<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 27, 1996
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________________
TO___________________________
Commission File No.0-12744
SUNRISE MEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3836867
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2382 FARADAY AVENUE, SUITE 200
CARLSBAD, CA 92008
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 930-1500
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 October 31, 1996: 18,861,149
<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)
2
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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)
3
<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)
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 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.
5
<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.
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 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
---------------------
September27, 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).
7
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
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.
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.
The company recorded pre-tax charges from unusual items of $65.2 million in
fiscal 1996. These expenses included: $18.6 million for costs of an internal
investigation and restatement of historical financial statements and the
settlement of related litigation, including attorneys' fees; $27.6 million for
the write-down of assets in its support surfaces business to reflect revised
estimates of net asset realizations, including goodwill; and $19.0 million
related to a corporate reorganization and cost reduction program, including
severance costs ($3.2 million), facility closing costs, and product line
discontinuance expenses. Of the total charges of $65.2 million, approximately
$36.2 million required cash payments and $29.0 million represented non-cash
charges. A total of $18.8 million of the cash amounts had been paid by June
28, 1996, and an additional $1.6 million was paid during the first quarter of
fiscal 1997. Substantially all of the $15.8 million balance of cash charges is
expected to be paid over the next twelve months.
8
<PAGE>
In October 1996 the company sold its Comfort Clinic division for cash of $14
million. See Note 3 of Notes to Condensed Consolidated Financial Statements.
The proceeds were used to repay borrowings on the company's bank credit
facility. Funds available as of September 27, 1996 under the credit facility
were approximately $62 million.
The company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," in the first quarter of its 1997 fiscal year. The effect of
such adoption was not material.
IMPACT OF INFLATION
Inflation did not have any significant effect on the company's operating results
in the first quarter of fiscal 1997.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q, 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. The company has made forward-looking statements in this Form 10-Q.
These statements are only predictions, however, and actual events or results may
differ materially.
Risks facing the company 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; commercialization and technological
difficulties, shifts in industry distribution channels; acceleration of the
current trend of consolidation of the company's customer base; governmental
regulation of medical device design and manufacturing (such as by the F.D.A. in
the U.S.); the availability and financial prospects of future acquisition
candidates; and other factors. Given these uncertainties, prospective investors
are cautioned not to place undue reliance on forward-looking statements made by
the company. The company disclaims any obligation to update any such factors or
to announce publicly the result of any revisions to any of the forward-looking
statements contained in this and other Securities and Exchange Commission
filings of the company to reflect future events or developments.
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 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.
(Incorporated herein by reference to the company's Form 10-K/A for the
year ended June 30, 1995)
10.6 First Amendment to Second Amended and Restated Credit Agreement and
Waiver dated as of May 2, 1996 among Sunrise Medical Inc. And certain
subsidiary borrows and guarantors, Bank of America as agent and other
lenders. (Incorporated herein by reference to the company's Form 10-Q
for the quarter ended March 29, 1996)
10.7 Second Amendment to Second Amended and Restated Credit Agreement and
Waiver dated as of August 22, 1996 among Sunrise Medical Inc. and
certain subsidiary borrowers and guarantors, Bank of America as agent
and other lenders. (Incorporated herein by reference to the company's
Form 10-K for the year ended June 28, 1996)
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
27, 1996.
10
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SUNRISE MEDICAL INC. AND SUBSIDIARIES
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: November 8, 1996 /s/ Ted N. Tarbet
----------------------------
Ted N. Tarbet
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 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 27, 1996 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 27, 1996
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-27-1997
<PERIOD-END> SEP-27-1996
<CASH> 4,095
<SECURITIES> 0
<RECEIVABLES> 146,930
<ALLOWANCES> 13,087
<INVENTORY> 84,040
<CURRENT-ASSETS> 259,636
<PP&E> 160,091
<DEPRECIATION> 79,107
<TOTAL-ASSETS> 625,011
<CURRENT-LIABILITIES> 151,706
<BONDS> 204,248
0
0
<COMMON> 18,860
<OTHER-SE> 244,861
<TOTAL-LIABILITY-AND-EQUITY> 625,011
<SALES> 165,353
<TOTAL-REVENUES> 165,353
<CGS> 110,899
<TOTAL-COSTS> 110,899
<OTHER-EXPENSES> 46,063
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,002
<INCOME-PRETAX> 5,883
<INCOME-TAX> 2,823
<INCOME-CONTINUING> 3,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,060
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
