<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 January 1, 1999
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: (760) 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
----- -----
As of January 28, 1999, the company had 22,198,418 outstanding shares of $1
par value common stock.
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of January 1, 1999 and
July 3, 1998 3
Condensed consolidated statements of operations for the thirteen and
twenty-six weeks ended January 1, 1999 and December 26, 1997 4
Condensed consolidated statements of cash flows for the twenty-six weeks
ended January 1, 1999 and December 26, 1997 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
January 1, July 3,
ASSETS 1999 1998
- ------ ------------------------------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,217 $ 931
Trade receivables, net 136,247 121,967
Installment receivables, net 14,061 12,329
Income tax refunds receivable - 4,013
Inventories 92,143 94,589
Deferred income taxes 18,523 19,288
Other current assets 6,975 3,622
--------- ---------
Total current assets 269,166 256,739
Property and equipment, net 88,012 85,804
Goodwill and other intangible assets, net 267,521 266,815
Other assets, net 9,126 6,947
--------- ---------
Total assets $633,825 $616,305
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 5,235 $ 3,753
Trade accounts payable 46,528 48,723
Accrued compensation and other expenses 88,088 93,890
Income taxes payable 3,917 2,794
--------- ---------
Total current liabilities 143,768 149,160
Long-term debt, less current installments 201,290 188,029
Deferred income taxes 8,645 6,456
Stockholders' equity:
Preferred stock, $1 par. Authorized 5,000 shares; none issued - -
Common stock, $1 par. Authorized 40,000 shares; 22,198 and 22,151 shares,
respectively, issued and outstanding 22,198 22,151
Additional paid-in capital 203,556 203,346
Retained earnings 52,367 46,994
Accumulated other comprehensive income 2,001 169
--------- ---------
Total stockholders' equity 280,122 272,660
--------- ---------
Total liabilities and stockholders' equity $633,825 $616,305
--------- ---------
--------- ---------
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
3
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------------- --------------------------------------
January 1, 1999 December 26, 1997 January 1, 1999 December 26, 1997
-------------------- ------------------- -------------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $163,460 $169,089 $328,255 $324,121
Cost of sales 112,556 115,962 225,774 220,035
------- ------- ------- -------
Gross profit 50,904 53,127 102,481 104,086
Marketing, selling and administrative expenses 37,297 40,464 72,209 77,077
Research and development 4,938 4,114 9,347 8,303
Re-engineering expenses - 7,043 - 11,678
Amortization of goodwill and other intangibles 2,123 2,104 4,246 4,149
-------- -------- --------- ---------
Operating income (loss) 6,546 (598) 16,679 2,879
-------- -------- ---------- -------
Other (expense) income:
Interest expense (3,910) (4,024) (7,945) (7,435)
Interest income and other, net 1,143 6,435 2,364 7,811
-------- --------- --------- ---------
(2,767) 2,411 (5,581) 376
--------- --------- ---------- ----------
Income before income taxes 3,779 1,813 11,098 3,255
Income taxes 1,963 885 5,725 1,458
--------- ---------- --------- ---------
Net income $ 1,816 $ 928 $ 5,373 $ 1,797
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Basic earnings per share $ 0.08 $ 0.04 $ 0.24 $ 0.08
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Weighted average number of shares outstanding 22,197 21,962 22,187 21,924
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Diluted earnings per share $ 0.08 $ 0.04 $ 0.24 $ 0.08
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Weighted average number of shares outstanding 22,326 22,301 22,297 22,236
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
4
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
----------------------------------------------
January 1, December 26,
1999 1997
----------------------- ----------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,373 $ 1,797
Depreciation and amortization 8,219 8,564
Amortization of goodwill and other intangibles 4,246 4,149
Other non-cash items 2,860 (8,525)
Changes in assets and liabilities:
Receivables, net (14,972) (7,366)
Inventories 3,428 (4,531)
Other assets (4,553) 4,792
Income taxes 4,923 (2,669)
Accounts payable and other liabilities (8,822) 7,668
------- -------
Net cash provided by operating activities 702 3,879
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (8,948) (4,771)
------- -------
Net cash used for investing activities (8,948) (4,771)
------- -------
Cash flows from financing activities:
Borrowings (repayments) of long-term debt, net 9,838 (1,260)
Proceeds from issuance of common stock 257 1,759
--------- -------
Net cash provided by financing activities 10,095 499
------- --------
Effect of exchange rate changes on cash (1,563) (448)
-------- --------
Net increase (decrease) in cash and cash equivalents 286 (841)
Cash and cash equivalents at beginning of period 931 4,223
--------- -------
Cash and cash equivalents at end of period $ 1,217 $ 3,382
--------- -------
--------- -------
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
5
<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 July 3, 1998, filed
by Sunrise Medical Inc. (the company) with the Securities and Exchange
Commission. The unaudited condensed consolidated financial statements as of
January 1, 1999 and for the thirteen week and twenty-six week periods ended
January 1, 1999 and December 26, 1997 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>
January 1, July 3,
1999 1998
-------- -------
<S> <C> <C>
Raw material $41,476 $42,634
Work-in-progress 13,792 12,588
Finished goods 36,875 39,367
------ ------
$92,143 $94,589
------ ------
------ ------
</TABLE>
Interim period inventory classifications involve a degree of estimation due
to the timing of physical inventories throughout the fiscal year.
3. ACQUISITIONS AND MERGERS
On April 13, 1998 the company issued 2.7 million shares of its common stock
for all outstanding common stock of DynaVox, a manufacturer of speech
augmentation devices. This business combination has been accounted for as a
pooling of interests and, accordingly, the consolidated financial statements
for periods prior to the combination have been restated to include the
accounts and results of operations of DynaVox.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
6
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-six Weeks
Ended December 26, Ended December 26,
1997 1997
-------------------------------------------------
<S> <C> <C>
Net sales:
Sunrise, as previously reported $165,346 $316,409
DynaVox 3,743 7,712
-------- --------
Combined $169,089 $324,121
-------- --------
-------- --------
Net income:
Sunrise, as previously reported $ 431 776
DynaVox 497 1,021
-------- --------
Combined $ 928 $ 1,797
-------- --------
-------- --------
</TABLE>
4. COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) in the first quarter of fiscal
year 1999. SFAS 130 establishes standards for reporting and presenting
comprehensive income. Components of comprehensive income (loss) include net
income and foreign currency translation adjustments. The company's
comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
Jan. 1, 1999 Dec. 26, 1997 Jan. 1 1999 Dec. 26, 1997
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net income $ 1,816 $ 928 $5,373 $1,797
Foreign currency translation (2,339) 2,253 1,832 (267)
------- ------- ------- -------
Comprehensive income (loss) $ (523) $ 3,181 $7,205 $1,530
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
5. EARNINGS PER SHARE (EPS)
In accordance with statements of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS 128), the following is a reconciliation of the
numerators and denominators of the basis and diluted EPS.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
Jan. 1, 1999 Dec. 26, 1997 Jan. 1 1999 Dec. 26, 1997
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of
shares outstanding 22,197 21,962 22,187 21,924
Net income $1,816 $ 928 $5,373 $1,797
Basic earnings per share $ 0.08 $0.04 $ 0.24 $ 0.08
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
Jan. 1, 1999 Dec. 26, 1997 Jan. 1 1999 Dec. 26, 1997
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Diluted:
Weighted average number of shares
outstanding 22,197 21,962 22,187 21,924
Dilutive effect of stock options (1), (2) 129 339 110 312
--------- --------- -------- ---------
Weighted average number of shares assuming
dilution 22,326 22,301 22,297 22,236
Net income $1,816 $ 928 $5,373 $1,797
Diluted earnings per share $ 0.08 $0.04 $ 0.24 $ 0.08
</TABLE>
(1) 1,352,000 and 773,000 common share equivalents were not used to compute
diluted earnings per share for the thirteen weeks ended January 1, 1999
and December 26, 1997, respectively, as the effect was antidilutive.
(2) 1,402,000 and 789,000 common share equivalents were not used to compute
diluted earnings per share for the twenty six weeks ended January 1, 1999
and December 26, 1997, respectively, as the effect was antidilutive.
6. CONTINGENCIES
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.
8
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REPORTING UNITS
The company reports its results of operations by four groups: Home Healthcare
Group (HHG), European Homecare, Continuing Care Group (CCG) and DynaVox.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JANUARY 1, 1999 COMPARED TO THIRTEEN WEEKS ENDED
DECEMBER 26, 1997
NET SALES
Net sales for the second quarter of fiscal 1999 were $163.5 million compared
to $169.1 million in the comparable period of fiscal 1998, with the impact
from acquisitions and foreign currency translations negligible. The decrease
in sales is the result of the timing of the quarter end, whereby there were
fewer shipping days in the current year quarter versus the prior year.
HHG's sales, which include homecare operations in the United States, Canada,
Mexico and Australia, decreased 1% in the second quarter of 1999 to $86.6
million, compared to $87.5 million in the second quarter of 1998. Increased
sales of mobility products were more than offset by declines in personal care
and respiratory products. Personal care product shipments were impacted by
limitations at the company's Mexico facility, resulting in a buildup in
backlog at quarter's end. The decline in respiratory product sales is due to
industry softness in this market as a result of decreased government
reimbursement rates.
European Homecare sales were $52.0 million in the second quarter of 1999
compared to $57.5 million in the second quarter of 1998, a decrease of 10%.
Western Europe, which includes Spain and France Homecare, experienced sales
growth, but was offset by overall sales declines in Northern Europe,
attributable to delays in new product launches, and Central Europe, due to
reimbursement changes. Export sales were negatively impacted by the strong
pound sterling.
CCG, which combines globally all product lines that are sold to nursing homes
and assisted living facilities, posted sales of $19.3 million in the second
quarter of 1999, a decline of 7% from sales of $20.8 million in the
comparable period of 1998. The decline is primarily attributable to a
decrease in sales volume to one major customer. In addition, construction
emphasis is shifting from nursing home construction to assisted living
facilities. Sales to assisted living facilities grew 228% this quarter, but
from a small base.
DynaVox sales advanced 49% to $5.6 million in the second quarter of 1999
compared to $3.7 million in the same period of the prior year. The increase
is attributable to sales of new products, including the DynaVox 3100,
DynaMyte 3100 and software for both Windows and MacIntosh system
environments, introduced in the first quarter of 1999.
9
<PAGE>
EXPENSE AND PROFIT ANALYSIS
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------------------------------------
January 1, December 26,
1999 1997
-------------------------- -----------------------
<S> <C> <C>
Gross profit 31.1% 31.4%
Operating income (loss) 4.0% (0.4%)
Interest expense 2.4% 2.4%
Net income 1.1% 0.5%
</TABLE>
Despite the decline in sales, gross profit as a percentage of net sales for
the second quarter of 1999 decreased only 0.3% from the second quarter of
fiscal 1998, primarily as a result of higher freight costs to expedite
shipments and lower production volumes, offset by lower material costs.
Marketing, selling and administrative expenses decreased by 8% in the second
quarter of 1999 compared to the prior year period, and declined as a
percentage of sales to 22.8% compared to 23.9% in the second quarter of 1998.
The decrease is a continuation of the first quarter trend of good control
over operating expenses, and also represents a positive benefit from
re-engineering efforts.
Research and development expenses increased to $4.9 million, representing 3%
of net sales, from $4.1 million in the prior year, or 2.4% of sales, as the
company focuses resources on more sophisticated new products.
Expenses related to re-engineering, which was completed in June of 1998, were
$7.0 million in the second quarter of 1998. These expenses were the costs
incurred during the quarter with respect to the re-engineering and facilities
consolidation.
Interest and other income, net in the prior year second quarter includes a
favorable settlement of a patent infringement litigation and a gain on the
sale of property in the U.K, totaling approximately $4.9 million, pre-tax.
The effective tax rate of 51.9% in the second quarter of 1999 was comparable
to 49.0% in the same period of 1998.
Net income for the second quarter 1999 was $1.8 million, or $0.08 per share,
compared to net income of $0.9 million, or $0.04 per share in the second
quarter of 1998. Last year's earnings were impacted by non-recurring
re-engineering expenses and other income items that had a net negative impact
of $2.1 million before taxes, or $0.06 per share after adjusting for taxes.
TWENTY-SIX WEEKS ENDED JANUARY 1, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED
DECEMBER 26, 1997
NET SALES
Net sales for the first half of fiscal 1999 were $328.3 million compared to
$324.1 million in the comparable period of 1998, an increase of 1%, with the
impact from acquisitions and foreign currency translations negligible.
10
<PAGE>
HHG's sales increased 2% in the first half of 1999 to $170.3 million,
compared to $167.4 million in the first half of 1998. The increase is
primarily attributable to growth in mobility products. The group's
performance was negatively impacted by continuing production problems in
Mexico, exacerbated by the holiday shutdown and success of the recently
introduced Breezy 100 wheelchair, causing an increase in backlog of personal
care products. The unfavorable industry conditions in oxygen products,
brought about by the Balanced Budget Act, resulted in a sales decline in
respiratory products.
European Homecare sales declined 3% to $108.1 compared to $111.5 million in
the first half of fiscal 1998. Spain, France Homecare and the Central Europe
distribution divisions all had sales growth, while revenues in the U.K.
declined due to soft market conditions and Germany was impacted by
reimbursement changes.
CCG sales increased 3% to $39.3 million in the first half of 1999, compared
to $38.0 in the comparable period of 1998. The increase is attributable to
strong shipments in the first quarter, offset by softness in the second
quarter.
DynaVox sales of $10.5 million represent a 36% growth over $7.7 million in
sales during the first half of 1998, as a result of similar trends to those
described above for the second quarter, namely new product introductions.
EXPENSE AND PROFIT ANALYSIS
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
------------------------------------------------
January 1, December 26,
1999 1997
-------------------------- ---------------------
<S> <C> <C>
Gross profit 31.2% 32.1%
Corporate operating income 5.1% 0.9%
Interest expense 2.4% 2.3%
Net income 1.6% 0.6%
</TABLE>
Gross profit as a percentage of net sales decreased by 0.9% compared to the
first half of the prior year. Margins were negatively impacted by higher
freight costs to expedite backlog shipments and lower production volumes.
Marketing, selling and administrative expenses were 22.0% of net sales in the
first half of 1999 compared to 23.8% the prior year period, a decline of
1.8%. The decrease represents the benefits the re-engineering program and the
leaner structure of the company.
Research and development expenses increased in the first half of 1999 to $9.3
million, 2.8% of net sales, compared to $8.3 million, or 2.6% of net sales in
the same period of 1998. This increase reflects the company's investment in
new products to improve sales and margins.
In the first half of 1998, re-engineering expenses totaled $11.7 million. The
same items as described previously for the second quarter are also included
in the year-to-date amount.
The change in interest income and other, net from the prior year relates
primarily to a favorable settlement of a patent infringement lawsuit and a
gain on the sale of property in the U.K reported in the second quarter of
1998.
11
<PAGE>
The effective tax rate of 51.6% in the first half of 1999 was higher than the
rate of 44.8% in the same period of 1998 as the 1998 rate was impacted by
DynaVox's earnings, which represented a larger portion of net income and were
taxed at a lower rate. The effective tax rate is greater than the expected
statutory rate due to the effect of amortization of non-deductible goodwill.
Net income was $5.4 million, or $0.24 per share, compared to net income of
$1.8 million, or $0.08 per share in the same period of the prior year. Last
year's earnings were impacted by $6.8 million or $0.18 per share, net
non-recurring expense and income items described above for the quarter.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1999, the company's working capital increased by
$17.8 million to $125.4 million primarily due to increased accounts
receivable. The company invested $8.9 million in property and equipment,
including the new facility in Mexico and a plant expansion in Germany. The
company borrowed $9.8 million in long-term debt, net of a $2.9 million pay
down in the second quarter.
The effect of foreign currency translation may result in amounts being shown
for cash flows in the Condensed Consolidated Statements of Cash Flows that
are different from the changes reflected in the balance sheet captions.
IMPACT OF INFLATION
Inflation did not have a significant effect on the company's operating
results in the first half of fiscal 1999.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products in use around
the world today are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such Year 2000 requirements.
A corporate oversight task force is in operation at Sunrise to address Year
2000 issues. Milestones have been established and detailed plans are actively
being implemented so that Sunrise products and internal computer, financial,
manufacturing, research and other infrastructure systems are reviewed, and
the necessary changes are addressed. Corporate and divisional staffs,
including the company's internal auditors, are performing independent reviews
and evaluations of equipment and systems to verify compliance. Additionally,
Sunrise customer and supplier relationships are being reviewed to assess and
address Year 2000 issues.
During 1998, all Sunrise information processing operations in the U.S. were
consolidated onto two Year 2000 compliant system platforms from 10 original
legacy systems. In Europe, the
12
<PAGE>
conversion of Sunrise operations to a common Year 2000 compliant system is
complete in the U.K. and France, with the conversions for Germany, Spain and
the outlying distribution companies scheduled to be completed by mid-calendar
1999.
The company is evaluating all products manufactured and sold for Year 2000
compliance. Most products will not be affected due to the mechanical nature
and the absence of date-dependent functions. Those products with date
functions will be analyzed and tested by the company's engineering and
quality assurance staff by mid-calendar 1999 to determine whether they will
be in any way affected by the Year 2000 situation. While the company is
taking numerous steps to ensure that all products are Year 2000 compliant and
to make information on the Year 2000 readiness of Sunrise products available
to its customers, there is no way to fully guarantee that the company will be
completely successful in either case.
Also, Sunrise is requesting assurances from its major suppliers that they are
addressing this issue and that products procured by Sunrise will function
properly in the Year 2000. Certain critical suppliers have been unwilling to
provide such assurances and do not expect to provide such assurances prior to
the Year 2000. This is particularly the case outside of the United States
where Sunrise has significant operations. This could result in manufacturing
delays and backlogs. In addition, many governmental agencies (including
agencies which directly or indirectly provide funding for the purchase of
products sold by Sunrise) and other third parties (such as telephone,
electricity and other utility companies) may not be Year 2000 compliant. As a
result, it is difficult for the company to assess the likelihood, or the
impact on its business, of such entities' failure to be Year 2000 compliant.
The company anticipates that its systems, equipment and processes will be
substantially Year 2000 compliant by the end of June 1999. The costs the
company has incurred to date in connection with its Year 2000 compliance
program have not had a material impact on its financial condition or results
of operations. Based on the information currently available, the company
estimates that its total cost will not be material. This estimate is based on
information available at this time. New developments that occur could affect
the company's estimate of the amount of time and costs necessary to become
Year 2000 compliant. The company currently expects that the Year 2000 issue
will not pose significant operational problems. However, delays in the
company's remediation efforts, or a failure to timely identify all Year 2000
dependencies in the systems, equipment or processes of the company, its
vendors, customers, financial institutions or other third parties could have
material adverse consequences, including delays in the manufacture, delivery
or sale of products. The company is in the process of developing contingency
plans along with its remediation efforts for continuing operations in the
event such problems arise, but no assurance can be given that the company
will be fully successful in this regard. The information about the Year 2000
status of Sunrise Medical Inc. and its subsidiaries is believed to be
accurate, but is presented for information purposes only, and is not a
contractual commitment or modification of any contract that may exist between
Sunrise and any third party.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
13
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). The statement changes the way
companies report segment information and requires segments to be determined
and reported based on how management measures performance and makes decisions
about allocating resources. SFAS 131 will be reflected in the company's 1999
Annual Report.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities: (SFAS 133). This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999.
Adoption of these standards is not expected to have a material effect on the
company's financial position or results of operations.
FORWARD-LOOKING STATEMENTS
The company has made forward-looking statements in this Form 10-Q, including
(i) timing of the completion of the conversion of European computer systems.
These statements are only predictions. Actual events or results may differ
materially as a result of risks and uncertainties facing the company
including: (i) the impact of competitive products and activities; (ii)
industry pricing pressures; (iii) the cost and availability of raw materials;
(iv) product development, commercialization and market acceptance risks; (v)
reductions in government funding for products sold by the company; (vi)
unfavorable governmental regulatory actions (such as by the FDA in the U.S.);
(vii) risks and uncertainties associated with the company's international
activities; (viii) year 2000 compliance issues; and (ix) other factors
referenced in this and other Securities and Exchange Commission filings of
the company. The company disclaims any obligation to update any such factors
or to announce publicly the result of any revision to any of the
forward-looking statements contained in this Form 10-Q, or to make
corrections to reflect future events or developments.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY FORWARD CONTRACTS. Although the majority of the company's
transactions are in U.S. dollars, some transactions are based in various
foreign currencies. The company purchases short-term, forward exchange
contracts to hedge the impact of foreign currency fluctuations on certain
underlying assets, liabilities and commitments for operating costs
denominated in foreign currencies. The purpose of entering into these
contracts is to protect against economic losses associated with foreign
exchange transactions. Gains and losses on the hedges offset a majority of
the increases or decreases in the company's local currency operating costs in
the corresponding periods. The contracts have maturity dates that do not
normally exceed 12 months. The unrealized gains and losses on these contracts
are deferred and recognized in the results of operations in the period in
which the hedged transaction impacts earnings. The company does not purchase
short-term forward exchange contracts for trading purposes.
14
<PAGE>
As of January 1, 1999 the company had $41.9 million in foreign currency
forward contracts compared to $31.8 million as of July 3, 1998. The company
has performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates applied to the hedging contracts. As of
January 1, 1999, the analysis indicated that such market movements would have
resulted in a $3.5 million loss on foreign currency forward contracts
outstanding. Comparatively, a $3.2 million loss on foreign currency forward
contracts would have resulted assuming a 10% adverse movement in foreign
exchange rates applied to hedging contracts at July 3, 1998. Such losses
would be substantially offset by gains from the revaluation or settlement of
the underlying positions hedged. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar. Actual
gains and losses in the future may differ materially from that analysis based
on changes in the timing and amount of foreign currency exchange rate
movements and the company's actual exposures and hedges.
INTEREST RATE SWAPS. The company is exposed to interest rate risk through its
variable interest rate borrowing activities. The company used interest rate
swap agreements to minimize the impact of interest rate fluctuation on
interest expense.
As of January 1, 1999 the company had the following interest rate swaps
outstanding:
<TABLE>
<CAPTION>
Contract Weighted Average Unrealized
Amount Interest Rate Gain (loss)
----------------------------------------------
U.S. Dollar Equivalent Amounts (in millions)
<S> <C> <C> <C>
U.S. Dollar $ 30.0 5.63% $(0.3)
French Franc 63.4 5.76% (1.8)
German Deutsche Mark 49.7 4.93% (0.7)
----- -----
$143.1 $(2.8)
----- -----
----- -----
</TABLE>
The interest rate swaps mature at varying dates from February 1999 through
April 2001.
15
<PAGE>
SUNRISE MEDICAL INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company held its Annual Meeting of Stockholders on November 20, 1998. The
following eight directors were elected for a one-year term. The manner in
which the shares represented at the meeting were voted in the election of
each director is detailed below.
<TABLE>
<CAPTION>
Voted Withheld/
For Abstained
---------- ---------
<S> <C> <C>
Richard H. Chandler 18,960,780 292,790
Lee A. Ault III 18,986,005 267,565
Michael N. Hammes 18,973,827 279,743
Murray H. Hutchison 18,983,018 270,552
William L. Pierpoint 18,983,673 269,897
Joseph Stemler 18,984,521 269,049
John R. Woodhull 18,985,952 267,618
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits:
Number Description
-------- -----------
<C> <S>
3.1 Certificate of Incorporation of the company and amendments
thereto. (a)
3.2 Amendment to Certificate of Incorporation of the company as set
forth under the caption "Article III - Liability of Director to
the Corporation." (b)
3.3 Amended and Restated Bylaws as of April 29, 1997. (c)
4.1 Amended and Restated Shareholders' Rights Agreement dated May 16,
1997. (d)
10.17 Third Amended and Restated Credit Agreement and Waiver dated as
of August 28, 1997 among Sunrise Medical Inc. and certain
subsidiary borrowers and guarantors, Bank of America as agent and
other lenders. (e)
10.18 Note Purchase Agreement dated as of October 1, 1997 for $50
million 7.09% Series A Senior Notes Due October 28, 2004 and for
$50 million 7.25% Series B Senior Notes Due October 28, 2007. (e)
</TABLE>
16
<PAGE>
<TABLE>
<C> <S>
10.21 Second Amendment to the Third Amended and Restated Credit
Agreement and Waiver dated as of August 26, 1998 among Sunrise
Medical Inc. and certain subsidiary borrowers and guarantors,
Bank of America as agent and other lenders.(f)
27 Financial Data Schedule.
- ---------------------------
</TABLE>
(a) Incorporated herein by reference to the company's Registration
Statement No. 2- 86314.
(b) Incorporated herein by reference to the company's 1987 Definitive
Proxy Statement.
(c) Incorporated herein by reference to the company's Form 10-K for
the year ended June 28, 1997.
(d) Incorporated herein by reference to the company's Form 8-K dated
May 16, 1997.
(e) Incorporated herein by reference to the company's Form 10-Q dated
November 10, 1997.
(f) Incorporated herein by reference to the company's Form 10-Q dated
November 16, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 1, 1999.
17
<PAGE>
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: February 4, 1999 /s/ Ted N. Tarbet
-------------------------------------
Ted N. Tarbet
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 4, 1999 /s/ John M. Radak
-------------------------------------
John M. Radak
Vice President and Controller
(Principal Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 3, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 1, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> JAN-01-1999
<CASH> 1,217
<SECURITIES> 0
<RECEIVABLES> 161,299
<ALLOWANCES> 10,991
<INVENTORY> 92,143
<CURRENT-ASSETS> 269,166
<PP&E> 178,013
<DEPRECIATION> 90,001
<TOTAL-ASSETS> 633,825
<CURRENT-LIABILITIES> 143,768
<BONDS> 0
0
0
<COMMON> 22,198
<OTHER-SE> 257,924
<TOTAL-LIABILITY-AND-EQUITY> 633,825
<SALES> 328,255
<TOTAL-REVENUES> 328,255
<CGS> 225,774
<TOTAL-COSTS> 225,774
<OTHER-EXPENSES> 85,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,945
<INCOME-PRETAX> 11,098
<INCOME-TAX> 5,725
<INCOME-CONTINUING> 5,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,373
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
