<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
================================================================================
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1995
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO ___________________________
Commission File No. 0-12744
SUNRISE MEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3836867
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2382 FARADAY AVENUE, SUITE 200
CARLSBAD, CA 92008
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 930-1500
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Number of shares of common stock outstanding at December 29, 1995: 18,825,449
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 29, June 30,
1995 1995
------------- --------
(unaudited) (restated)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 3,223 $ 1,740
Receivables, net 144,004 141,556
Inventories 86,604 81,941
Other current assets 15,825 11,865
-------- --------
Total current assets 249,656 237,102
-------- --------
Property, plant and equipment, net 92,258 89,133
Goodwill and other intangible assets, net 275,978 270,478
Other assets, net 1,562 1,196
-------- --------
Total assets $619,454 $597,909
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 4,368 $ 2,328
Trade accounts payable 36,257 36,096
Accrued compensation and other expenses 73,239 72,485
Income taxes 5,615 1,102
-------- --------
Total current liabilities 119,479 112,011
-------- --------
Long-term debt, less current installments 187,611 182,029
Deferred income taxes 4,598 4,376
Stockholders' equity:
Preferred stock, $1 par. Authorized
5,000 shares; non issued -- --
Common stock, $1 par. Authorized
40,000 shares; 18,824 and 18,597 shares,
respectively, issued and outstanding 18,824 18,597
Additional paid-in capital 195,725 189,955
Retained earnings 90,070 86,276
Cumulative foreign currency translation
adjustment 3,147 4,665
-------- --------
Total stockholders' equity 307,766 299,493
-------- --------
Total liabilities and stockholders' equity $619,454 $597,909
======== ========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
2
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SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, excpet per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks
Ended
September 29,
1995
--------------
(unaudited)
<S> <C>
Net sales $157,172
Cost of sales 102,472
--------
Gross profit 54,700
--------
Marketing, selling and administrative expenses 37,010
Research and development expenses 3,724
Corporate expenses 2,363
Amortization of goodwill and other intangibles 2,041
--------
Corporate operating income 9,562
--------
Other income (expense):
Interest expense (3,530)
Interest income and other, net 658
--------
(2,872)
--------
Income before taxes 6,690
Income taxes 2,896
--------
Net income $ 3,794
========
Earnings per share $ 0.20
========
Weighted average number of shares outstanding 19,147
========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
3
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks
Ended
September 29,
1995
--------------
(unaudited)
<S> <C>
Cash flows from operating activities:
Net income $ 3,794
Non-cash items 8,361
Changes in assets and liabilities, net of effect
of acquisitions:
Receivables, net 272
Inventories (2,923)
Other current assets (5,212)
Accounts payable and other liabilities (1,154)
--------
Net cash provided by operating activities 3,138
--------
Cash flows from investing activities:
Purchase of property, plant and equipment, net (6,671)
Net cash invested in acquisition of business (2,463)
--------
Net cash used for investing activities (9,134)
--------
Cash flows from financing activities:
Borrowings of long-term debt 51,561
Repayments of long-term debt (44,175)
Proceeds from issuance of common stock 70
--------
Net cash provided by financing activities 7,456
--------
Effect of exchange rate changes on cash 23
--------
Net increase in cash and cash equivalents 1,483
Cash and cash equivalents at beginning of period 1,740
--------
Cash and cash equivalents at end of period $ 3,223
========
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
4
<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/A Amendment No. 1 for the fiscal year ended June 30, 1995, filed by
Sunrise Medical Inc. (the "company") with the Securities and Exchange
Commission. The unaudited condensed consolidated financial statements as of
September 29, 1995 and for the thirteen-week period then ended 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.
On January 4, 1996 the company reported 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 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.
Accordingly, the company has restated its financial statements for the years
ended June 30, 1995 and July 1, 1994. Because it is not practicable to
reconstruct reliable accounting records at its Bio Clinic subsidiary for interim
periods during those years, the company has been unable to allocate accurately
to individual quarters the full year restatement adjustments for any financial
statement item other than net sales. Accordingly, no interim financial
statements for the thirteen-week period ended September 30, 1994 are presented
herein and previously reported interim results for fiscal 1995 should be
disregarded.
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 29, June 30,
1995 1995
------------- --------
<S> <C> <C>
Raw material $37,136 $35,126
Work-in-progress 9,629 8,490
Finished goods 39,839 38,325
------- -------
$86,604 $81,941
======= =======
</TABLE>
Interim period inventory classifications involve a degree of estimation due to
the timing of physical inventories throughout the fiscal year.
5
<PAGE>
3. Acquisition
On July 19, 1995 the company acquired Coopers Healthcare Plc, a United Kingdom-
based manufacturer of patient aids, for 222,266 shares of its common stock
(valued at $5.8 million) and cash of $2.5 million. The transaction has been
accounted for as a purchase. Pro forma results of operations, assuming the
acquisition had been made at the beginning of fiscal 1996, would not be
materially different from the results reported.
4. Subsequent Events
Following the announcement by the company on October 26, 1995 of an internal
investigation into accounting practices at its Bio Clinic Corporation subsidiary
(Note 1), 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 have been consolidated in the U.S.
District Court for the Southern District of California. In addition, a number
of derivative actions seeking unspecified damages have been filed against the
company and certain of its current and former officers, directors and employees
in California and Delaware state courts. The company is vigorously defending
this litigation.
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 statements. The company is cooperating fully
with the SEC in its investigation.
On January 4, 1996 the company further announced that it expected to record a
pre-tax charge of $32 to $38 million in its fiscal 1996 second quarter, ending
December 29, 1995. This charge will include: the estimated cost of the
internal investigation, restatement, and reissuance of historical financial
statements; the expected attorneys' fees associated with related pending
litigation; the writedown of certain assets at Bio Clinic and Comfort Clinic to
reflect revised estimates of net asset realizations; immaterial Bio Clinic
adjustments related to periods prior to fiscal 1994; and the one-time estimated
expenses associated with a reorganization of company operations as part of a
company-wide profit improvement program, including severance, facility closing
costs, and write-downs associated with discontinued low-volume products. The
company also announced that it had entered into an agreement to sell Bio
Clinic's air therapy rental business. The loss on this sale, which was
completed on January 31, 1996, is included in the estimate of second quarter
charges.
6
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1995 were not affected by the
restatement described in Note 1 of Notes to Condensed Consolidated Financial
Statements. However, it is not practicable to determine the effect on other
items in the company's consolidated financial statements for that period. The
quarterly trend in net sales may not be indicative of any similar trend with
respect to other aspects of the company's consolidated financial statements.
Accordingly, the following discussion involves only limited quarterly
comparisons, and includes comparisons of divisional sales and profit
contribution for all divisions of the company other than the two (Bio Clinic and
Comfort Clinic) affected by the restatement.
Net sales for the first quarter of fiscal 1996 were $157.2 million compared to
$140.6 million in the comparable period of fiscal 1995, an increase of 12%.
Companies acquired during the past year accounted for 11% sales growth, foreign
currency translation added 2%, and the company's base business declined by
approximately 2%, depressed by lower sales of support surfaces (Bio Clinic and
Comfort Clinic).
Sales of support surfaces declined 37% from last year's first quarter, from
$36.5 million to $23.0 million. Comfort Clinic sales in the 1995 period
benefitted from strong mass market promotions of therapeutic mattresses and
pillows. Together, Bio Clinic and Comfort Clinic reported a first quarter loss
of $2.6 million based on divisional profit contribution, as gross margins
decreased under market pricing pressures while expenses and staffing levels had
not yet been reduced to reflect the lower revenue base. Divisional profit
contribution is an internal measurement used by the company to measure
divisional, product line and group performance; it does not include any
allocations of corporate office expense, goodwill amortization, interest, or
income taxes.
Exclusive of support surfaces, which represented 15% of consolidated sales in
the first quarter of fiscal 1996, the company's other operating divisions
reported sales growth of 29% compared to the first quarter of fiscal 1995, with
11% from internal growth, 15% from acquisitions, and 3% from foreign exchange
translation. The gross margin of these other divisions increased to 37.5% from
36.5% in the prior year first quarter, reflecting improvements in gross margins
for patient aids and respiratory products. The divisional operating expenses
(research and development, and marketing, selling and administrative expenses)
of these divisions were a comparable 25.1% of net sales in each period. The
divisional profit contribution, excluding support surfaces, increased 40% to
$16.6 million in the first quarter of fiscal 1996 from $11.9 million in the
comparable prior year period.
During the first quarter of fiscal 1996, Rehabilitation Products net sales were
$87.9 million, an increase of 30% over net sales of $67.5 million in the first
quarter of fiscal 1995. Wheelchair sales were particularly strong, while patient
aids sales were positively affected by the inclusion of Coopers, a U.K.
ambulatory aids manufacturer acquired in July 1995. This group's profit
contribution increased faster than sales, as gross margins improved compared to
last year's first quarter.
7
<PAGE>
Respiratory Products Group sales in the first quarter of fiscal 1996 were $25.6
million, an increase of 1% over the $25.5 million in sales during the first
quarter of the prior year. Improved European results were offset by sales
weakness in the U.S., where demand was adversely affected by the likelihood of a
reduced Medicare reimbursement level for oxygen concentrators. The increase in
group profit contribution was slightly ahead of sales growth in comparison to
the first quarter of fiscal 1995.
The Recovery Products Group reported net sales of $43.5 million in the first
quarter, a decline of 8% from net sales of $47.3 million in the first quarter of
fiscal 1995, and incurred a loss in each period principally as a result of
problems in the support surfaces business. Excluding support surfaces, first
quarter net sales increased to $21 million from $11 million, as healthcare bed
sales grew substantially, due primarily to the inclusion of Corona, the French
bed manufacturer acquired in April 1995. However, this growth was more than
offset by the significant sales decline in support surfaces. Profit contribution
for the Recovery Products Group, other than support surfaces, increased by a
higher percentage than did sales due to Corona's higher margins.
Interest expense for the first quarter of fiscal 1996 was $3.5 million. Average
borrowings for the quarter were higher than during the first quarter of fiscal
1995 because of debt incurred to finance recent acquisitions.
The effective tax rate of 43.3% in the first quarter of fiscal 1996 was slightly
higher than the rate of 42.5% for all of fiscal 1995 as a result of higher
non-deductible goodwill amortization.
Net income for the quarter was $3.8 million or $0.20 per share.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 1996 the company's working capital increased
by $5.1 million to $130.2 million. Cash of $3.1 million was provided by
operating activities. Purchases of property, plant and equipment ($6.7 million)
and a business acquisition were financed primarily by additional borrowings
under the company's long-term credit facility. Capital expenditures included new
product tooling, building improvements, machinery and other equipment to improve
efficiency or expand capacity.
On January 4, 1996 the company announced that it expects to incur pre-tax
charges of $32 million to $38 million in its fiscal 1996 second quarter, ending
December 29, 1995. See Note 4 of Notes to Condensed Consolidated Financial
Statements for a discussion of these charges.
The company amended its five and one-half year multi-currency bank credit
facility as of September 29, 1995. Under the amended credit facility, the
company's revolving credit commitment was increased to $275 million, with annual
reductions of $20 million beginning in January 1998. Funds available as of
September 29, 1995 under the amended credit facility were approximately $100
million.
8
<PAGE>
As a result of the restatement of its fiscal 1995 and 1994 financial statements
and non-recurring charges to be recorded in the second quarter of fiscal 1996,
the company anticipated non-compliance with certain covenants contained in its
credit facility. On February 16, 1996 the bank group agreed to waive compliance
with these covenants until February 28, 1997. Management believes that
amendments will be made to the credit facility prior to the end of the company's
1996 fiscal year that will enable the company to be in compliance with the
covenants in the credit facility, although no assurance can be given that such
amendments will be completed. In connection with the waiver of compliance by the
bank group, the company has agreed to an increase in the interest rate and must
comply with certain revised covenants, such as maintenance of debt to capital
ratio, net worth and interest coverage. In addition, the company must obtain
approval of the bank group for any acquisitions. As a result of the
aforementioned waiver, borrowings under the credit facility remain classified as
long-term debt .
IMPACT OF INFLATION
Inflation did not have any significant effect on the company's operating results
in the first quarter of fiscal 1996.
FORWARD-LOOKING STATEMENTS
Any statements contained in this Form 10-Q which are not historical facts are
forward-looking statements that involve risks and uncertainties. The company
wishes to caution the reader that actual events or results may differ materially
from these forward-looking statements. These risks and uncertainties
include, but are not limited to: the impact of competitive products and pricing
pressures; 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; regulatory related risks; and
other risks referenced in this and other Securities and Exchange Commission
filings of the company.
9
<PAGE>
SUNRISE MEDICAL INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Description
-------- -----------
10.1 Amended and Restated Stock Option Plan for Key Associates.
(Incorporated herein by reference to the 1990 Definitive Proxy
Statement of the company)
10.2 1993 Stock Option Plan. (Incorporated herein by reference to
the 1993 Definitive Proxy Statement of the company)
10.3 Management Incentive Bonus Plan. (Incorporated herein by
reference to the company's Registration Statement No. 2-86314
filed with the Securities and Exchange Commission)
10.4 Special Bonus Plan. (Incorporated herein by reference to the
company's fiscal 1992 Form 10-K)
10.5 First 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. (Incorporated herein by reference to the
company's Form 10-K/A for the year ended June 30, 1995)
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 29,
1995.
10
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SUNRISE MEDICAL INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNRISE MEDICAL INC.
Date: February 21, 1996 /s/ Ted N. Tarbet
-----------------------------------
Ted N. Tarbet
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 21, 1996 /s/ John M. Radak
-----------------------------------
John M. Radak
Vice President and Controller
(Principal Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 29, 1995 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 29, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1996
<PERIOD-END> SEP-29-1995
<CASH> 3,223
<SECURITIES> 0
<RECEIVABLES> 153,440
<ALLOWANCES> 9,436
<INVENTORY> 86,604
<CURRENT-ASSETS> 249,656
<PP&E> 163,944
<DEPRECIATION> 71,686
<TOTAL-ASSETS> 619,454
<CURRENT-LIABILITIES> 119,479
<BONDS> 187,611
0
0
<COMMON> 18,824
<OTHER-SE> 288,942
<TOTAL-LIABILITY-AND-EQUITY> 619,454
<SALES> 157,172
<TOTAL-REVENUES> 157,172
<CGS> 102,472
<TOTAL-COSTS> 102,472
<OTHER-EXPENSES> 45,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,530
<INCOME-PRETAX> 6,690
<INCOME-TAX> 2,896
<INCOME-CONTINUING> 3,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,794
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
