its business are in compliance with all applicable
laws, statutes, rules, ordinances and regulations, whether federal, state or
local, including, without limitation, those promulgated by the Food and Drug
Administration (the "FDA") and those governing building, zoning, safety,
antipollution, health, waste disposal, and hazardous or toxic substances. The
Company has not received notice of any violation of any applicable federal,
state or local statute, law or regulation (including, without limitation, any
applicable FDA or other law, ordinance or regulation) or of any investigation
relating to the same, which violation might have a Material Adverse Effect on
its properties or the operation of its business; the Company has not experienced
any voluntary or involuntary recalls of its products; and, the Company is not
aware or any presently existing circumstances that are likely to result in
violations of such laws, statutes, ordinances or regulations which, individually
or in the aggregate, would have a Material Adverse Effect on the Company.
6.14 Insurance. The Company maintains and has maintained
----------
continuously, with responsible insurance carriers, workmen's compensation, real
property, and general liability insurance and such other insurance policies as
are customarily carried by similar businesses. All insurance coverage
applicable to the Company, its business, the Assets or its employees (a) is in
full force and effect, (b) insures the Company in reasonably sufficient amounts
(consistent with industry standards) against all risks usually insured against
by persons operating similar businesses or properties of similar size in the
localities where such businesses or properties are located, (c) provides
coverage as may be required by applicable regulation of which the Company has
knowledge and by any and all contracts to which the Company is a party and (d)
has been issued by insurers of recognized responsibility. There are no
outstanding unpaid premiums except in the ordinary course of business and no
notice of cancellation or nonrenewal of any such coverage has been received.
There are no provisions in such insurance policies for retroactive or
prospective premium adjustments. The Company is not in default under any of
such policies or
A-20
<PAGE>
binders, and the Company has not failed to give any notice or to present any
claim under any such policy or binder in a due and timely fashion. To the
Knowledge of the Company, there are no facts upon which an insurer might be
justified in reducing coverage or increasing premiums on existing policies or
binders. Copies of all such policies have been made available to the Purchaser
and Parent for its inspection.
6.15 Books and Records. The Company has made and kept books, records
-----------------
and accounts, which, in reasonable detail, accurately and fairly reflect the
activities of the Company. The minute books of the Company accurately and
adequately reflect all action previously taken by the Stockholders, Board of
Directors and committees of the Board of Directors of the Company. The copies
of the stock book records of the Company heretofore delivered to the Purchaser
and Parent are true, correct and complete, and accurately reflect all
transactions effected in the stock of the Company through and including the date
hereof. The Company has not engaged in any transaction, maintained any bank
account or used any corporate funds except for transactions, bank accounts and
funds which have been and are reflected in the normally maintained books and
records of the Company.
6.16 Severance Arrangements. The Company has not entered into any
----------------------
severance or similar arrangement in respect of any personnel that provides
for any obligation (absolute or contingent) of the Company or any other person
to make any payment to any such personnel following termination of employment.
6.17 Fringe Benefit and Pension Plans.
--------------------------------
(a) Definitions. The following terms, when used in this Section 6.18,
-----------
shall have the following meanings. Any of these terms may, unless the context
otherwise requires, be used in the singular or the plural depending on the
reference.
(1) Benefit Arrangement. Any employment, consulting, severance
-------------------
or other similar contract, arrangement or policy and each plan, arrangement
(written or oral), program, agreement or commitment providing for insurance
coverage (including any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits, life, health, disability or accident benefits
(including, without limitation, any "voluntary employees' beneficiary
association" as defined in Section 501(c)(9) of the Code providing for the
same or other benefits) or for deferred compensation, profit sharing
bonuses, stock options, stock appreciation rights, stock purchases or other
forms of incentive compensation or postretirement insurance, compensation
or benefit which (A) is not a Welfare Plan, Pension Plan or Multiemployer
Plan, (B) is entered into, maintained, contributed to or required to be
contributed to, as the case may be, by the Company or an ERISA Affiliate or
under which the Company or an ERISA Affiliate may incur any liability, and
(C) covers any employee or former employee of the Company or any ERISA
Affiliate.
(2) Employee Plan. Any Benefit Arrangement, Multiemployer Plan,
-------------
Pension Plan and Welfare Plan, as amended.
(3) ERISA. The Employee Retirement Income Security Act of 1974,
-----
as amended.
(4) ERISA Affiliate. "ERISA Affiliate" shall mean any entity
---------------
which is (or at any relevant time was) a member of a "controlled group of
corporations" with or under "common control" with the Company as defined in
Section 414(b), (c), (m) or (o) of the Code.
(5) Multiemployer Plan. Any "multiemployer plan," as defined in
------------------
Sections 3(37) or 4001(a)(3) of ERISA, (A) which the Company or any ERISA
Affiliate maintains, administers, contributes to or is required to
contribute to, or, after September 25, 1980, maintained, administered,
contributed to or was required to contributed to, or under which the
Company or any ERISA Affiliate may incur any liability and (B) which covers
any employee or former employee of the Company or any ERISA Affiliate.
A-21
<PAGE>
(6) Pension Plan. Any "employee pension benefit plan" as defined
------------
in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which the
Company or any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to, or, within the five (5) years prior to the
Closing Date, maintained, administered, contributed to or was required to
contribute to, or under which the Company or any ERISA Affiliate may incur
any liability and (B) which covers any employee or former employee of the
Company or any ERISA Affiliate.
(7) Welfare Plan. Any "employee welfare benefit plan" as defined
------------
in Section 3(1) of ERISA, (A) which the Company or any ERISA Affiliate
maintains, administers, contributes to or is required to contribute to, or
under which the Company or any ERISA Affiliate may incur any liability and
(B) which covers any employee or former employee of the Company or any
ERISA Affiliate (with respect to their relationship with such entities).
(b) Disclosure: Delivery of Copies of Relevant Documents and Other
--------------------------------------------------------------
Information. The Disclosure Letter contains a complete list of Employee Plans
- -----------
of the Company. True and complete copies of each of the Employee Plans of the
Company have been delivered to the Parent or the Purchaser. The Disclosure
Letter contains a description of the complete age, salary, service and related
data as of the last day of the last plan year for employees and former employees
of the Company, and a description setting forth the amount of any liability of
the Company as of the Closing Date with respect to each Welfare Plan.
(c) Representations.
---------------
(1) There are no ERISA Affiliates.
(2) There are no Pension Plans.
(3) There are no Multiemployer Plans.
(4) There are no Welfare Plans.
(5) Benefit Arrangements. Each Benefit Arrangement which
--------------------
covers or has covered employees or former employees of the Company has been
maintained in compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Benefit Arrangement, including but not limited to the
Code. Except as provided by law, the employment of all persons presently
employed or retained by the Company is terminable at will.
(6) Deductibility of Payments. There is no contract, agreement,
-------------------------
plan or arrangement covering any employee or former employee of the Company
that, individually or collectively, provides for the payment by the Company
of any amount that is not deductible under Section 162(a)(1) or 404 of the
Code.
(7) Fiduciary Duties and Prohibited Transactions. Neither the
--------------------------------------------
Company nor any plan fiduciary of any Benefit Arrangement which covers or
has covered employees or former employees of the Company has engaged in any
transaction in violation of Sections 404 or 406 of ERISA or any "prohibited
transaction," as defined in Section 4975(c)(1) of the Code, for which no
exemption exists under Section 408 of ERISA or Section 4975(c)(2) or (d) of
the Code which would have a Material Adverse Effect on the Company or on
the Surviving Corporation.
(8) Litigation. Neither the Company, nor any Employee Plan which
----------
covers or has covered employees or former employees of the Company is a
party to any litigation, relating to or seeking benefits under any Employee
Plan.
(9) No Amendments. The Company has not announced any plan or
-------------
legally binding commitment to create any additional Employee Plans which
are intended to cover employees or former employees of the Company or to
amend or modify any existing Employee Plan which covers or has covered
employees or former employees of the Company.
A-22
<PAGE>
(10) No Other Material Liability. No event has occurred in
---------------------------
connection with which the Company or any Employee Plan, directly or
indirectly, could be subject to any material liability (i) under any
statute, regulation or governmental order relating to any Employee Plans or
(ii) pursuant to any obligation of the Company to indemnify any person
against liability incurred under any such statute, regulation or order as
they relate to the Employee Plans.
6.18 Employment Practices
--------------------
(a) No employees of the Company are represented by any labor
organization, and, as of the date hereof, no labor organization or group of
employees of the Company has made a demand for recognition, has filed a petition
seeking a representation proceeding nor, to the best knowledge of the Company,
has any intention to hold an election of a collective bargaining representative.
There is no strike, work stoppage or labor disturbance pending or threatened
which involves any employees of the Company.
(b) As of the date of this Agreement, there are at present no claims
against the Company pending or to its knowledge threatened by any governmental
authority, labor organization, or employee alleging that the Company has
violated any applicable laws with respect to employment practices, employment
documentation, terms and conditions of employment, wages or hours. The Company
is not engaged in any unfair labor practice. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any other domestic or foreign governmental agency, and there
are no facts or information which could give rise thereto.
6.19 Consents and Approvals. No consent, approval or authorization of,
----------------------
or declaration, filing or registration with, any governmental or regulatory
authority, or any other person or entity, is required to be made or obtained
by the Company in connection with the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby,
except for approval by the Stockholders of the Company.
6.20 Warranty and Product Liability Matters. The Company has not committed
--------------------------------------
any act and there has been no omission, which may result in, and there has been
no occurrence which may give rise to, product liability or liability for breach
of warranty (whether covered by insurance or not) on the part of the Company,
with respect to products designed, manufactured, assembled, repaired,
maintained, delivered or installed or services rendered prior to or on the
Closing Date. To the Knowledge of the Company, the Company's products and
services comply in all material respects with and meet the standards of all
applicable federal and state laws. Except as disclosed in the Disclosure Letter,
as of the Closing Date, no claims, including but not limited to product or
service warranty (other than claims in the normal course of business, consistent
in amount and number with those made in prior periods), liability, strict
liability or negligence claims, in respect to the Company's products or services
are pending or threatened, nor is there any reasonable basis for any such claim.
6.21 Proprietary Rights.
------------------
(a) All of the Company's registrations of trademarks and of other
marks, trade names or other trade rights, and all pending applications for any
such registrations and all of the Company's patents, if any, and copyrights and
all pending applications therefor, and all other trademarks and other marks,
trade names and other trade rights and all other trade secrets, designs, plans,
specifications and other proprietary rights, whether or not registered
("Proprietary Rights"), other than trade secrets, designs, plans and
specifications are listed in the Disclosure Letter.
(b) All Proprietary Rights other than trade secrets, designs, plans
and specifications are appropriate and sufficient to operate the business and
operations of the Company as currently conducted.
(c) The Company has the right and authority to use and enforce all
Proprietary Rights none of which will cease to be valid and in full force and
effect by reason of the execution, delivery and performance of this Agreement or
the consummation of the transactions stated herein. There are not any
restrictions on the rights of the Company, and it is reasonably expected that
after the Closing Date, there will not be any
A-23
<PAGE>
restrictions on the Company's right, to sell products manufactured or services
provided by the Company in connection with its business that incorporate or
contain the Proprietary Rights.
(d) The Company has no licenses granted by or to it or no other
agreements to which it is a party, relating in whole or in part to any of the
Proprietary Rights.
(e) To the Company's Knowledge, the Company's use of the Proprietary
Rights is not infringing upon or otherwise violating the rights of any third
party in or to such Proprietary Rights. No proceedings have been instituted
against or notices received by the Company that are presently outstanding
alleging that the Company's use of its Proprietary Rights infringes upon or
otherwise violates any rights of a third party in or to such Proprietary Rights.
To the Company's Knowledge, no other firm, corporation, partnership,
association, business organization or person has the right, to receive a royalty
or similar payment in respect of any Proprietary Rights, or to use any of the
Proprietary Rights of the Company, on the goods on which they are now being used
either in identical form or in such near resemblance thereto as to be likely,
when applied to the goods of any such person, to cause confusion with such
trademarks or other Proprietary Rights or to cause a mistake or to deceive. No
other firm, corporation, partnership, association, business organization or
person has notified the Company or claimed to the Company that it has any of the
rights set forth in the immediately preceding sentence.
(f) The Company has taken all reasonable and prudent steps to protect
the Proprietary Rights from infringement by any other firm, corporation,
partnership, association, business organization or person.
6.22 Taxes.
-----
(a) Filing of Returns. There have been properly completed and filed
-----------------
on a timely basis and in correct form all Returns required to be filed on or
prior to the date hereof. As of the time of filing, the foregoing Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities, status or other matters of the Company or any other
information required to be shown thereon. In particular, the foregoing returns
are not subject to penalties under Section 6662 of the Code, relating to
accuracy-related penalties (or any corresponding provision of the state, local
or federal Tax law) or any predecessor or successor provision of law.
(b) Payment of Taxes. With respect to all amounts of Taxes imposed on
----------------
the Company or for which the Company is or could be liable, whether to taxing
authorities (as, for example, under law) or to other persons or entities (as,
for example, under tax allocation agreements), with respect to all taxable
periods or portions of periods ending on or before the Closing Date, all
applicable tax laws and agreements have been fully complied with, and all such
amounts required to be paid by the Company to taxing authorities or others on or
the date (other than reserves for tax liability set forth in the Company's
financial statements) hereof have been timely paid.
(c) Audit History. No issues have been raised (and are currently
-------------
pending) by any taxing authority in connection with any of the Returns. No
waivers of statutes of limitation with respect to the Returns have been given by
or requested from the Company. The Disclosure Letter sets forth (i) the taxable
years of the Company as to which the respective statutes of limitations with
respect to Taxes have not yet expired, and (ii) with respect to such taxable
years, those years for which examinations have been completed, those years for
which examinations are presently being conducted, those years for which
examinations have not been initiated, and those years for which required Returns
have not yet been filed. There are no pending or, to the knowledge of the
Company, threatened audits, investigations or claims for or relating to any
material additional Liability in respect of Taxes, and there are no matters
under discussion with any governmental authorities with respect to Taxes that in
the reasonable judgment of the Company, or its counsel, are likely to result in
a material additional Liability for Taxes. Except to the extent shown on the
Disclosure Letter, all deficiencies asserted or assessments made as a result of
any examinations have been fully paid, or are fully reflected as a liability in
the Interim Financial Statements, or are being contested and an adequate reserve
therefor has been established and is fully reflected in the Interim Financial
Statements.
A-24
<PAGE>
(d) Tax Elections. All material elections with respect to Taxes
-------------
affecting the Company as of the date hereof are set forth in the Disclosure
Letter.
(e) Adjustments Under Section 481. The Company has not agreed to make
-----------------------------
nor is it required to make any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise.
(f) Parachute Payment. The Company is not a party to any agreement,
-----------------
contract, arrangement or plan that has resulted or would result, separately or
in the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code.
(g) Permanent Establishment. The Company does not have and has not
-----------------------
had a permanent establishment in any foreign country, as defined in any
applicable tax treaty or convention between the United States and such foreign
country. The Company is not required to be qualified to do business in any
state other than Montana.
(h) Existing Partnerships. The Company is not a party to any joint
---------------------
venture, partnership or other arrangement, contract and relationships that could
be treated as a partnership for federal income tax purposes. The Company is not
a party to, or bound by (nor will the Company become a party to or bound by) any
tax-indemnity, tax-sharing, or tax-allocation agreement. The Company is not
now, and has never been a member of an affiliated group of corporations within
the meaning of Section 1504 of the Code.
(i) Unpaid Tax. The unpaid Taxes of the Company do not exceed the
-----------
reserve for tax liability (excluding any reserve for deferred Taxes established
to reflect timing differences between book and tax income) set forth or included
in the Company's Closing Balance Sheet.
(j) Characterization of the Company and Stockholders. The Company is
------------------------------------------------
not and has not been a United States real property holding corporation (as
defined in Section 897(c)(2) of the Code) during the application holding period
specified in Section 897(c)(1)(A)(ii) of the Code. The Company is not now and
never has been an "investment company" within the meaning of Section
368(a)(2)(F)(iii) of the Code. Neither the Company nor any Stockholder is a
person other than a United States person within the meaning of the Code.
(k) No Withholding. The transaction contemplated herein is not
--------------
subject to the tax withholding provisions of Section 3406 of the Code, or of
Subchapter A of Chapter 3 of the Code, or of any other provision of law.
(l) Characterization of Assets. None of the Assets of the Company is
--------------------------
property that is required to be treated as being owned by any other person
pursuant to the so-called safe harbor lease provisions of former Section
168(f)(8) of the Code. None of the Assets of the Company directly or indirectly
secures any debt the interest on which is tax-exempt under Section 103(a) of the
Code. None of the Assets of the Company is "tax-exempt use property" within the
meaning of Section 168(h) of the Code.
(m) Pre-Arranged Plan of Distribution. The Stockholders, either
---------------------------------
either individually or viewed in combination, are not acquiring the Parent
Shares with a view to, and have no pre-arranged or other plan to, dispose
of or sell a sufficient number or amount of Parent Shares such that the
Merger would be disqualified as tax free pursuant to Section 368(a)(2)(D) of the
Code.
6.23 Payments. The Company has not, directly or indirectly, paid or
--------
delivered any fee, commission or other sum of money or item or property, however
characterized, to any finder, agent, government official or other party, in the
United States or any other country, which is in any manner related to the
business or operations of the Company, which the Company knows or has reason to
believe to have been illegal under any federal, state or local laws of the
United States or any other country having jursidiction; and the Company has not
participated, directly or indirectly, in any boycotts or other similar
practices affecting any of its actual or potential customers and has at all
times done business in an open and ethical manner. The Company is in compliance
with the Foreign Corrupt Practices Act with respect to disbursements.
A-25
<PAGE>
6.24 Environmental Matters.
----------------------
(a) For the purposes of this Agreement, the term "Environmental
Laws" shall mean all federal, state and local environmental protection,
occupational, health and safety laws, ordinances, restrictions, licenses, rules,
regulations and permit conditions, including, but not limited to, the Federal
Water Pollution Control Act, Resource Conservation & Recovery Act, Clean Air
Act, Comprehensive Environmental Response, Compensation and Liability Act,
Emergency Planning and Community Right to Know, Occupational Safety and Health
Act and other federal, state or local laws of similar effect, each as amended
and in effect as of the applicable date, and the term "Hazardous Materials"
shall mean any hazardous or toxic substances, wastes or materials, defined as
such or governed by any applicable Environmental Law.
(b) (i) To the knowledge of the Company, the Facilities have
been and currently are operated and maintained and the Company has operated
and is currently operating in compliance with all Environmental Laws.
Throughout the period of the Company's ownership and/or operation of the
Facilities, the Company has not received any notices, directives, violation
reports, actions or claims from or by (1) any federal, state or local
governmental agency concerning Environmental Laws or (2) any person
alleging that, in connection with Hazardous Materials, conditions at the
Facilities or the Company's acts or omissions have resulted in or caused or
threatened to result in or cause injury or death to any person or damage to
any property, including without limitation, damage to natural resources,
and to the Company's knowledge, no such notices, directives, violation
reports, actions, claims, assessments or allegations exist;
(ii) the Company does not currently lease, operate or own
any Facilities with respect to which the Company is a party to any pending
proceedings under any Environmental Law, and, to the Company's knowledge,
no such proceeding is threatened;
(iii) no underground storage tanks either are or, to the
Company's knowledge, have been located at any of the Facilities;
(iv) there has been no spill, discharge, release,
contamination or cleanup of or by any Hazardous Materials used, generated,
treated, stored, disposed of or handled by the Company at the Facilities
and, to the best of the Company's knowledge, no spill, discharge or
release or contamination or cleanup of or by Hazardous Materials has
occurred on or to the Facilities by any third party;
(v) the Company and has not used, generated, treated,
stored, disposed of, handled, transported or released any Hazardous
Material in a manner which would give rise to any liability under any
Environmental Laws;
(vi) the Company is not aware of any facts, events,
or conditions (including without limitation the generation, treatment,
transport, storage, emission, disposal, release or other placement,
deposit or location of any substance) which materially interfere with or
prevent continued compliance by the Company with, or give rise to any
present or potential liability (including with respect to past activities)
under any Environmental Laws; and
(vii) the Company has neither released any other person from
any claim under any Environmental Law nor waived any rights or defenses
concerning any environmental conditions at the Facilities or in connection
with the Company's use, ownership and/or operation of the Assets.
The Company's last inspection reports, including a Phase I Assessment
for the real property owned by the Company, from each applicable authority with
respect to any Environmental Laws and relating to its Facilities, properties,
Assets, personnel or business activities are identified in the Disclosure Letter
and copies have been delivered to Parent and Purchaser.
6.25 No Conflict or Violation. Neither the execution and delivery
-------------------------
of this Agreement nor the consummation of the transactions contemplated hereby
will result in a (a) violation of or a conflict with any
A-26
<PAGE>
provision of the Certificate of Incorporation or Bylaws of the Company, (b)
breach of or a default under any term or provision of any contract, agreement,
lease commitment, license, franchise or permit to which the Company is a party
or an event which with notice, lapse of time, or both, would result in any such
breach or default, or (c) violation by the Company of any statute, rule,
regulation, ordinance, code, order, judgment, writ, injunction, decree, or
award, or an event which with notice or lapse of time (or both) would result in
any such violation which in the case of (b) or (c) would have a Material Adverse
Effect on the Company.
6.26 Material Misstatements or Omissions. At and as of the Closing Date,
-----------------------------------
no representations or warranties by the Company in this Agreement, nor any
document, exhibit, certificate or schedule furnished to the Purchaser or Parent
pursuant hereto, or in connection with the transactions contemplated hereby, or
in connection with the S-4 Registration Statement contain or will contain any
untrue statement of a material fact, or omit or will omit to state any material
fact necessary to make the statements or facts contained herein or therein in
the context in which they were made not misleading. Each such document,
certificate or schedule furnished to the Purchaser or Parent pursuant hereto, or
in connection with the transactions contemplated hereby, fully and fairly
presents in all material respects the information called for thereby and set
forth therein. To the best of the Company's knowledge, the Company has
disclosed all events, conditions and facts materially affecting the business,
prospects and financial condition of the Company.
6.27 Transactions with Related Parties. Except as set forth in the
---------------------------------
Disclosure Letter, there are no agreements, contract or other arrangements
between (i) the Company and (ii) any Related Persons (as hereinafter defined)
of the Company. Except as set forth in the Disclosure Letter, and except for
the ownership of the Parent Stock issued hereunder on the Closing Date, no
Related Person of the Company and no present officer or director of any Related
Person of the Company has any interest in any property (real or personal,
tangible or intangible) or contract used in or pertaining to the business of the
Company (or the Surviving Corporation and its Subsidiaries), and no Related
Person of the Company has any direct or indirect ownership interest (excluding
immaterial passive investments) in any person (other than through the Company)
with which the Company competes in any material respect or has a material
business relationship. The Disclosure Letter sets forth as of the date of this
Agreement a description of all such services provided by any Related Person of
the Company. A "Related Person" shall mean any officer, director or holder in
excess of 5% of the equity securities of the Company, and any affiliates or
associates (as defined in Rule 12b-2 under the Exchange Act) of such officer,
director or holder in excess of 5% of the equity securities of the Company.
6.28 No Brokers or Finders Fees. There are no broker's and finder's
--------------------------
expenses, commissions, fees or other forms of compensation which are due or
payable from or by any Holder, the Stockholder Representative, or the Company,
or may have been earned by any third party acting on behalf of any Holder or the
Company in connection with the negotiation and execution hereof and the
consummation of the transactions contemplated hereby.
6.29 Payment and Conversion of Loans and Debentures. The loans previously
----------------------------------------------
made to the Alan Maxwell Pension Plan in the amounts of $68,000 and $18,000 and
the convertible debentures to Donn and John Sherrill in the amounts of $15,000
and $10,000 have been paid or converted into Common Stock of the Company and the
Company has no further obligations thereunder. In addition, the Company has no
outstanding obligations under that certain consulting agreement with Julia
Wilson, including any obligations to repurchase common stock issued in
connection therewith.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND PARENT
The Parent and the Purchaser hereby represent and warrant to the Company as
follows:
7.1 Due Organization of Parent and Purchaser. The Parent and Purchaser
----------------------------------------
are corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each has all requisite corporate power and
authority to own, lease and operate its properties and conduct its business as
it is presently being conducted and as it is contemplated to be conducted.
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<PAGE>
7.2 Parent Documents. The Parent has duly filed and submitted all
----------------
reports required to be filed or submitted by it with the Commission under the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Parent has delivered to the Company copies of the most
recent annual report on Form 10-K filed by the Parent under the Exchange Act and
the most recent annual report to shareholders of the Parent and the definitive
proxy statement filed with such report, along with all quarterly reports on Form
10-Q and current reports on Form 8-K filed by the Parent since the date of such
annual report. The financial statements included in such reports have been
prepared in accordance with GAAP consistently applied throughout the periods
indicated and present fairly the consolidated financial position of the Parent
and its subsidiaries, and the consolidated results of its operations for the
periods ended, on the dates indicated. The quantity of outstanding shares and
options set forth in the Company's Annual Report on Form 10K for the year ended
June 28, 1996 is accurate.
7.3 Absence of Changes. Since the date of the latest financial statements
------------------
included in the Parent's most recent report on Form 10-K, and except as
subsequently disclosed in a quarterly report on Form 10-Q or a current report on
Form 8-K filed with the Commission since that date, there has not been any
material adverse change in the business, prospects, assets, liabilities,
consolidated earnings, reserves or condition (financial or otherwise) of the
Parent.
7.4 Issuance of Parent Stock. Parent Stock, when issued pursuant hereto,
------------------------
will be legally and validly authorized and issued, fully paid and non-
assessable, and will not have been issued in violation of the preemptive rights
of any person.
7.5 No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement nor the consummation of the transactions contemplated hereby will
result in (a) a violation of or a conflict with any provision of the Certificate
of Incorporation or Bylaws of the Purchaser or the Parent, (b) a breach of or a
default under any term or provision of any contract, agreement, lease
commitment, license, franchise or permit to which the Purchaser or the Parent
is a party or an event which with notice, lapse of time, or both, would result
in any such breach or default, or (c) a violation by the Purchaser or Parent of
any statute, rule, regulation, ordinance, code, order, judgment, writ,
injunction, decree, or award, or an event which with notice, lapse of time, or
both, would result in any such violation, except for any of the foregoing that
would not have a Material Adverse Effect on the Parent.
7.6 Consents and Approvals. Other than the Registration Statement and any
----------------------
forms or notices which may be required to be filed by the Parent with the
Commission, the New York Stock Exchange or state securities commissioners, no
consent, approval or authorization or declaration, filing or registration with
any governmental or regulatory authority, or any other person or entity, is
required to be made or obtained by the Parent in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.
7.7 Due Authorization. Each of the Parent and the Purchaser have all
-----------------
requisite power and authority to own, lease and operate their assets, to conduct
their business as presently conducted and to execute and deliver the documents
called for in this Agreement to which each of them is a party. Each of the
Parent and the Purchaser has all necessary corporate power and authority to
enter into this Agreement and has taken all corporate action necessary to
contemplate the transactions contemplated hereby and to perform its obligations
hereunder. This Agreement has been duly executed and delivered by the Parent
and the Purchaser and is a legal, valid and binding obligation of the Parent and
the Purchaser, enforceable against the Parent and the Purchaser in accordance
with its terms, subject to the proviso in the immediately preceding sentence.
7.8 S-4 Registration Statement. The Registration Statement to be filed
--------------------------
pursuant to Section 2.2 hereof, as amended and at the time it is declared
effective by the Securities and Exchange Commission, will not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that the foregoing representation shall not apply to any information provided by
or relating to the Company.
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<PAGE>
ARTICLE VIII
COVENANTS PRIOR TO THE CLOSING DATE
-----------------------------------
The Company and the Purchaser, as applicable, covenant as follows for
the period from the date hereof through the Closing Date:
8.1 Maintenance of Business. The Company shall not, except as
-----------------------
consented to by the Parent in writing, take any action inconsistent with this
Agreement or with the consummation of the Merger. The Company shall operate the
Company's business and cause the Company's business to be operated in the
ordinary course and in the manner heretofore conducted and shall use their best
efforts to keep available to the Company the services of the present employees
and to maintain the relationships between the Company and its suppliers,
customers, distributors and others having business relations with it. Without
limiting the generality of the foregoing, the Company shall (a) maintain its
Assets in their current state of repair, subject to normal wear and tear; (b)
maintain insurance covering its Assets comparable to that in effect as of the
date hereof; (c) not purchase or commit to purchase any Assets other than in the
ordinary course of business without the consent of the Purchaser or the Parent;
and (d) make timely payments on accounts payable and other obligations of the
Company in accordance with past practice. The Company shall promptly notify the
Purchaser and Parent, within two (2) days, of any identifiable event and as soon
as practicable in the case of other events and conditions which constitute a
material adverse development in the business of the Company or its market
position, sales and profit trends, labor relations, litigation or insurance
claims or other material events; provided that such disclosure shall not be
deemed to cure any breach of a representation, warranty, covenant, or agreement
to satisfy any condition.
8.2 No Solicitation of Transactions. The Company shall not, directly or
-------------------------------
indirectly, and shall use their best efforts to cause the Company's officers,
directors, Holders, and agents not to, solicit, initiate or deliberately
encourage submission of proposals or offers from any person relating to any
acquisition or purchase of all or (other than in the ordinary course of
business) a material amount of the Assets of, or any equity interest in, the
Company or any merger, consolidation or business combination with the Company;
provided, however, that consistent with its fiduciary obligations under
applicable law as advised in writing by counsel, the Company may participate in
any discussions or negotiations regarding, and may furnish to any other person
information with respect to, any of the foregoing. The Company hereby represents
that it is not now engaged in discussions or negotiations with any party other
than the Purchaser and Parent with respect to any of the foregoing. The Company
shall notify the Parent promptly (orally and in writing) if any such written
offer, or any inquiry or contact by an officer or director of the Company (or to
its knowledge by other individuals) with any person with respect thereto, is
made and shall provide the Parent with a copy of such offer.
8.3 Certain Prohibited Transactions.
-------------------------------
(a) Except as provided in subsection (b), the Company shall not, without the
prior written consent of the Parent, engage in any transaction or act (i) which
would have a material Adverse Effect on the business, operations, properties,
Assets or financial condition of the Company, (ii) which would constitute a
changes under Section 6.8 required to be disclosed in the Disclosure Letter if
entered into prior to the date hereof, (iii) which would result in financial
commitments by the Company that exceed, in the aggregate, $10,000, other than
the purchase of raw materials, components and tooling which is purchased in the
ordinary course of business, consistent with past practice, or (iv) which would
constitute a binding contract or agreement of material nature the terms of which
extends beyond the Closing Date. The Company shall not make any significant
purchase or disposal of Assets or enter into any lease agreement, the term of
which would extend beyond six (6) months after the Closing Date.
(b) The Parent is aware that the Company has obtained a $500,000 FMHA loan, of
which the Company intends approximately $350,000 will be used for Facility
expansion, $105,000 will be used to purchase a Computer Numeric Controlled
Router machine, and $45,000 will be used to pay for other associated costs. The
Parent is aware that the Company intends to pay approximately $35,000 to William
J. Senecal for consulting fees and travel expenses and approximately $18,000 to
Dorsey & Whitney for legal services provided in connection with the Merger.
These payments and loans are hereby approved by the Parent and the amounts of
the
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<PAGE>
payments to Mr. Senecal and Dorsey & Whitney specified in the previous sentence
shall not be counted against the Net Worth of the Company.
8.4 Investigation by the Parent. The Company shall allow the Parent, at its
---------------------------
own expense, during regular business hours, prior to the Closing Date, through
the Parent's or Purchaser's employees, agents and representatives, to make such
investigation of the business, properties, plants, books and records of the
Company and to conduct such examination of the condition (financial or
otherwise) of the Company as the Parent deems necessary or advisable to
familiarize itself with such business, properties, plants, books, records,
condition or other matters, and to verify the representations and warranties of
the Company hereunder. The Parent shall use its best efforts to maintain the
confidentiality of all information obtained from its investigation and, subject
to the provisions of Section 11.9 hereof, shall comply with the terms of that
certain Confidentiality Agreement entered into by and between Quickie Designs,
Inc., a wholly-owned subsidiary of the Parent, and the Company.
8.5 Consents and Best Efforts Agreement to Vote in Favor of the Merger. As
------------------------------------------------------------------
soon as practicable, the Company shall commence to take all reasonable action
required to obtain all consents, including without limitation, a consent by each
party to any contract listed in the Disclosure Letter, to the substitution of
the Surviving Corporation as successor in interest to the Company under each
respective Contract and agreements, and to give all notices and make all filings
with, any third parties, including governmental authorities, necessary to
authorize, approve or permit the transactions contemplated hereby. In addition,
subject to the terms and conditions herein provided, each of the parties hereto
covenants and agrees to use its best efforts to take, or cause to be taken, an
action to do or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated hereby. The Board of Directors of the Company shall
use its best efforts to obtain the requisite Stockholder approval for the
consummation of the Merger. Wayne Hanson and William Senecal own of record and
beneficially 26.9% and 5.23%, respectively, of the outstanding shares of the
Company's common stock (the "Company Shares"), have concurrently herewith
entered into an agreement whereby they have committed to vote the Company Shares
owned by them in favor of consummation of the Merger and thus inducing the
Parent and the Purchaser to enter into this Agreement.
8.6 Use of Company Funds. The Company shall not make any payments using the
--------------------
Company corporate funds for any purpose other than in the ordinary course of
business. The Company shall not declare or pay any cash or stock dividend, make
any distribution to the Holders, buy back or otherwise purchase any of its
outstanding capital stock or pay any other bonus to any shareholder, officer or
director of the Company. The Company shall not issue new options for more than
1,000 shares (in the aggregate) of the Company's common stock and the price of
new options shall remain at $100 per share.
8.7 Employees. The Company shall not take any action to induce an
---------
employee of the Company whom the Purchaser or Parent is seeking to retain as an
employee to leave the employ of the Company. The Company shall not make any
salary increases, other than increases in hourly wages in the ordinary course of
business and consistent with past practice and in any event not to exceed 5%, or
hire any management personnel without prior approval from the Parent.
8.8 Satisfaction of Conditions. The Purchaser, Parent, and the Company each
--------------------------
shall use its best efforts to satisfy the Conditions to Obligation of Each Party
to Effect the Merger set forth in Article X.
8.9 Tax Elections. No new elections with respect to Taxes or any changes in
-------------
current elections with respect to Taxes affecting the Company shall be made
without the prior written consent of the Parent.
8.10 Preparation of Registration Statement. The parent shall promptly
-------------------------------------
prepare and file with the Commission the Registration Statement. The parent
shall use its reasonable best efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing and to obtain all necessary state securities laws or "blue sky"
permits, approvals and registrations in connection with the issuance of the
Parent Stock pursuant hereto. The Company shall furnish to the Parent, for use
in preparation of the Registration Statement all information concerning the
Company (including financial statements) and its Holders required by Form S-4
and the proxy rules under the Exchange Act. Following notice by the Commission
of the
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<PAGE>
effectiveness of the Registration Statement, the Company shall promptly notice a
meeting of its Stockholders to obtain their approval for the consummation of the
Merger.
8.11 Accounts Receivable. Without the written consent of Parent, the
-------------------
Company shall not approve any repayment terms on outstanding accounts receivable
which extend payment beyond 180 days from the Closing Date.
8.12 Non-Foreign Affidavit. Holders shall each furnish to the Purchaser,
---------------------
on or before the Closing Date, an affidavit sworn under penalty of perjury,
setting forth such Holder's name, address, and federal tax identification number
(social security number) and stating that he or she is not a foreign person
within the meaning of the Code.
8.13 Employment Agreement. On or before the Closing Date, Wayne H. Hanson
--------------------
shall enter into an employment agreement with the Purchaser in substantially
the form attached hereto as Exhibit B.
8.14 Noncompetition Agreement. On or before the Closing Date, Wayne H.
------------------------
Hanson shall enter into a Noncompetition Agreement in substantially the form
attached hereto as Exhibit C.
ARTICLE IX
COVENANTS AFTER THE CLOSING DATE
--------------------------------
The Company and Purchaser, as applicable, covenant as follows for the
period from and after the Closing Date:
9.1 Indemnification.
----------------
(a) By the Holders. Subject to the limitations of Section 9.2
--------------
hereof, the Holders, severally, shall indemnify, save and hold harmless the
Parent, Purchaser, and Surviving Corporation from and against any and all costs,
losses, liabilities, damages, lawsuits, diminution in value, taxes, demands,
assessments, fines, deficiencies, claims and expenses, including without
limitation, interest, penalties, attorneys', accountants' and expert witness'
fees and all amounts paid in investigation, defense or settlement of any of the
foregoing (collectively referred to herein as "Claims"), incurred in connection
with or arising out of or resulting from or incident to (i) any breach of any
covenant set forth in Article VIII or IX hereof or representation or warranty
set forth in Article VI hereof made by the Company in or pursuant to this
Agreement or (ii) the inaccuracy of any representation, made by the Company in
or pursuant to Article XI or the Disclosure Letter to this Agreement.
(b) By the Purchaser and the Parent. The Parent and Purchaser
-------------------------------
shall indemnify and save and hold harmless each Holder from and against any
and all Claims incurred in connection with or arising out of or resulting from
or incident to (i) any breach of any covenant set forth in Article VIII or IX
hereof or representation or warranty set forth in Article VII hereof made by the
Parent or Purchaser in or pursuant to this Agreement or (ii) the inaccuracy of
any representation made by the Parent or Purchaser in or pursuant to this
Agreement.
(c) Defense of Claims. If any lawsuit or enforcement action is
-----------------
filed against any party entitled to the benefit of indemnity hereunder, written
notice thereof shall be given to the indemnifying party as promptly as
practicable (and in any event within fifteen (15) days after the service of the
citation or summons); provided that the failure of any indemnified party to
give timely notice shall not affect rights to indemnification hereunder except
to the extent that the indemnifying party demonstrates that a material
substantive right was materially impaired by such failure. After such notice, if
the indemnifying party shall acknowledge in writing to such indemnified party
that such indemnifying party shall be liable under its indemnity in connection
with such lawsuit or action, then the indemnifying party shall be entitled, if
it so elects, to take control of the defense and investigation of such lawsuit
or action and to employ and engage attorneys of its own choice to handle and
defend the same, at the indemnifying party's cost, risk and expense, and such
indemnified party shall cooperate in all reasonable respects, with the
indemnifying party and such attorneys in the investigation, trial and defense of
such lawsuit or action and any appeal arising therefrom; provided, however, that
the indemnified party may, at its own cost, participate in such investigation,
trial and defense of such lawsuit or action and any appeal arising therefrom. If
the indemnifying party fails to assume the defense of such claim within fifteen
(15) days after receipt of the
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<PAGE>
written notice, the indemnified party against which such claim has been asserted
will (upon delivering notice to such effect to the indemnifying party) have the
right to undertake, at the indemnifying party's cost and expense, the defense,
compromise, or settlement of such claim on behalf of and for the account and
risk of the indemnifying party; provided, however, that such claim shall not be
compromised or settled without the written consent of the indemnifying party,
which consent shall not be unreasonably withheld. The indemnifying party shall
be liable for any settlement of any action effected pursuant to and in
accordance with this Section 9.1 and for any final judgment (subject to any
right of appeal), and the indemnifying party agrees to indemnify and hold
harmless an indemnified party from and against any damages by reason of such
settlement or judgment.
(d) No Limitation to Third Party Claims. The provisions of this
-----------------------------------
Section 9.1 are not limited to matters asserted by the parties, but cover,
without limitation, costs, losses, liabilities, damages, lawsuits, claims and
expenses incurred in connection with third party claims. The indemnity
hereunder is in addition to any and all rights and remedies of the parties in
connection herewith. In the event that the indemnified party shall receive
reimbursement, by insurance or otherwise (other than through payments made
pursuant to this Section 9.1), of sums as to which the indemnified party shall
have made payments under this Section 9.1, such sums shall be reimbursed by the
indemnified party upon receipt.
(e) $70,000 Minimum. Neither the Parent, the Purchaser nor the
---------------
Stockholders shall make any indemnification claim against another party hereto
pursuant to this Section 9.1 until all such claims in the aggregate exceed
$70,000 and then only to the extent that such claim or claims exceed $70,000.
9.2 Limitation on Indemnification. Notwithstanding any other provision
-----------------------------
of this Article IX, if any claims are made by third parties against an
indemnified party, for which the indemnifying party would be liable, and it
appears likely that such claims might also be covered by the indemnified party's
insurance policies, the indemnified party shall make a claim under such
policies, and to the extent that the indemnified party obtains any recovery from
such insurance, such recovery shall be offset against any sums due from the
indemnifying party (or shall be repaid to the indemnifying party, if the
indemnifying party has already fully paid such amounts). The amount of
indemnification pursuant to Section 9.1 in the aggregate, together with the
adjustments to the Merger Consideration pursuant to Section 5.4 hereof, is
limited in amount to and shall be limited to payment from Escrow Shares. The
amount of indemnification by any one Holder pursuant to Section 9.1, together
with the adjustments to the Merger Consideration pursuant to Section 5.4
hereof, each on a pro rata basis, is limited to the value of the Escrow Shares
otherwise payable to such Holder but retained by the Parent pursuant to Article
III hereof.
9.3 Further Assurances. On and after the Closing Date, the Parent and
------------------
Purchaser shall take all appropriate action and execute any documents of any
kind which may be reasonably necessary or desirable to carry out the
transactions contemplated hereby.
9.4 Cooperation and Records Retention. The Purchaser, the Stockholder
---------------------------------
Representative and the Company shall (i) provide each other with such assistance
as may reasonably be requested by any of them in connection with the preparation
of any Return, audit, or other examination by any taxing authority or judicial
or administrative proceedings relating to liability for Taxes, (ii) each retain
and provide the other with any records or other information that may be relevant
to such Return, audit or examination, proceeding, or determination, and (iii)
each provide the other with any final determination of any such audit or
examination, proceeding, or determination that affects any amount required to
be shown on any Return for any period. Without limiting the generality of the
foregoing, as of the Closing Date, the Company shall have in its possession
copies of all Returns, supporting work schedules, and other records or
information that may be relevant to such Returns for all tax periods or portions
thereof ending before or including the Closing Date and shall not destroy or
otherwise dispose of any such records without first providing the parties hereto
with a reasonable opportunity to review and copy the same.
9.5 Tax Proceedings. The Surviving Corporation shall notify the
---------------
Stockholder Representative, and the Stockholder Representative shall notify the
Surviving Corporation, within fifteen (15) days of either party's receipt of any
tax inquiries or notifications thereof which relate to any period prior to the
Closing Date, and the Stockholder Representative shall prepare and deliver
responses to such inquiries as the Stockholder Representative deem necessary or
appropriate. All responses prepared by the Stockholder Representative to taxing
authority inquiries relating to tax periods prior to the Closing Date shall
first be reviewed and approved in writing
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<PAGE>
by the Purchaser or Parent before submitting to the appropriate taxing
authority. In addition, the Stockholder Representative shall prepare and file
the federal and state income tax returns, including any payroll and
informational reports, for the Company for the period form January 1, 1996 to
the Closing Date; provided, however, the Surviving Corporation shall receive a
copy of such returns at least fifteen (15) business days prior to the filing due
date and the Stockholder Representative shall not file such returns without
prior written consent by the Surviving Corporation. If the Stockholder
Representative is not responding or otherwise proceeding in a timely manner in
connection with any tax audit, the Purchaser and Parent shall have the right to
prepare and file responses to any such audit.
9.6 Liability for Taxes. The Purchaser or the Parent shall pay for any
--------------------
sales tax or transfer tax due on the Merger. Notwithstanding the limitations of
Section 9.2 hereof, the Holders shall be jointly and severally liable for, and
shall save and hold harmless the Purchaser and Parent against any tax assessed
on the Company, including, but not limited to, associated interest and
penalties, in respect of all periods up to and including the Closing Date, to
the extent not accrued on the Closing Balance Sheet. Without limiting the
generality of the forgoing, the Stockholder Representative acknowledges that he
and the other Holders have consulted with their own tax advisors regarding the
treatment of the transaction contemplated by this Agreement, that none of the
Purchaser, Parent, or the Company has made any representation regarding such tax
treatment, and that the Holders shall be liable for all Taxes imposed upon the
Holders arising out of such transactions.
9.7 Eliminations of Personal Guarantees. As soon as practicable following
------------------------------------
the Closing Date, Purchaser and Parent shall work with Wayne Hanson and William
Senecal and take all reasonable steps necessary to eliminate the personal
guarantees of Wayne Hanson and William Senecal on the Company debt set forth in
Section 9.7 of the Disclosure Letter.
9.8 Dispositions of Parent Shares. None of the Stockholders, acting
------------------------------
individually or as a result of their actions viewed in combination, shall sell
or otherwise dispose of a number or amount of Parent Shares which is likely to
or may disqualify the Merger as tax free pursuant to Section 368(a)(2)(D) of the
Code. Any claims that Parent or Purchaser may have pursuant to this Section 9.8
shall be governed by Section 9.1 hereof and limited by the provisions of Section
9.2 hereof.
ARTICLE X
CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER
-----------------------------------------------------------
The respective obligations of each party to effect the Merger provided
for hereby are subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, provided that no party shall be entitled to
refuse to consummate the transaction in reliance upon its failure to complete an
action within its control:
10.1 Representations, Warranties and Covenants. All representations
------------------------------------------
and warranties contained in this Agreement shall be true and correct in all
material respects at and as of the Closing Date as if such representations and
warranties were made at and as of the Closing Date, except as and to the extent
that the facts and conditions upon which such representations and warranties are
based are expressly required or permitted to be changed by the terms hereof and
the parties shall have performed all agreements and covenants required hereby
to be performed by it or them prior to or at the Closing Date, and there shall
be delivered to the Purchaser a certificate signed by each of the officers of
the Company to the effect; provided, however, that no party shall be entitled to
refuse to consummate the transaction in reliance upon its or their own breach or
failure to perform.
10.2 Consents. All consents, approvals and waivers from third parties and
---------
governmental authorities necessary to the transactions as contemplated hereby
shall have been obtained.
10.3 Board and Stockholder Approval. The Board of Directors of the Company
-------------------------------
and holders of Company Shares have duly approved this Merger and this Agreement,
all in accordance with applicable law.
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<PAGE>
10.4 Affiliate Agreement.
-------------------
(a) Prior to the Closing Date, the Company shall cause to be delivered
to the other parties hereto a list, reviewed by its counsel, identifying all
persons who will be, in its opinion, at the time of the Stockholder's Meeting,
"affiliates" of the Company for the purposes of Rule 145 promulgated by the
Commission under the Securities Act (an "Affiliate List"). The Company shall
furnish such information and documents as the parties hereto may reasonably
request for the purpose of reviewing such Affiliate List. Prior to the Closing
Date, the Company shall cause each person who is identified as an "affiliate" of
the Company in such Affiliate List to execute an affiliate agreement,
substantially in the form of Exhibit G attached hereto, providing, among other
things, that such person will not offer or sell or otherwise dispose of any of
the shares of Parent Stock issued to such person pursuant to the Merger (or
otherwise held by such person) in violation of the Securities Act.
(b) The affiliate agreements shall remain in full force and effect as
of the Closing Date and for such period thereafter as the limitations of Rule
145 shall be in effect.
10.5 Due Diligence Review.
--------------------
(a) Prior to October 1, 1996, the Parent and Purchaser shall have
completed their review of documents provided by or on behalf of the Company and
their investigation of the Company as described in Section 8.4 hereof; such
review and investigation shall have revealed, prior to October 1, 1996, no
material variations from the representations and warranties made herein or
assumptions made by the Purchaser and Parent as to the prospects for ongoing
growth and profitability of the Company.
(b) Prior to October 1, 1996, the Company shall have completed their
standard due diligence review of the Parent, including but not limited to a
review of the Parent's audited financial statements for the 1995-1996 fiscal
year to be issued in August 1996.
(c) On or after October 1, 1996, this Agreement may be terminated at
any time prior to the Closing Date (i) by mutual consent by Parent, Purchaser
and the Company, or (ii) by the Parent or Purchaser upon the occurrence of an
event which has or is reasonably likely to have a Material Adverse Effect on the
Company, or (iii) by the Company upon the occurrence of an event
which has or is reasonably likely to have a Material Adverse Effect on the
Parent.
10.6 Opinion of Counsel. Closing shall be contingent upon the Parent
------------------
receiving an opinion letter from the Company's legal counsel as to those matters
set forth in Exhibit H hereto.
10.7 Corporate Documents. The Parent shall have received from the Company
-------------------
resolutions adopted by the Board of Directors and Stockholders of the Company
approving this Agreement and the Merger (and the transactions contemplated
hereby), certified by the corporate secretary of the Company. The Parent shall
have also received the corporate minute books, Articles of Incorporation, Bylaws
and stock transfer books of the Company.
10.8 Certificates. The Company shall have furnished the Parent or
------------
Purchaser with such certificates of the officers of the Company and others to
evidence compliance with the conditions set forth herein as may be reasonably
requested by the Purchaser or Parent.
10.9 Ancillary Agreements. The Surviving Corporation shall have entered
--------------------
into an employment agreement and a noncompetition agreement with Wayne H. Hanson
as provided in this Agreement.
10.10 Registration of Parent Shares. The Registration Statement shall have
-----------------------------
been declared effective by the Commission and shall not be the subject of any
stop order or proceedings seeking a stop order.
10.11 NYSE Listing. The Purchaser shall have caused the shares of Parent
------------
Stock deliverable at the Closing Date to be listed on the New York Stock
Exchange effective as of no later than the Closing Date.
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10.12 Amounts Owed by Bill Senecal. All amounts owed to the Company by Bill
----------------------------
Senecal, including amounts of principal and interest owing under that certain
promissory note in the principal amount of $13,000, dated January 1, 1995, shall
have been repaid to the Company by Mr. Senecal on or prior to the Closing Date.
10.13 Tax Representations. Prior to the Closing Date, the Company shall
-------------------
cause to be delivered to the Parent and the Purchaser a representation in
the form of Exhibit J hereto which the Company shall have caused to be signed by
each Holder of the Company stating in substance that such individuals have no
pre-arranged plan to dispose of sufficient Parent Shares as to disqualify the
Merger as tax free pursuant to Section 368(a)(2)(D) of the Code.
10.14 Assignment of SBA Loans. Prior to the Closing Date, the Company shall
-----------------------
have arranged for the assignment of the loans from the SBA (in the amount of
$228,000 and $50,000), the City of Belgrade (in the amount of $200,000) and
First Security Bank of Bozeman (in the amounts of $500,000 and $480,000) to the
Purchaser.
10.15 Termination of Kid-Kart Inc. Stock Purchase Agreement. Prior to the
-----------------------------------------------------
Closing Date, the Company should have delivered to the Parent and the Purchaser
an agreement, executed by the Company and Wayne H. Hanson, terminating that
certain Kid-Kart, Inc. Stock Purchase Agreement, dated July 15, 1995 and
releasing the parties thereto, the Parent and the Purchaser from any all
obligations or liabilities arising thereunder.
10.16 Stockholder Certificates. Prior to the Closing Date, the Company
------------------------
shall cause to be delivered to the Parent and the Purchaser a certificate signed
by each of the Holders, in form and substance satisfactory to the Parent and
Purchaser and their counsel, to the effect that each Holder (i) adopts and
commits to each of the covenants set forth in Article IX hereof, (ii) agrees to
be bound by and authorizes the Parent to take the actions set forth under
Article V hereof; (iii) appoints Wayne Hanson as the Stockholder Representative
as set forth in Section 3.2 hereof; (iv) represents those matters specified in
Section 8.12 hereof; and (v) waives and releases the Parent, Purchaser and Kid-
Kart from any and all liability, obligations or claims associated with any and
all preemptive rights with respect to the purchase and sale of stock of the
Company. Each Holder shall also execute a stock power in blank authorizing the
transfer to the Parent up to the amount of the Escrow Shares withhold form such
individual pursuant to Section 2.8 hereof.
10.17 Building Variance. Prior to the Closing Date, the Company shall cause
-----------------
to be delivered to the Parent and the Purchaser a variance issued by the City of
Belgrade, Montana pursuant to the Belgrade Area Building Code relating to and
approving the structure at 732 Cruiser Lane, Belgrade, Montana, which was
constructed with a height exceeds the maximum allowable by 24 inches.
10.18 Indemnification Agreement. Prior to the Closing Date, the Company
-------------------------
shall cause to be delivered to the Parent and the Purchaser and agreement
executed by Wayne Hanson wherein Mr. Hanson agrees to indemnify Parent and
Purchaser for any and all obligations and liabilities associated with claims by
Wendell Cooper that Mr. Copper may have had or acquired and equity interest
in, or rights to common stock of, the Company.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Survival of Representations and Warranties. All statements contained
in the Disclosure Letter or in any certificate, schedule, exhibit or instrument
or conveyance delivered by or on behalf of the parties pursuant to this
Agreement or in connection with the transactions described herein shall be
deemed to be representations and warranties by the parties hereunder. The
representations, warranties, covenants and agreements of the Company, Purchaser
and Parent contained herein shall survive the consummation of the transactions
described herein and the Closing Date, without regard to any investigation made
by any of the parties hereto. The representations and warranties contained in
Articles VI and VII shall expire on the first anniversary of the Closing Date.
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<PAGE>
11.2 Expenses. The costs and expenses of Peat Marwick and Company's
--------
Auditors in auditing the Closing Balance Sheet and auditing the Net Worth of the
Company shall be borne by the Parent and Company, respectively. the Company and
Parent each shall pay its own attorneys' and other fees incurred by it and
associated with the transactions described herein, although the Company shall
endeavor to insure that such expenses are as low as possible. See Sections
8.3(b) and 5.2 hereof.
11.3 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by the Company without the prior written
consent of the Parent, or by the Parent or Purchaser without the prior written
consent of the Company.
11.4 Notices. Unless otherwise provided herein, any notice, request,
-------
instruction or other document to be given hereunder by either party to the other
shall be in writing and delivered personally or mailed by certified mail,
postage prepaid, return receipt requested (such mailed notice to be effective on
the date such receipt is acknowledged) as follows:
If to the Company, addressed to:
Kid-Kart, Inc.
732 Cruiser Lane
Belgrade, MT 59714
Attention: Wayne H. Hanson
Copy to:
Dorsey & Whitney LLP
507 Davidson Building
8 Third Street North
Great Falls, MT 59401
Attention: Jack Manning
If to the Parent or the Surviving Corporation, addressed to:
Sunrise Medical Inc.
2382 Faraday Avenue, Suite 200
Carlsbad, CA 92008
Attention: Steven A. Jaye, Esq.
Copy to:
Latham & Watkins
650 Town Center Drive, Suite 2000
Costa Mesa, CA 92626-1925
Attention: Jeffrey T. Pero, Esq.
or to such other place as a party may designate by written notice to the others.
11.5 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto, constitutes the entire Agreement among the parties pertaining
to the subject matter hereof and supersedes all prior writings, agreements,
understandings,negotiations and discussions, whether oral or written, of the
parties, none of which have been relied on in any way by the Purchaser, Parent
or the Company.
1.6 Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or the breach thereof, with the exception of any claim for a
temporary restraining order or preliminary or permanent injunctive relief to
enjoin any breach or threatened breach hereof, shall be settled by arbitration
to be held in San Diego, California, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
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<PAGE>
11.7 Multiple Counterparts. This agreement may be executed in one or more
---------------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.8 Headings and Table of Contents. The headings of the Articles and
------------------------------
Sections herein and the Table of Contents are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
11.9 Publicity. Except as provided herein or required by law (including,
---------
without limitation, the federal securities laws) neither the Purchaser, Parent
nor the Company shall issue any press release or make any public statement
regarding the transactions contemplated hereby, without the prior written
approval of the other. It is understood that a public announcement or
announcements may be made by the Purchaser or Parent before or after the Closing
Date, which announcement will satisfy the Parent's disclosure obligations under
applicable law.
11.10 Governing Law. This Agreement shall be governed by the laws of the
-------------
State of California, without regard to principles of conflict of laws and each
party consents to California jurisdiction.
11.11 Construction. This Agreement represents the product of negotiations
------------
taking place over time as to which different provisions were drafted mutually by
different draftsmen, and none should be construed as the product of any
individual.
11.12 Attorneys' Fees. In connection with any action or arbitration
---------------
between the parties hereto to enforce a party's rights under this Agreement, the
prevailing party shall be entitled to recover its costs and expenses, including
without limitation, reasonable attorneys' fees, incurred in connection with such
action, including any appeal of such action.
//
//
//
//
//
//
//
//
//
//
//
//
//
A-37
<PAGE>
IN WITNESS WHEREOF, the undersigned have affixed their signatures
hereto as of the date first set forth above.
KID-KART, INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
JAY MEDICAL, LTD.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
SUNRISE MEDICAL INC.
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
A-38
<PAGE>
APPENDIX B
SECTIONS 35-1-826 THROUGH 35-1-839
OF MONTANA LAW RELATING TO DISSENTERS' RIGHTS
35-1-826 DEFINITIONS.--As used in 35-1-826 through 35-1-839, the following
definitions apply:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" includes the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under 35-1-827 and who exercises that right when and in the manner
required by 35-1-829 through 35-1-837.
(4) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate action
until the date of payment at the average rate currently paid by the corporation
on its principal bank loans or, if the corporation has no loans, at a rate that
is fair and equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial shareholder to the extent of
the rights granted by a nominee certificate on file with a corporation.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
35-1-827 RIGHT TO DISSENT.--(1) A shareholder is entitled to dissent from
and obtain payment of the fair value of 1 the shareholder's shares in the event
of any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a party if:
(i) shareholder approval is required for the merger by 35-1-815 or the
articles of incorporation and the shareholder is entitled to vote on the merger;
or
(ii) the corporation is a subsidiary that is merged with its parent
corporation under 35-1-818;
(b) consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired if the shareholder is
entitled to vote on the plan;
(c) consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course of
business if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution but not including a sale pursuant to court order
or a sale for cash pursuant to a plan by which all or substantially all of the
net proceeds of the sale will be distributed to the shareholders within 1 year
after the date of sale;
(d) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because of it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of redemption, including
a provision with respect to a sinking fund for the redemption or repurchase of
the shares;
(iii) alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
(iv) excludes or limits the right of the shares to be voted on any matter or
to 2 cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights; or
B-1
<PAGE>
(v) reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under 35-1-
621; or
(e) any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and to
obtain payment for their shares.
(2) A shareholder entitled to dissent and to obtain payment for 1 shares under
35-1-826 through 35-1-839 may not challenge the corporate action creating the
shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation. (Last amended by Ch. 249, L.
'93, eff. 10-1-93.)
______
Ch. 249, L. '93, eff. 10-1-93, added matter in italic and deleted 1"his"
and 2"accumulate".
35-1-828 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--(1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(a) he submits to the corporation the record shareholder's written consent to
the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(b) he does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
35-1-829 NOTICE OF DISSENTERS' RIGHTS.--(1) If a proposed corporate action
creating dissenters' rights under 35-1-827 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under 35-1-826 through 35-1-839 and
must be accompanied by a copy of 35-1-826 through 35-1-839.
(2) If a corporate action creating dissenters' rights under 35-1-827 taken
without a vote of shareholders, the corporation shall give written notification
to all shareholders entitled to assert dissenters' rights that the action was
taken and shall send them the dissenters' notice described in 35-1-831.
35-1-830 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) If proposed corporate
action creating dissenters' rights under 35-1-827 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights:
(a) shall deliver to the corporation before the vote is taken written notice
of his intent to demand payment for his shares if the proposed action is
effectuated; and
(b) may not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)(a)
is not entitled to payment for his shares under 35-1-826 through 35-1-839.
35-1-831 DISSENTERS' NOTICE.--(1) If proposed corporate action creating
dissenters' rights under 35-1-827 is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of 35-1-830.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken and must:
(a) state where the payment demand must be sent and where and when
certificates for certified shares must be deposited;
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<PAGE>
(b) inform shareholders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment is received;
(c) supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and that requires the person asserting dissenters' rights to
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) set a date by which the corporation must receive the payment demand, which
may not be fewer than 30 nor more than 60 days after the date the required
notice under subsection (1) is delivered; and
(e) be accompanied by a copy of 35-1-826 through 35-1-839.
35-1-832 DUTY TO DEMAND PAYMENT.--(1) A shareholder sent a dissenters'
notice described in section 35-1-831 shall demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenters' notice pursuant to 35-1-831(2)(c), and
deposit his certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his certificates under
subsection (1) retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
(3) A shareholder who does not demand payment or deposit his certificates
where required, each by the date set in the dissenters' notice, is not entitled
to payment for his shares under 35-1-826 through 35-1-839.
35-1-833 SHARE RESTRICTIONS.--(1) The corporation may restrict the transfer
of uncertificated shares form the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions are released
under 35-1-835.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
35-1-834 PAYMENT.--(1) Except as provided in section 35-1-836, as soon as
the proposed corporate action is taken or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with 35-1-832 the amount the
corporation estimates to be the fair value of the dissenters' shares plus
accrued interest.
(2) The payment must be accompanied by:
(a) the corporation's balance sheet as of the end of a fiscal year ending not
more than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(b) a statement of the corporation's estimate of the fair value of the shares;
(c) an explanation of how the interest was calculated;
(d) a statement of the dissenters' right to demand payment under 35-837; and
(e) A copy of 35-1-826 through 35-1-839.
35-1-835 FAILURE TO TAKE ACTION.--(1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing certificates, the corporation shall return the deposited certificates
and release the transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under 35-1-831 and repeat the payment demand procedure.
35-1-836 AFTER-ACQUIRED SHARES.--(1) A corporation may elect to withhold
payment required by 35-1-834 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
B-3
<PAGE>
(2) To the extent the corporation elects to withhold payment under subsection
(1), after taking the proposed corporate action, the corporation shall estimate
the fair value of the shares plus accrued interest and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of his demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated, and a
statement of the dissenter's right to demand payment under 35-1-837.
35-1-837 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.--(1) A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and the amount of interest due and
may demand payment of the dissenter's estimate, less any payment under 35-1-834,
or reject the corporation's offer under 35-1-836 and demand payment of the fair
value of the dissenter's shares and the interest due if:
(a) the dissenter believes that the amount paid under 35-1-834 or offered
under 35-1-836 is less than the fair value of the dissenter's shares or that the
interest due is incorrectly calculated;
(b) the corporation fails to make payment under 35-1-834 within 60 days after
the date set for demanding payment; or
(c) the corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within 60n days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection (1) within
30 days after the corporation made or offered payment for his shares.
35-1-838 COURT ACTION.--(1) If a demand for payment under 35-1-837 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand and shall petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not commence
the proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the district court of the
county where a corporation's principal office or, if its principal office is not
located in this state, where its registered office is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters whose demand remain unsettled,
whether or not residents of this state, parties to the proceeding as in an
action against their shares, and all parties must be served with a copy of the
petition. Nonresidents may be served by certified mail or by publication as
provided by law.
(4) The jurisdiction of the district court in which the proceeding is
commenced under subsection (2) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment:
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares plus interest exceeds the amount paid by the corporation; or
(b) for the fair value plus accrued interest of his after-acquired shares for
which the corporation elected to withhold payment under 35-1-836.
35-1-839 COURT COSTS AND ATTORNEY FEES.--(1) The court in an appraisal
proceeding commenced under 35-1-838 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against the corporation, except
that
B-4
<PAGE>
the court may assess costs against all or some of the dissenters, in
amounts the court finds equitable, to the extent the court finds dissenters
acted arbitrarily, vexatiously, or not in good faith in demanding payment under
35-1-837.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) against the corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of 35-
1-829 through 35-1-837; or
(b) against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by 35-1-826 through 25-1-839.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award the counsel reasonable attorney fees to be paid out of the amounts awarded
the dissenters who were benefited.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 102(b)(7) of the Delaware General Corporation Law permits a
Delaware corporation to limit the personal liability of its directors in
accordance with the provisions set forth therein. The Certificate of
Incorporation, as amended, of Sunrise provides that the personal liability of
its directors shall be limited to the fullest extent permitted by applicable
law.
Section 145 of the Delaware General Corporation Law contains provisions
permitting corporations to indemnify any person who is or was a director,
officer, employee or agent of the corporation, or who is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, in
accordance with the provisions set forth therein. The Bylaws of Sunrise
generally provide for indemnification of such persons to the fullest extent
allowed by applicable law.
Item 21. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------ -----------
<S> <C>
2.1 -- Agreement and Plan of Merger among Sunrise Medical
Inc., Jay Medical, Ltd., and Kid-Kart, Inc. dated
September 24, 1996*
3.1 -- Certificate of Incorporation of Sunrise and
amendments thereto/(a)/
3.2 -- Amendment to Certificate of Incorporation of Sunrise
as set forth under the caption "Article III--
Liability of Director to the Corporation"/(b)/
3.3 -- Bylaws of Sunrise/(a)/
3.4 -- Amendment to Article II, Section 2, of Sunrise's
Bylaws/(c)/
3.5 -- Amendment to Certificate of Incorporation of Sunrise
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)/
5.1 -- Opinion of Latham & Watkins regarding the legality of
the issuance of Sunrise Common Stock*
8.1 -- Opinion of Dorsey & Whitney LLP regarding tax matters*
9.1 -- Stockholders Agreement dated September 24, 1996, by
and among Sunrise Medical Inc., Kid-Kart, Inc., Jay
Medical, Ltd., Wayne Hanson and William Senecal*
10.6 -- Amended and Restated Stock Option Plan for Key
Associates/(i)(p)/
10.7 -- 1993 Stock Option Plan/(j)(p)/
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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 Plance 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 borrowers
and guarantors, Bank of America as agent and other
lenders(g)
10.15 -- Second Amendment to Second Amended and Restated and
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+
23.1 -- Consent of KPMG Peat Marwick LLP, Billings, Montana
23.2 -- Consent of KPMG Peat Marwick LLP, Los Angeles,
California
23.3 -- Consent of Latham & Watkins (contained in Exhibit
5.1)
23.4 -- Consent of Dorsey & Whitney LLP (contained in Exhibit
8.1)
24.1 -- Power of Attorney*
99.1 -- Form of proxy card*
*
- -----------------------
* Previously filed
</TABLE>
+ Incorporated herein by reference to the exhibit of the same number of the
company's Annual Report on Form 10-K for the fiscal year ended June 28,
1996 (File No. 1-11228)
(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
(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
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<PAGE>
(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)
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act"):
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) that, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
PROVIDED, HOWEVER, that subparagraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
(b) The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such Securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions under Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
(d) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Carlsbad, State of California, on December 5, 1996.
SUNRISE MEDICAL INC.
By: /s/Ted N. Tarbet
----------------------------------------
Ted N. Tarbet, Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities indicated
on December 5, 1996.
/s/Richard H. Chandler* Chairman, President and Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Richard H. Chandler
/s/Ted N. Tarbet Senior Vice President and Chief Financial Officer
- ------------------------- (Principal Financial Officer)
Ted N. Tarbet
/s/John M. Radak* Vice President and Controller (Principal
- --------------------------- Accounting Officer)
John M. Radak
/s/Lee A. Ault III* Director
- ---------------------------
Lee A. Ault III
/s/Lloyd E. Cotsen* Director
- ---------------------------
Lloyd E. Cotsen
/s/Babette Heimbuch* Director
- ---------------------------
Babette Heimbuch
/s/Murray H. Hutchison* Director
- ---------------------------
Murray H. Hutchison
/s/William L. Pierpoint* Director
- ---------------------------
William L. Pierpoint
/s/Joseph Stemler* Director
- ---------------------------
Joseph Stemler
/s/J. R. Woodhull* Director
- ---------------------------
J. R. Woodhull
*By: /s/Ted N. Tarbet
Ted N. Tarbet
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------ ----------- ----
<S> <C> <C>
2.1 -- Agreement and Plan of Merger among Sunrise Medical
Inc., Jay Medical, Ltd., and Kid-Kart, Inc. dated
September 24, 1996*
3.1 -- Certificate of Incorporation of Sunrise and
amendments thereto(a)
3.2 -- Amendment to Certificate of Incorporation of Sunrise
as set forth under the caption "Article III--
Liability of Director to the Corporation"(b)
3.3 -- Bylaws of Sunrise(a)
3.4 -- Amendment to Article II, Section 2, of Sunrise's
Bylaws(c)
3.5 -- Amendment to Certificate of Incorporation of
Sunrise 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)
5.1 -- Opinion of Latham & Watkins regarding the legality of
the issuance of Sunrise Common Stock
8.1 -- Opinion of Dorsey & Whitney LLP regarding tax matters
9.1 -- Stockholders Agreement dated September 24, 1996, by
and among Sunrise Medical Inc., Kid-Kart, Inc., Jay
Medical, Ltd., Wayne Hanson and William Senecal*
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 Plance 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)
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
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 borrowers
and guarantors, Bank of America as agent and other
lenders(g)
10.15 -- Second Amendment to Second Amended and Restated and
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+
23.1 -- Consent of KPMG Peat Marwick LLP, Billings, Montana
23.2 -- Consent of KPMG Peat Marwick LLP, Los Angeles,
California
23.3 -- Consent of Latham & Watkins (contained in Exhibit
5.1)
23.4 -- Consent of Dorsey & Whitney LLP (contained in Exhibit
8.1)
24.1 -- Power of Attorney*
99.1 -- Form of proxy card*
*
- ----------------------------
* Previously filed
</TABLE>
+ Incorporated herein by reference to the exhibit of the same number of the
company's Annual Report on Form 10-K for the fiscal year ended June 28,
1996 (File No. 1-11228)
(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
(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)
II-7
<PAGE>
[LETTERHEAD OF LATHAM & WATKINS]
December 4, 1996
Sunrise Medical Inc.
2382 Faraday Avenue
Suite 200
Carlsbad, California 92008
Re: Registration Statement on Form S-4 of
Common Stock, par value $1.00 per share
---------------------------------------
Ladies and Gentlemen:
In connection with the registration of that certain number of shares
of common stock of Sunrise Medical Inc. (the "Company"), par value $1.00 per
share, having a value of $6,899,320 based on the Nominal Share Price (as defined
in the Merger Agreement by and between the Company, Jay Medical, Ltd. and Kid-
Kart, Inc., dated September 24, 1996 (the "Merger Agreement") (the "Shares"),
under the Securities Act of 1933, as amended (the "Act"), pursuant to a
Registration Statement on Form S-4 (Registration No. 333-14493) filed with the
Securities and Exchange Commission (the "Commission") on October 21, 1996, as
amended (the "Registration Statement"), you have requested our opinion with
respect to the matters set forth below.
In our capacity as your counsel in connection with such registration,
we have made such legal and factual examinations and inquiries, including an
examination of originals or copies certified or otherwise identified to our
satisfaction of such documents, corporate records and instruments, as we have
deemed necessary or appropriate for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
<PAGE>
Sunrise Medical Inc.
December 4, 1996
Page 2
We are opining herein as to the effect on the subject transaction only
of the General Corporation Law of the State of Delaware, and we express no
opinion with respect to the applicability thereto, or the effect thereon, of any
other laws or as to any matters of municipal law or the laws of any other local
agencies within any state.
Subject to the foregoing and in reliance thereon, it is our opinion
that the Shares have been duly authorized, and, upon issuance, delivery and
payment therefor in the manner contemplated by the Merger Agreement will be
validly issued, fully paid and nonassessable securities of the Company.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
/s/ LATHAM & WATKINS
<PAGE>
[Letterhead of Dorsey & Whitney]
December 4, 1996
Kid-Kart, Inc.
732 Cruiser Lane
Belgrade, Montana 59714
Dear Ladies and Gentlemen:
We have acted as special tax counsel to Kid-Kart, Inc. in connection
with the Registration Statement on Form S-4 originally filed on October 21, 1996
(the "Registration Statement") with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Securities Act"). The Registration
Statement relates to the proposed merger of Kid-Kart, Inc. with and into Jay
Medical, Ltd. This opinion is delivered in accordance with the requirements of
Item 601(b)(8) of Regulation S-K under the Securities Act.
In connection with this opinion, we have examined and are familiar
with originals or copies, certified or otherwise identified to our satisfaction,
of the Registration Statement, the Proxy Statement/Prospectus included therein
(the "Proxy Statement/Prospectus") and such other documents as we have deemed
necessary or appropriate.
We hereby confirm that the discussions in the Proxy
Statement/Prospectus under the captions "Summary -- Certain United States
Federal Income Tax Consequences" and "Certain United States Federal Income Tax
Consequences" are a fair and accurate summary of the matters addressed therein,
based upon current law and the facts and assumptions stated or referred to
therein. There can be no assurance that contrary positions may not be taken by
the Internal Revenue Service.
<PAGE>
Kid-Kart, Inc.
December 4, 1996
Page 2
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the use of our name under the captions referenced
above. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
Very truly yours,
/s/ DORSEY & WHITNEY LLP
<PAGE>
EXHIBIT 23.1
The Board of Directors
Sunrise Medical Inc.:
We consent to the use of our report related to the balance sheet of Kid-Kart,
Inc. as of December 31, 1995 and the related statements of operations,
stockholders' equity and cash flows for the year then ended included herein and
to the reference to our firm under the heading "Experts" in the registration
statement.
/s/ KPMG PEAT MARWICK LLP
Billings, Montana
December 5, 1996
<PAGE>
EXHIBIT 23.2
ACCOUNTANT'S CONSENT
The Board of Directors
Sunrise Medical Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
December 4, 1996
