<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 April 2, 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 May 7, 1999, the company had 22,203,633 outstanding shares of $1 par value
common stock.
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of April 2, 1999 and 3
July 3, 1998
Condensed consolidated statements of operations for the thirteen and 4
thirty-nine weeks ended April 2, 1999 and March 27, 1998
Condensed consolidated statements of cash flows for the thirty-nine 5
weeks ended April 2, 1999 and March 27, 1998
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
Part II. Other Information
Item 4. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
April 2, July 3,
ASSETS 1999 1998
- ------ ----------- ----------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 1,504 $ 931
Trade receivables, net 133,832 121,967
Installment receivables, net 18,855 12,329
Income tax refunds receivable - 4,013
Inventories 89,207 94,589
Deferred income taxes 15,890 19,288
Other current assets 6,256 3,622
--------- ---------
Total current assets 265,544 256,739
Property and equipment, net 86,924 85,804
Goodwill and other intangible assets, net 257,706 266,815
Other assets, net 10,072 6,947
--------- ---------
Total assets $ 620,246 $ 616,305
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 5,456 $ 3,753
Trade accounts payable 59,086 59,638
Accrued compensation and other liabilities 71,162 82,975
Income taxes payable 3,708 2,794
--------- ---------
Total current liabilities 139,412 149,160
Long-term debt, less current installments 196,270 188,029
Deferred income taxes 6,981 6,456
Stockholders' equity:
Preferred stock, $1 par. Authorized 5,000 shares; none issued - -
Common stock, $1 par. Authorized 40,000 shares; 22,204 and
22,151 shares, respectively, issued and outstanding 22,204 22,151
Additional paid-in capital 203,594 203,346
Retained earnings 54,146 46,994
Accumulated other comprehensive (loss) income (2,361) 169
--------- ---------
Total stockholders' equity 277,583 272,660
--------- ---------
Total liabilities and stockholders' equity $ 620,246 $ 616,305
--------- ---------
--------- ---------
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
3
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SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------ ----------------------------------
April 2, 1999 March 27, 1998 April 2, 1999 March 27, 1998
----------------- ------------------ ----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $169,715 $164,415 $497,970 $488,536
Cost of sales 119,967 112,102 345,741 332,137
---------- ---------- ---------- ----------
Gross profit 49,748 52,313 152,229 156,399
Marketing, selling and administrative expenses 35,440 36,173 107,649 113,250
Research and development 5,222 4,200 14,569 12,503
Re-engineering expenses - 5,307 - 16,985
Amortization of goodwill and other intangibles 2,133 2,124 6,379 6,273
---------- ---------- ---------- ----------
Operating income 6,953 4,509 23,632 7,388
---------- ---------- ---------- ----------
Other (expense) income:
Interest expense (4,239) (3,641) (12,184) (11,076)
Interest income and other, net 746 832 3,110 8,643
---------- ---------- ---------- ----------
(3,493) (2,809) (9,074) (2,433)
---------- ---------- ---------- ----------
Income before income taxes 3,460 1,700 14,558 4,955
Income taxes 1,681 1,798 7,406 3,256
---------- ---------- ---------- ----------
Net income (loss) $ 1,779 $ (98) $ 7,152 $ 1,699
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $ 0.08 $ - $ 0.32 $ 0.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic weighted average number of shares outstanding 22,202 22,020 22,192 21,956
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.08 $ - $ 0.32 $ 0.08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted weighted average number of shares outstanding 22,245 22,020 22,257 22,262
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(See accompanying notes to condensed consolidated financial statements)
4
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SUNRISE MEDICAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------------------------
April 2, March 27,
1999 1998
-------------------- ----------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,152 $ 1,699
Depreciation and amortization 12,247 12,500
Amortization of goodwill and other intangibles 6,379 6,273
Other non-cash items 3,797 2,697
Changes in assets and liabilities:
Trade receivables, net (12,375) (9,884)
Installment receivables, net (8,899) 3,520
Inventories 4,890 (11,150)
Other assets (1,994) (6,279)
Income taxes 5,031 4,780
Accounts payable and other liabilities (9,136) 11,020
--------- --------
Net cash provided by operating activities 7,092 15,176
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (14,003) (5,115)
--------- --------
Net cash used for investing activities (14,003) (5,115)
--------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 66,949 193,365
Principal payments on long-term borrowings (57,161) (204,716)
Proceeds from issuance of common stock 301 2,010
--------- --------
Net cash provided by (used for) financing activities 10,089 (9,341)
--------- --------
Effect of exchange rate changes on cash (2,605) (1,840)
--------- --------
Net increase (decrease) in cash and cash equivalents 573 (1,120)
Cash and cash equivalents at beginning of period 931 4,223
--------- --------
Cash and cash equivalents at end of period $ 1,504 $ 3,103
--------- --------
--------- --------
</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 April 2, 1999 and for the
thirteen week and thirty-nine week periods ended April 2, 1999 and March 27,
1998 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. Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
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>
April 2, 1999 July 3, 1998
------------- ------------
<S> <C> <C>
Raw material $39,660 $42,634
Work-in-progress 11,478 12,588
Finished goods 38,069 39,367
------- -------
$89,207 $94,589
------- -------
------- -------
</TABLE>
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 Sentient Systems Technology Inc. (now DynaVox
Systems), 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 Thirty-nine Weeks
Ended March 27, 1998 Ended March 27, 1998
-------------------- --------------------
<S> <C> <C>
Net sales:
Sunrise, as previously reported $160,426 $476,834
Dynavox 3,989 11,702
--------- --------
Combined $164,415 488,536
--------- --------
--------- --------
Net (loss) income:
Sunrise, as previously reported $ (589) $ 187
DynaVox 491 1,512
--------- --------
Combined $ (98) $ 1,699
--------- --------
--------- --------
</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 (loss) and
foreign currency translation adjustments. The company's comprehensive income
(loss) was as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------- --------------------------------
April 2, 1999 March 27, 1998 April 2, 1999 March 27, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,779 $ (98) $7,152 $1,699
Foreign currency translation (loss) (4,362) (1,188) (2,530) (1,455)
------- ------- ------ ------
Comprehensive (loss) income $(2,583) $(1,286) $4,622 $ 244
------- ------- ------ ------
------- ------- ------ ------
</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
denominators of the basic and diluted EPS.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------- --------------------------------
April 2, 1999 March 27, 1998 April 2, 1999 March 27, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Weighted average number of shares outstanding 22,202 22,020 22,192 21,956
Dilutive stock options (1), (2) 43 - 65 306
--------- ---------- --------- --------
Weighted average number of shares assuming
dilution 22,245 22,020 22,257 22,262
--------- ---------- --------- --------
--------- ---------- --------- --------
</TABLE>
(1) 1,954,000 and 1,307,000 common share equivalents were not used to
compute diluted earnings per share for the thirteen weeks ended April
2, 1999 and March 27, 1998, respectively, as the effect was
antidilutive.
(2) 1,872,000 and 1,302,000 common share equivalents were not used to
compute diluted earnings per share for the thirty-nine weeks ended
April 2, 1999 and March 27, 1998, respectively, as the effect was
antidilutive
7
<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 APRIL 2, 1999 COMPARED TO THIRTEEN WEEKS ENDED MARCH 27,
1998
NET SALES
Net sales for the third quarter of fiscal 1999 were $169.7 million, an increase
of 3% from $164.4 million in the comparable period of fiscal 1998, with the
impact from acquisitions and foreign currency translations negligible.
HHG's sales, which include homecare operations in the United States, Canada,
Mexico and Australia, increased 1% in the third quarter of 1999 to $90.6
million, compared to $89.4 million in the third quarter of 1998. The increase
was volume driven, partially offset by the effects of pricing pressures.
Mobility product sales were higher while respiratory product sales
experienced a modest decline, hurt by an additional Medicare reimbursement
rate cut enacted January 1, 1999. Personal care product sales increased this
quarter, as the company's Mexico facility was able to reduce backlog from
high levels at the end of the prior quarter.
European Homecare sales were $54.7 million in the third quarter of 1999 compared
to $50.6 million in the third quarter of 1998, an increase of 8%. All reporting
groups experienced sales growth, with Western Europe leading the growth over
prior year primarily due to increased volume in respiratory products sales.
CCG, which combines globally all product lines that are sold to nursing homes
and assisted living facilities, posted sales of $19.5 million in the third
quarter of 1999, a decline of 4% from sales of $20.4 million in the
comparable period of 1998. U.S. sales were negatively impacted by a slowdown
in nursing home construction, declining 22%, but sales to assisted living
facilities more than doubled this quarter from a small base. Bed sales
declined slightly in France, but international sales of specialty bathing
products increased 28% over the prior year third quarter, primarily due to
strengthening the salesforce and additional investments in marketing programs.
DynaVox's third quarter sales of $4.9 million grew 23% from $4.0 million in
the same quarter of the prior year. The increase is attributable to sales of
new products, including the DynaVox 3100, DynaMyte 3100 and related DSS
software, all of which were introduced in the first quarter of 1999.
8
<PAGE>
EXPENSE AND PROFIT ANALYSIS
(as a % of sales)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-------------------------------
April 2, March 27,
1999 1998
--------------- ---------------
<S> <C> <C>
Gross profit 29.3% 31.8%
Operating income 4.1% 2.7%
Interest expense 2.5% 2.2%
Net income (loss) 1.0% (0.1%)
</TABLE>
Gross profit as a percentage of net sales for the third quarter of 1999
decreased 2.5 percentage points from the third quarter of fiscal 1998. The
decline is primarily the result of price declines, an unfavorable product mix
shift and higher freight costs to expedite backlog shipments.
Marketing, selling and administrative expenses decreased by 2% in the third
quarter of 1999 compared to the prior year period, and declined as a
percentage of sales to 20.9% compared to 22.0% in the third quarter of 1998.
This quarter's decrease is due to continued tighter control of operating
expenses and favorable collections on accounts previously reserved.
Research and development expenses increased to $5.2 million, representing 3.1%
of net sales, from $4.2 million in the prior year, or 2.6% of sales, as the
company focuses its resources on developing higher margin new products.
Expenses related to re-engineering were $5.3 million in the third quarter of
1998, but this program was completed last fiscal year. These expenses were
the costs incurred during the quarter primarily associated with
implementation of common software and hardware systems and with facilities
consolidations and relocations.
Interest expense for the third quarter increased $0.6 million compared to the
third quarter of 1998 as average borrowings and interest rates were higher.
The effective tax rate in the third quarter was 48.6% compared to 105.8% in the
same period of 1998. The prior year rate, which adjusted the year to date rate
to 65.7%, was higher due to the effect of non-deductible goodwill amortization
representing a greater portion of income before income taxes when compared with
the current year quarter.
Net income for the third quarter of 1999 was $1.8 million, or $0.08 per share,
compared to net loss of $0.1 million, or $0.00 per share in the third quarter of
1998. Last year's operations were impacted by non-recurring re-engineering
expenses that had a negative effect of $0.14 per share after adjusting for
taxes.
THIRTY-NINE WEEKS ENDED APRIL 2, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
MARCH 27, 1998
NET SALES
Net sales for the first nine months of fiscal 1999 were $498 million compared to
$488.5 million in the comparable period of 1998, an increase of 2%, with the
impact from acquisitions and foreign currency translations negligible.
9
<PAGE>
HHG's sales increased 2% to $260.8 million from $256.7 million in the first
nine months of 1998. The increase is primarily attributable to growth in
mobility products while personal care products remained essentially constant.
Respiratory sales declined slightly due to the unfavorable industry
conditions in oxygen products brought about by Medicare reimbursement rate
cuts.
European Homecare sales increased 1% to $162.9 million compared to $161.7
million for the first nine months of fiscal 1998. Western Europe drove the
growth with strong respiratory and mobility products sales, offset by sales
declines in Northern Europe, attributable to delays in new product launches, and
Central Europe, due to government reimbursement changes.
CCG sales increased 1% to $58.9 million in the first nine months of 1999,
compared to $58.4 million in the comparable period of 1998. The increase is
attributable to strong shipments in the first quarter, offset by softness in
the second and third quarters as a result of a decrease in sales to one major
customer and a shift in construction emphasis from nursing homes to assisted
living facilities. Sales to assisted living facilities grew 250% in the first
nine months of 1999 from a small base.
DynaVox sales of $15.4 million advanced 32% over $11.7 million during the
first nine months of 1998 driven by new product introductions and expanded
international sales.
EXPENSE AND PROFIT ANALYSIS
(as a % of sales)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------------
April 2, March 27,
1999 1998
--------------- ---------------
<S> <C> <C>
Gross profit 30.6% 32.0%
Operating income 4.7% 1.5%
Interest expense 2.4% 2.3%
Net income 1.4% 0.3%
</TABLE>
Gross profit as a percentage of net sales decreased by 1.4 percentage points
compared to the first nine months of the prior year. Margins were negatively
impacted by an unfavorable product mix shift in the third quarter and
increased freight costs to expedite backlog shipments.
Marketing, selling and administrative expenses were 21.6% of net sales in the
first nine months of 1999 compared to 23.2% in the prior year period, and
declined in total by 5%. This year's decrease reflected tighter control of
operating expenses and, in the third quarter, favorable receivables
collections on accounts previously reserved.
Research and development expenses increased in the first nine months of 1999
to $14.6 million, or 2.9% of net sales, compared to $12.5 million, or 2.6% of
net sales in the same period of 1998. This increase reflects the company's
investment in developing higher margin new products.
10
<PAGE>
Re-engineering expenses totaled $17.0 million in the first nine months of
1998 but did not materially impact this fiscal year.
Interest expense of $12.2 million for the first nine months of 1999 was 10%
higher than $11.1 million for the same period in 1998 due to higher average
borrowings and interest rates.
The change in "interest income and other" 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.
The effective tax rate of 50.9% in the first nine months of 1999 was lower
than the rate of 65.7% in the same period of 1998 as the prior year rate was
impacted by the heightened effect of amortization of non-deductible goodwill
in relation to lower income before taxes.
Net income was $7.2 million, or $0.32 per share, compared to net income of
$1.7 million, or $0.08 per share in the same period of the prior year. Last
year's earnings were reduced by $0.32 per share after adjusting for taxes, as
a result of net non-recurring expense and income items, primarily
re-engineering expenses, the settlement of a patent infringement lawsuit and
a gain on the sale of property in the U.K., as described previously.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $0.6 million to $ 1.5 million at April 2,
1999 from $0.9 million at the beginning of the fiscal year. Net cash provided
by operating activities was $7.1 million primarily attributable to cash
generation (defined as net income plus non-cash charges) of $29.6 million,
increased income taxes payable and decreases in both inventory and income tax
refunds receivable. This was offset by receivables growth, reflecting higher
sales and increased customer use of financing programs, together with a
decrease in accrued compensation and other current liabilities. Working
capital increased $18.6 million to $126.1 million during the first nine
months of 1999.
During the first nine months of 1999, the company increased long-term
borrowings by $9.8 million to finance operational activities and capital
expenditures. The company invested $14 million in property and equipment,
including leasehold improvements at the new facility in Mexico and a plant
expansion in Germany. On April 28, 1999, the Company amended its credit
agreement as it relates to certain collateral matters. The company believes
that it will be able to maintain an adequate liquidity position through cash
generation and available borrowings under its credit facility.
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 nine months of fiscal 1999.
11
<PAGE>
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 conversion of Sunrise operations to a common Year
2000 compliant system is complete in the U.K., Spain and France, with the
conversions for Germany and the outlying distribution companies scheduled to be
completed by July, 1999.
The company has evaluated all products manufactured and sold for Year 2000
compliance. Most products are not affected due to the mechanical nature and the
absence of date-dependent functions. Those products with date functions have
been analyzed and tested by the company's engineering and quality assurance
staff and it has been determined that all Sunrise products manufactured in the
last five years are Year 2000 compliant. While the company has taken 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. If necessary, and where feasible, substitute vendors will be
identified. 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
12
<PAGE>
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 July 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
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.
13
<PAGE>
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
the 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.
As of April 2, 1999 the company had $23.8 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 April 2, 1999,
the analysis indicated that such
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<PAGE>
market movements would have resulted in a $1.7 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 uses interest rate swap
agreements to minimize the impact of interest rate fluctuation on interest
expense.
As of April 2, 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% $(0.2)
French Franc 58.4 5.78% (1.7)
German Deutsche Mark 27.6 5.49% (0.7)
------ -----
$116.0 $(2.6)
------ -----
------ -----
</TABLE>
The interest rate swaps mature at varying dates from April 1999 through
April 2001.
15
<PAGE>
SUNRISE MEDICAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
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)
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)
10.23 2nd Amended and Restated 1993 Stock Option Plan.
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.
16
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K dated February 11, 1999 was filed in connection
with an amendment to the company's Amended and Restated Shareholder
Rights Agreement.
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: May 17, 1999 /s/ Ted N. Tarbet
------------------------------
Ted N. Tarbet
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 17, 1999 /s/ John M. Radak
------------------------------
John M. Radak
Vice President and Controller
(Principal Accounting Officer)
18
<PAGE>
2ND AMENDED AND RESTATED
1993 STOCK OPTION PLAN
OF
SUNRISE MEDICAL INC.
SUNRISE MEDICAL INC., a corporation organized under the laws of the State
of Delaware, adopted the 1993 Stock Option Plan of Sunrise Medical Inc. by the
action of its Board of Directors as of August 24, 1993 and the approval of its
Shareholders as of November 15, 1993; which Plan was also first amended and
restated by the Sunrise Medical Board of Directors as of November 13, 1997; and
is hereby amended and restated for a second time by action of the Board of
Directors as of April 28, 1998. The purposes of this Plan are as follows:
(1) To further the growth, development and financial success of the Company
by providing additional incentives to certain of its executive and other key
Associates who have been or will be given responsibility for the management or
administration of the Company's business affairs, by assisting them to become
owners of the Company's Common Stock and thus to benefit directly from its
growth, development and financial success.
(2) To enable the Company to obtain and retain the services of the type of
professional, technical and managerial Associates considered essential to the
long-range success of the Company by providing and offering them an opportunity
to become owners of the Company's Common Stock under options, including options
that are intended to qualify as "INCENTIVE STOCK OPTIONS" under Section 422 of
the Code.
(3) To provide for appropriate compensation for Non-Associate Directors for
service as members of the Board, by providing such Non-Associate Directors a
financial stake and interest in the Company's performance.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
The masculine pronoun shall include the feminine and neuter and the singular
shall include the plural, where the context so indicates.
SECTION 1.1 - BOARD
"BOARD" shall mean the Board of Directors of the Company.
SECTION 1.2 - CODE
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
SECTION 1.3 - COMMITTEE
"COMMITTEE" shall mean the Stock Option Committee of the Board appointed as
provided in Section 6.1.
SECTION 1.4 - COMPANY
"COMPANY" shall mean Sunrise Medical Inc. In addition, "COMPANY" shall mean
any corporation assuming, or issuing new Associate stock options in substitution
for, Incentive Stock Options, outstanding under the Plan, in a transaction to
which Section 424(a) of the Code applies.
SECTION 1.5 - DIRECTOR
"DIRECTOR" shall mean a member of the Board.
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<PAGE>
SECTION 1.6 - ASSOCIATE
"ASSOCIATE" shall mean any Associate (as defined in accordance with the
regulations and revenue rulings then applicable under Section 3401(c) of the
Code) of the Company, or of any corporation which is then a Parent Corporation
or a Subsidiary, whether such Associate is so employed at the time this Plan is
adopted or becomes so employed subsequent to the adoption of this Plan.
SECTION 1.7 - EXCHANGE ACT
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
SECTION 1.8 - EXECUTIVE OFFICERS
"EXECUTIVE OFFICERS" shall mean in any one of the Company's fiscal years
(a) the Chief Executive Officer of the Company (or the individual acting in such
capacity) and (b) the four most highly compensated Officers of the Company
(other than the Chief Executive Officer) whose total compensation is required to
be reported to the Company's stockholders under the Exchange Act.
SECTION 1.9 - INCENTIVE STOCK OPTION
"INCENTIVE STOCK OPTION" shall mean an Option which qualifies under Section
422 of the Code and which is designated as an Incentive Stock Option by the
Committee.
SECTION 1.10 - NON-ASSOCIATE DIRECTOR
"NON-ASSOCIATE DIRECTOR" shall mean a Director who is not an Associate.
SECTION 1.11 - NON-ASSOCIATE DIRECTOR OPTION
"NON-ASSOCIATE DIRECTOR OPTION" shall mean a Non-Qualified Option which is
granted to a Non-Associate Director.
SECTION 1.12 - NON-QUALIFIED OPTION
"NON-QUALIFIED OPTION" shall mean an Option which is not an Incentive Stock
Option and which is designated as a Non-Qualified Option by the Committee.
"NON-QUALIFIED OPTIONS" also includes Non-Associate Director Options.
SECTION 1.13 - OFFICER
"OFFICER" shall mean an officer of the Company, as defined in Rule 16a-1(f)
under the Exchange Act, as such Rule may be amended in the future.
SECTION 1.14 - OPTION
"OPTION" shall mean an option to purchase Common Stock of the Company,
granted under the Plan. "OPTIONS" includes both Incentive Stock Options and
Non-Qualified Options.
SECTION 1.15 - OPTIONEE
"OPTIONEE" shall mean an Associate or a Non-Associate Director to whom an
Option is granted under the Plan.
2
<PAGE>
SECTION 1.16 - PARENT CORPORATION
"PARENT CORPORATION" shall mean any corporation in an unbroken chain of
corporations ending with the Company if each of the corporations other than the
Company then owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
SECTION 1.17 - PLAN
"PLAN" shall mean this 1993 Stock Option Plan of Sunrise Medical Inc.
SECTION 1.18 - RULE 16b-3
"RULE 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended in the future.
SECTION 1.19 - SECRETARY
"SECRETARY" shall mean the Secretary of the Company.
SECTION 1.20 - SECURITIES ACT
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
SECTION 1.21 - SUBSIDIARY
"SUBSIDIARY" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
SECTION 1.22 - TERMINATION OF DIRECTORSHIP
"TERMINATION OF DIRECTORSHIP" shall mean the time when a Director ceases to
be a member of the Board for any reason, including, but not by way of
limitation, a termination by resignation, expiration of term, removal (with or
without cause), retirement or death.
SECTION 1.23 - TERMINATION OF EMPLOYMENT
"TERMINATION OF EMPLOYMENT" shall mean the time when the employee-employer
relationship between the Associate and the Company, a Parent Corporation or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, a termination by resignation, discharge, death or
retirement, but excluding terminations where there is a simultaneous
reemployment by the Company, a Parent Corporation or a Subsidiary. The
Committee, in its absolute discretion, shall determine the effect of all other
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; PROVIDED,
HOWEVER, that, with respect to Incentive Stock Options, a leave of absence shall
constitute a Termination of Employment if, and to the extent that, such leave of
absence interrupts employment for the purposes of Section 422(a)(2) of the Code
and the then applicable regulations and revenue rulings under said Section.
3
<PAGE>
ARTICLE II
SHARES SUBJECT TO PLAN
SECTION 2.1 - SHARES SUBJECT TO PLAN
(a) The shares of stock subject to Options shall be shares of the Company's
$1.00 par value Common Stock. The aggregate number of such shares which may be
issued upon exercise of Options shall not exceed 300,000; PROVIDED, HOWEVER,
that on the last business day of each fiscal year of the Company beginning with
July 1, 1994 such maximum number shall be increased by a number equal to 1.5% of
the number of shares of Common Stock issued and outstanding as of the close of
business on such day; PROVIDED, FURTHER, that the aggregate number of shares
which may be issued upon exercise of Options granted to the Executive Officers
as a group in any fiscal year of the Company under the Plan shall not exceed 60%
of the shares which may be issued upon exercise of all Options granted in such
fiscal year under the Plan.
(b) In no event shall the aggregate number of shares which may be issued
upon exercise of Options under the Plan exceed 4,000,000.
SECTION 2.2 - UNEXERCISED OPTIONS; RETAINED SHARES
If any Option expires or is canceled without having been fully exercised,
the number of shares subject to such Option but as to which such Option was not
exercised prior to its expiration or cancellation may again be optioned
hereunder, subject to the limitations of Section 2.1. Shares of stock which are
received or retained by the Company upon the exercise of options pursuant to
Section 5.3(b) or Sections 5.3(c) and 5.5(d) may also again be optioned
hereunder, subject to the overall limitation of section 2.1(b) but not subject
to the limitations of Section 2.1(a).
SECTION 2.3 - CHANGES IN COMPANY'S SHARES
In the event that the outstanding shares of Common Stock of the Company are
hereafter changed into or exchanged for a different number or kind of shares or
other securities of the Company, or of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend or combination of shares, appropriate adjustments shall
be made by the Committee in the number and kind of shares for the purchase of
which Options may be granted, including adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be issued on
exercise of Options.
ARTICLE III
GRANTING OF OPTIONS
SECTION 3.1 - ELIGIBILITY
Any executive or other key Associate of the Company or of any corporation
which is then a Parent Corporation or a Subsidiary, including the Executive
Officers, shall be eligible to be granted Options, except as provided in Section
3.2. Non-Associate Directors shall be granted Non-Associate Director Options as
provided in Section 3.4.
SECTION 3.2 - QUALIFICATION OF INCENTIVE STOCK OPTIONS
No Incentive Stock Option shall be granted unless such Option, when
granted, qualifies as an "INCENTIVE STOCK OPTION" under Section 422 of the Code.
Incentive Stock Options shall not be granted to Non-Associate Directors, but
may, in the discretion of the Committee, be granted to Directors who are also
Associates.
SECTION 3.3 - GRANTING OF OPTIONS TO ASSOCIATES
(a) In the case of Options to be granted to Associates, the Committee shall
from time to time, in its absolute discretion:
4
<PAGE>
(1) Determine which Associates are executive or other key Associates and
select from among the executive or other key Associates (including the
Executive Officers and those executive or other key Associates to whom
Options have been previously granted under the Plan) such of them as in its
opinion should be granted Options; and
(2) Determine the number of shares to be subject to such Options granted to
such selected executive or other key Associates or Executive Officers, and
determine whether such Options are to be Incentive Stock Options or
Non-Qualified Options; and
(3) Determine the terms and conditions of such Options, consistent with
the Plan.
(b) Upon the selection of an Executive Officer or an executive or other key
Associate to be granted an Option, the Committee shall instruct the Secretary to
issue such Option and may impose such conditions on the grant of such Option as
it deems appropriate.
SECTION 3.4 - GRANTING OF NON-ASSOCIATE DIRECTOR OPTIONS
Each Non-Associate Director elected or appointed as a Director following
January 27, 1998 shall receive an initial grant of a Non-Associate Director
Option for 2,000 shares of the Company's Common Stock (subject to adjustment
pursuant to Section 2.3) on the day of the initial election or appointment of
such Non-Associate Director as a Director. Thereafter, each Non-Associate
Director shall be granted a Non-Associate Director Option for 2,000 shares of
the Company's Common Stock (subject to adjustment pursuant to Section 2.3) each
year that he or she continues to serve as a Non-Associate Director.
ARTICLE IV
TERMS OF OPTIONS
SECTION 4.1 - OPTION AGREEMENT
Each Option shall be evidenced by a written Stock Option Agreement, which
shall be executed by the Optionee and an authorized Officer of the Company and
which shall contain such terms and conditions as the Committee shall determine,
consistent with the Plan. Stock Option Agreements evidencing Incentive Stock
Options shall contain such terms and conditions as may be necessary to qualify
such Options as "INCENTIVE STOCK OPTIONS" under Section 422 of the Code.
SECTION 4.2 - OPTION PRICE
(a) The price of the shares subject to each Option shall be set by the
Committee; PROVIDED, HOWEVER, that the price per share shall be not less than
100% of the fair market value of such shares on the date that such Option is
granted; PROVIDED, FURTHER, that, in the case of a Non-Associate Director
Option, the price per share shall equal 100% of the fair market value of such
shares of the date that such Non-Associate Director Option is granted; PROVIDED,
FURTHER, that, in the case of an Incentive Stock Option, the price per share
shall not be less than 110% of the fair market value of such shares on the date
such Option is granted in the case of an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company, any Subsidiary or any
Parent Corporation.
(b) For purposes of the Plan, the fair market value of a share of the
Company's Common Stock as of a given date shall be: (i) the closing price of a
share of the Company's Common Stock on the principal exchange on which shares of
the Company's Common Stock are then trading, if any, on the trading day previous
to such date, or, if shares were not traded on the trading day previous to such
date, then on the next preceding trading day during which a sale occurred; or
(ii) if such Common Stock is not traded on an exchange but is quoted on NASDAQ
or a successor quotation system, (1) the last sales price (if the Company's
Common Stock is then listed as a National Market Issue under the NASD National
Market System) or (2) the mean between the closing representative bid and asked
prices (in all other cases) for the
5
<PAGE>
Company's Common Stock on the trading day previous to such date as reported
by NASDAQ or such successor quotation system; or (iii) if such Common Stock
is not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the mean between the closing bid and asked prices for the
Company's Common Stock, on the trading day previous to such date, as
determined in good faith by the Committee; or (iv) if the Company's Common
Stock is not publicly traded, the fair market value established by the
Committee acting in good faith.
SECTION 4.3 - COMMENCEMENT OF EXERCISABILITY
(a) Except as the Committee may otherwise provide with respect to Options
granted to Associates who are not Officers, no Option may be exercised in whole
or in part during the first six months after such Option is granted.
(b) Options shall become exercisable at such times and in such installments
(which may be cumulative) as the Committee shall provide in the terms of each
individual Option; PROVIDED, HOWEVER, that by a resolution adopted after an
Option is granted the Committee may, on such terms and conditions as it may
determine to be appropriate, accelerate the time at which such Option or any
portion thereof may be exercised.
(c) Except as provided in the applicable Stock Option Agreement executed
hereunder, no portion of an Option which is unexercisable at Termination of
Employment (or Termination of Directorship, in the case of a Non-Associate
Director Option) shall thereafter become exercisable.
(d) To the extent that the aggregate fair market value of stock with
respect to which "INCENTIVE STOCK OPTIONS" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company, any Subsidiary and any Parent
Corporation) exceeds $100,000, such options shall be taxed as Non-Qualified
Options. The rule set forth in the preceding sentence shall be applied by taking
options into account in the order in which they were granted. For purposes of
this Section 4.3(d), the fair market value of stock shall be determined as of
the time that the option with respect to such stock is granted.
SECTION 4.4 - EXPIRATION OF OPTIONS
(a) Except as provided in the applicable Stock Option Agreement executed
hereunder, no Option may be exercised to any extent by anyone after the first to
occur of the following events:
(1) The expiration of ten years from the date the Option was granted; or
(2) With respect to an Incentive Stock Option in the case of an Optionee
owning (within the meaning of Section 424(d) of the Code), at the time the
Incentive Stock Option was granted, more than 10% of the total combined
voting power of all classes of stock of the Company, any Subsidiary or any
Parent Corporation, the expiration of five years from the date the
Incentive Stock Option was granted; or
(3) Except in the case of any Optionee who is disabled (within the meaning
of Section 22(e)(3) of the Code), the expiration of three months from the
date of the Optionee's Termination of Employment (or Termination of
Directorship, in the case of a Non-Associate Director Option) for any
reason other than normal retirement at age 65 or such Optionee's death
unless the Optionee dies within said three-month period; or
(4) In the case of an Optionee who is disabled (within the meaning of
Section 22(e)(3) of the Code), the expiration of one year from the date of
the Optionee's Termination of Employment (or Termination of Directorship,
in the case of a Non-Associate Director Option) for any reason other than
such Optionee's death unless the Optionee dies within said one-year period;
or
(5) In the case of a Non-Associate Director Option, three (3) months
following the Non-Associate Director's Termination of Directorship by reason of
expiration of term, removal (with or without cause) or resignation; or
(6) The expiration of one year from the date of the Optionee's death.
6
<PAGE>
(b) Subject to the provisions of Section 4.4(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires and
becomes unexercisable; and (without limiting the generality of the foregoing)
the Committee may provide in the terms of individual Options that said Options
expire immediately upon a Termination of Employment (or Termination of
Directorship, in the case of a Non-Associate Director Option) for any reason.
SECTION 4.5 - CONSIDERATION
In consideration of the granting of an Option, the Optionee shall agree, in
the written Stock Option Agreement, to remain in the employ (or, in the case of
a Non-Associate Director, as a Director) of the Company, a Parent Corporation or
a Subsidiary for a period of at least one year after the Option is granted.
Nothing in this Plan or in any Stock Option Agreement hereunder shall confer
upon any Optionee any right to continue in the employ or as a Director of the
Company, any Parent Corporation or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company and its Parent Corporation and
Subsidiaries, which are hereby expressly reserved, to discharge (or, in the case
of a Non-Associate Director, to remove) any Optionee at any time for any reason
whatsoever, with or without cause.
SECTION 4.6 - ADJUSTMENTS IN OUTSTANDING OPTIONS
Except as provided in the applicable Stock Option Agreement executed
hereunder, in the event that the outstanding shares of the stock subject to
Options are changed into or exchanged for a different number or kind of shares
of the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split-up, stock
dividend or combination of shares, the Committee shall make an appropriate and
equitable adjustment in the number and kind of shares as to which all
outstanding Options, or portions thereof then unexercised, shall be exercisable,
to the end that after such event the Optionee's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustment in an
outstanding Option shall be made without change in the total price applicable to
the Option or the unexercised portion of the Option (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices)
and with any necessary corresponding adjustment in Option price per share;
PROVIDED, however, that, in the case of Incentive Stock Options, each such
adjustment shall be made in such manner as not to constitute a "MODIFICATION"
within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by
the Committee shall be final and binding upon all Optionees, the Company and all
other interested persons.
SECTION 4.7 - MERGER, CONSOLIDATION, ACQUISITION,
LIQUIDATION OR DISSOLUTION
Notwithstanding the provisions of Section 4.6, in its absolute discretion,
and on such terms and conditions as it deems appropriate, the Committee may
provide by the terms of any Option that such Option cannot be exercised after
the merger or consolidation of the Company with or into another corporation, the
acquisition by another corporation or person of all or substantially all of the
Company's assets or 80% or more of the Company's then outstanding voting stock
or the liquidation or dissolution of the Company; and if the Committee so
provides, it must on such terms and conditions as it deems appropriate, also
provide, either by the terms of such Option or by a resolution adopted prior to
the occurrence of such merger, consolidation, acquisition, liquidation or
dissolution, that, for some period of time prior to such event, such Option
shall be exercisable as to all shares covered thereby, notwithstanding anything
to the contrary in Section 4.3(a), Section 4.3(b) and/or any installment
provisions of such Option, but subject to Section 4.3(e). Not withstanding the
foregoing, the Board may, in it's absolute discretion, provide in the
Agreement(s) (or otherwise evidence their determination) that such option(s)
vest fully and automatically upon a change in control of the Company.
7
<PAGE>
ARTICLE V
EXERCISE OF OPTIONS
SECTION 5.1 - PERSON ELIGIBLE TO EXERCISE
During the lifetime of the Optionee, only the Optionee may exercise an
Option (or any portion thereof) granted to him or her. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when such
portion becomes unexercisable under the Plan or the applicable Stock Option
Agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
SECTION 5.2 - PARTIAL EXERCISE
At any time and from time to time prior to the time when any exercisable
Option or exercisable portion thereof becomes unexercisable under the Plan or
the applicable Stock Option Agreement, such Option or portion thereof may be
exercised in whole or in part; PROVIDED, HOWEVER, that the Company shall not be
required to issue fractional shares and the Committee may, by the terms of the
Option, require any partial exercise to be with respect to a specified minimum
number of shares.
SECTION 5.3 - MANNER OF EXERCISE
An exercisable Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or his office of all of the following prior
to the time when such Option or such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement:
(a) Notice in writing signed by the Optionee or other person then entitled
to exercise such Option or portion, stating that such Option or portion is
exercised, such notice complying with all applicable rules established by
the Committee; and
(b) (1) Full payment (in cash or by check) for the shares with respect to
which such Option or portion is thereby exercised; or
(2) With the consent of the Committee, and except in the case of
a Non-Associate Director Option, (A) shares of the Company's Common
Stock owned by the Optionee duly endorsed for transfer to the Company
or (B) shares of the Company's Common Stock issuable to the Optionee
upon exercise of the Option, with a fair market value (as determined
under Section 4.2(b), on the date of option exercise equal to the
aggregate Option price of the shares with respect to which such Option
or portion is thereby exercised; or
(3) With the consent of the Committee, any combination of the
consideration provided in the foregoing subsections (1) and (2) except in
the case of a Non-Associate Director Option; and
(c) The payment to the Company (or other employer corporation) of all
amounts which it is required to withhold under federal, state or local law
in connection with the exercise of the Option. In the case of a
Non-Qualified Option, the payment of such withholding shall be effected by
the retention by the Company, from the shares of the Company's Common Stock
otherwise issuable upon exercise of the Option, of shares with a fair
market value (as determined under Section 4.2(b)) on the date of Option
exercise equal to the amount of such required withholdings, rounded up to
the next whole number of shares. The Company shall pay to the Optionee or
other person then entitled to exercise the Option an amount in cash equal
to the fair market value (as determined under Section 4.2(b)) of any
fractional share retained in excess of the shares representing, in value,
the amount of such required withholdings; and
(d) Such representations and documents as the Committee, in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
8
<PAGE>
securities laws or regulations. The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer orders to transfer agents and
registrars; and
(e) In the event that the Option or portion thereof shall be exercised
pursuant to Section 5.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option or portion thereof.
SECTION 5.4 - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES
The shares of the Company's Common Stock issuable and deliverable upon the
exercise of an Option, or any portion thereof, may be either previously
authorized but unissued shares or issued shares which have then been reacquired
by the Company. The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise of
any Option or portion thereof prior to fulfillment of all of the following
conditions:
(a) The admission of such shares to listing on all stock exchanges on which
such series or class of stock is then listed; and
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body, which the Committee shall, in its absolute discretion,
deem necessary or advisable; and
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The payment to the Company (or other employer corporation) of all
amounts which it is required to withhold under federal, state or local law
in connection with the exercise of the Option. In the case of a
Non-Qualified Option, the payment of such withholding shall be effected by
the retention by the Company, from the shares of the Company's Common Stock
otherwise issuable upon exercise of the Option, of shares with a fair
market value (as determined under Section 4.2(b)) on the date of Option
exercise equal to the amount of such required withholdings, rounded up to
the next whole number of shares. The Company shall pay to the Optionee or
other person then entitled to exercise the option an amount in cash equal
to the fair market value (as determined under Section 4.2(b)) of any
fractional share retained in excess of the shares representing, in value,
the amount of such required withholdings; and
(e) The lapse of such reasonable period of time following the exercise of
the Option as the Committee may establish from time to time for reasons of
administrative convenience.
SECTION 5.5 - RIGHTS AS STOCKHOLDERS
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
9
<PAGE>
SECTION 5.6 - TRANSFER RESTRICTIONS
Unless otherwise approved in writing by the Committee, no shares acquired
upon exercise of any Option by any Officer, Director (including, but not limited
to, any Non-Associate Director) or other Optionee subject to Section 16 of the
Exchange Act may be sold, assigned, pledged, encumbered or otherwise transferred
until at least six months have elapsed from (but excluding) the date that such
Option was granted. The Committee, in its absolute discretion, may impose such
other restrictions on the transferability of the shares purchasable upon the
exercise of an Option, other than a Non-Associate Director Option, as it deems
appropriate. Any such other restriction shall be set forth in the respective
Stock Option Agreement and may be referred to on the certificates evidencing
such shares. The Committee may require an Associate to give the Company prompt
notice of any disposition of shares of stock, acquired by exercise of an
Incentive Stock Option, within two years from the date of granting such Option
or one year after the transfer of such shares to such Associate. The Committee
may direct that the certificates evidencing shares acquired by exercise of an
Incentive Stock Option refer to such requirement to give prompt notice of
disposition.
ARTICLE VI
ADMINISTRATION
SECTION 6.1 - STOCK OPTION COMMITTEE
The Committee shall consist of two or more Non-Associate Directors,
appointed by and holding office at the pleasure of the Board, each of whom is
both (a) a Non-Associate Director as defined by Rule 16b-3 and (b) an "OUTSIDE
DIRECTOR" within the meaning of Section 162(m)(4)(C)(ii) of the Code.
Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee shall be filled by the Board.
SECTION 6.2 - DUTIES AND POWERS OF COMMITTEE
It shall be the duty of the Committee to conduct the general administration
of the Plan in accordance with its provisions. The Committee shall have the
power to interpret the Plan and the Options and to adopt such rules for the
administration, interpretation and application of the Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Any such
interpretations and rules in regard to (a) Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "INCENTIVE STOCK OPTIONS"
within the meaning of Section 422 of the Code. The Board shall have the right to
exercise all of the rights or duties of the Committee under the Plan.
SECTION 6.3 - MAJORITY RULE
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
SECTION 6.4 - COMPENSATION; PROFESSIONAL ASSISTANCE;
GOOD FAITH ACTIONS
Members of the Committee shall receive such compensation for their services
as members as may be determined by the Board. All expenses and liabilities
incurred by members of the Committee in connection with the administration of
the Plan shall be borne by the Company. The Committee may employ attorneys,
consultants, accountants, appraisers, brokers or other persons. The Committee,
the Company and its Officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Optionees, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
the Options, and all members of the Committee shall be fully protected by the
Company in respect to any such action, determination or interpretation.
10
<PAGE>
ARTICLE VII
OTHER PROVISIONS
SECTION 7.1 - OPTIONS NOT TRANSFERABLE
No Option or interest or right therein or part thereof shall be liable for
the debts, contracts or engagements of the Optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law, by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; PROVIDED, HOWEVER, that nothing in this Section 7.1 shall
prevent transfers by will or by the applicable laws of descent and distribution.
SECTION 7.2 - AMENDMENT, SUSPENSION OR
TERMINATION OF THE PLAN
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Committee.
However, without approval of the Company's stockholders given within 12 months
before or after the action by the Committee, no action of the Committee may,
except as provided in Section 2.3, increase any limit imposed in Section 2.1 on
the maximum number of shares which may be issued on exercise of Options or amend
or modify the Plan in a manner requiring stockholder approval under Section 422
of the Code. Neither the amendment, suspension nor termination of the Plan
shall, without the consent of the holder of the Option, impair any rights or
obligations under any Option theretofore granted. No Option may be granted
during any period of suspension nor after termination of the Plan, and in no
event may any Option be granted under this Plan after the first to occur of the
following events:
(a) The expiration of ten years from the date the Plan is adopted by the
Board; or
(b) The expiration of ten years from the date the Plan is approved by the
Company's stockholders under Section 7.3.
SECTION 7.3 - APPROVAL OF PLAN BY STOCKHOLDERS
This Stock Option Plan was originally approved by the Stockholders of the
Company as of November 15, 1993.
SECTION 7.4 - EFFECT OF PLAN UPON OTHER OPTION
AND COMPENSATION PLANS
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Parent Corporation or any
Subsidiary. Nothing in this Plan shall be construed to limit the right of the
Company, any Parent Corporation or any Subsidiary (a) to establish any other
forms of incentives or compensation for Associates of the Company, any Parent
Corporation or any Subsidiary or (b) to grant or assume options otherwise than
under this Plan in connection with any proper corporate purpose, including, but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, firm or association.
SECTION 7.5 - TITLES
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of the Plan.
11
<PAGE>
SECTION 7.6 - CONFORMITY TO SECURITIES LAWS
The Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
the Plan shall be administered, and Options shall be granted and may be
exercised, only in such a manner as to conform to such laws, rules and
regulations. To the extent permitted by applicable law, the Plan and Options
granted hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
* * * *
I hereby certify that the Plan was previously approved by the stockholders
of Sunrise Medical Inc. on November 15, 1993, and the first amended and restated
Plan was duly adopted by the Board of Directors of Sunrise Medical Inc. on
November 13, 1997; and the second amended and restated Plan was duly adopted by
the Board of Directors of Sunrise Medical Inc. on April 28, 1998.
Executed as of April 28, 1998.
------------------------------------------
Secretary
* * * *
12
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 2, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 2, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> APR-02-1999
<CASH> 1,504
<SECURITIES> 0
<RECEIVABLES> 161,308
<ALLOWANCES> 8,621
<INVENTORY> 89,207
<CURRENT-ASSETS> 265,544
<PP&E> 178,173
<DEPRECIATION> 91,249
<TOTAL-ASSETS> 620,246
<CURRENT-LIABILITIES> 139,412
<BONDS> 0
0
0
<COMMON> 22,204
<OTHER-SE> 255,379
<TOTAL-LIABILITY-AND-EQUITY> 620,246
<SALES> 497,970
<TOTAL-REVENUES> 497,970
<CGS> 345,741
<TOTAL-COSTS> 345,741
<OTHER-EXPENSES> 128,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,184
<INCOME-PRETAX> 14,558
<INCOME-TAX> 7,406
<INCOME-CONTINUING> 7,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,152
<EPS-PRIMARY> 0.32
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