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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2000.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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SUNRISE MEDICAL INC.
(NAME OF SUBJECT COMPANY)
SUNRISE MEDICAL INC.
(NAME OF PERSON FILING STATEMENT)
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COMMON STOCK, PAR VALUE $1.00 PER SHARE
(TITLE OF CLASS OF SECURITIES)
867910 10 1
(CUSIP NUMBER OF CLASS OF SECURITIES)
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MURRAY H. HUTCHISON
CHAIRMAN OF THE BOARD OF DIRECTORS
SUNRISE MEDICAL INC.
2382 FARADAY AVENUE, SUITE 200
CARLSBAD, CALIFORNIA 92008
(760) 930-1500
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICE AND
COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
------------------------
COPIES TO:
PAUL TOSETTI, ESQ.
LATHAM & WATKINS
633 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CA 90071
(213) 485-1234
/ / CHECK THE BOX IF THE FILING RELATES SOLELY TO PRELIMINARY COMMUNICATIONS
MADE BEFORE THE COMMENCEMENT OF A TENDER OFFER.
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ITEM 1. SUBJECT COMPANY INFORMATION.
(a) NAME AND ADDRESS. The name of the subject company is Sunrise
Medical Inc., a corporation organized under the laws of the State of Delaware
(the "Company" or "Sunrise Medical"), and the address of the principal executive
offices of the Company is 2382 Faraday Avenue, Suite 200, Carlsbad, California
92008. The telephone number of the principal executive offices of the Company is
(760) 930-1500.
(b) SECURITIES. The title of the class of equity securities to which this
statement relates is the common stock, par value $1.00 per share, of the Company
(the "Common Stock"), including the associated common stock purchase rights (the
"Rights" and, together with the Common Stock, the "Shares"). As of October 27,
2000, there were 22,359,218 shares of Common Stock outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF THE FILING PERSON.
(a) NAME AND ADDRESS. The name, business address and business telephone
number of the Company, which is the person filing this Schedule 14D-9, are set
forth in Item 1 above.
(d) TENDER OFFER. This Schedule 14D-9 relates to the offer by V.S.M.
Acquisition Corp., a corporation organized under the laws of the State of
Delaware ("Purchaser") and a wholly owned subsidiary of V.S.M. Holdings, Inc., a
corporation organized under the laws of State of Delaware ("Holdings") and a
wholly owned subsidiary of V.S.M. Investors, LLC, a Delaware limited liability
company ("Parent"), disclosed in a Tender Offer Statement on Schedule TO, dated
October 30, 2000 (the "Schedule TO"), to purchase all of the issued and
outstanding Shares at a price of $10.00 per Share, net to the seller in cash
(the "Offer Price"), upon the terms and subject to the conditions set forth in
the offer to purchase (the "Offer to Purchase"), dated October 30, 2000, and the
related letter of transmittal (the "Letter of Transmittal," which, as may be
amended and supplemented from time to time, together with the Offer to Purchase,
constitute the "Offer").
The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of October 16, 2000 (the "Merger Agreement"), by and among the Company,
Parent, Holdings and Purchaser, a copy of which is filed as Exhibit (e)(1)
hereto and is incorporated herein by reference. Subject to certain terms and
conditions of the Merger Agreement, Purchaser will be merged with and into the
Company (the "Merger") as soon as practicable after the consummation of the
Offer, with the Company being the surviving corporation in the Merger (the
"Surviving Corporation") and becoming a wholly owned subsidiary of Holdings.
The Schedule TO states that the address of the principal executive offices
of Parent, Holdings and Purchaser is 245 Park Avenue, 41st Floor, New York, New
York 10167. The telephone number for each of Parent, Holdings and Purchaser is
(212) 351-1600.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
(d) CONFLICTS OF INTEREST. Except as described or referred to below, there
exists on the date hereof no material agreement, arrangement or understanding
and no actual or potential conflict of interest between the Company or its
affiliates and (i) the Company or its executive officers, directors or
affiliates or (ii) Parent, Holdings, Purchaser or their executive officers,
directors or affiliates.
ARRANGEMENTS WITH EXECUTIVE OFFICERS, DIRECTORS OR AFFILIATES OF THE COMPANY
Certain contracts, agreements, arrangements and understandings between the
Company and certain of its directors, executive officers and affiliates are
described in the Company's Information Statement in the sections entitled
"Executive Compensation", "Compensation Committee Interlocks and Insider
Participation", "Director Compensation", "Report of Compensation Committee on
Executive
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Compensation", "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions." The Information Statement
is attached hereto as Annex A and is incorporated herein by reference. Certain
of these contracts, agreements, arrangements and understandings will be affected
by the Merger, as described below and as set forth in Annex A.
Certain contracts, agreements, arrangements and understandings between the
Company or its affiliates and Parent, Holdings, Purchaser or their executive
officers, directors or affiliates, including the Letter Agreements, the
Management Unit Subscription Agreement, the Securityholders Agreement, the
Employment Agreements, and the Management Agreement entered into or to be
entered into with executives of the Company are set forth under the caption
"SPECIAL FACTORS--Interests of Certain Persons in the Transaction" in the Offer
to Purchase which is incorporated by reference herein. Capitalized terms used in
the description of agreements below and not otherwise defined herein shall have
the meanings ascribed to them in the particular agreement.
THE MERGER AGREEMENT.
In connection with the transactions contemplated by the Merger, the Company,
Parent, Holdings and Purchaser entered into the Merger Agreement. The summary of
the material terms of the Merger Agreement set forth under the caption "SPECIAL
FACTORS--The Merger Agreement" in the Offer to Purchase is incorporated by
reference herein. The summary of the Merger Agreement contained in the Offer to
Purchase is qualified in its entirety by reference to the Merger Agreement, a
copy of which is filed as Exhibit (e)(1) hereto and is incorporated herein by
reference.
CONFIDENTIALITY AGREEMENT.
The Company, Vestar Capital Partners IV, L.P. and Park Avenue Equity
Partners, L.P. entered into a Confidentiality/Standstill Agreement dated May 4,
2000 (the "Confidentiality Agreement"). The following summary is qualified in
its entirety by reference to the complete text of the Confidentiality Agreement
which is filed as Exhibit (e)(2) hereto and incorporated herein by reference.
Pursuant to the Confidentiality Agreement, the parties agreed to keep
confidential certain information received from the Company. The Confidentiality
Agreement includes, among other provisions, a two-year standstill and employee
non-solicitation agreements by Vestar Capital Partners IV, L.P. and Park Avenue
Equity Partners, L.P. in favor of the Company. The Confidentiality Agreement
does not contain a provision providing for an exclusive negotiating period with
the Company. The Confidentiality Agreement's term expires two years from the
date of the last delivery of confidential information.
SHARES BENEFICIALLY OWNED.
If the directors and executive officers of the Company who own Shares tender
their Shares in the Offer or their Shares are acquired in the Merger, they will
receive the Offer Price for their Shares on the same terms as the other
shareholders of the Company. As of October 27, 2000, the directors and executive
officers of the Company beneficially owned in the aggregate 2,386,221 Shares,
after giving effect to the exercise of their options to purchase Shares,
excluding the Stock Price Securities (as defined below).
TREATMENT OF STOCK OPTIONS.
The Merger Agreement provides that except as otherwise consented to by an
option or unit holder, the Company shall cause each outstanding option to
purchase Shares and each outstanding performance bonus unit (other than certain
options to purchase approximately 1,096,667 Shares and 5,000 units, in each case
whose vesting is based upon the Company's attainment of certain stock targets of
the Shares of the Company (collectively such options and units are referred to
as the "Stock Price Securities")) that have been granted under the Company's
Performance Bonus Unit Program and Stock
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Options Plans (as defined in the Merger Agreement), including those granted to
directors and executive officers of the Company, to become vested and
exercisable with respect to all Shares subject thereto or with respect to all
such units. Each such option holder and unit holder will be paid by the Company
for such options and units (other than the Stock Price Securities), provided
that the exercise price with respect to such options or units is less than the
Offer Price, an amount in cash determined by multiplying (i) the excess, if any,
of the Offer Price over the applicable exercise price of such options or units
by (ii) the number of Shares subject to such options or the number of such
units. Each such option and unit will thereafter be canceled by the Company. The
Stock Price Securities will not be accelerated and cancelled and will continue
in accordance with the documents governing their issuance unless the holders
thereof consent to or have consented to their cancellation without any payment
therefor. As of October 27, 2000, the directors and executive officers of the
Company held options under the Company's option plans ("Options") to acquire an
aggregate of 2,724,800 Shares, with exercise prices ranging from $4.188 to
$27.75.
Michael Hammes, Ben Anderson-Ray, Raymond Huggenberger, Steven Jaye and John
Radak are a part of a group of eleven officers that also includes Geoff Cooper,
James Fetter, Sam Sinasohn, Carey Winkel, Peter Riley and Robert Logemann (the
"Management Group") who have entered into letter agreements with Parent whereby
55% of the pre-tax proceeds (i.e., substantially all after-tax proceeds) of any
cash payment attributable to the vesting of certain options exercisable for
approximately 2,193,333 Shares (the "Roll-Over Options") held by such
individuals would be used to purchase Parent Units as described under the
caption "SPECIAL FACTORS--Interests in Certain Persons in the Transaction" in
the Offer to Purchase. This summary of the letter agreements is qualified in its
entirety by reference to the letter agreements, copies of which are filed as
Exhibit (d)(iii) to Schedule TO. The executive officers of the Company that are
included in the Management Group hold Roll-Over Options that are exercisable for
approximately 1,300,000 Shares.
INDEMNIFICATION AGREEMENTS.
The Company has entered into agreements to provide indemnification for its
directors and executive officers in addition to the indemnification provided in
the Company's Certificate of Incorporation and Bylaws a copy of which is filed
as Exhibit (e)(12) hereto and is incorporated herein by reference.
TREATMENT OF STOCK PURCHASE PLAN RIGHTS.
The Sunrise Medical Inc. Associate Stock Purchase Plan (the "Stock Purchase
Plan") was established to provide the opportunity for employee ownership of
capital stock of the Company through payroll deductions. Under the Stock
Purchase Plan, purchases may be made by participating employees on a semi-annual
basis, based on a 15% discount from the lesser of the market price on the first
day or last day of the offering period. The offering periods will begin on
March 1 and September 1 of each year. A total of 1,000,000 shares of Common
Stock of the Company were authorized by the Board of Directors of the Company
for purchase under the Plan. The Merger Agreement provides that each stock
purchase right under the Company's Stock Purchase Plan, outstanding as of the
date of the Merger Agreement, will, at the time of the Merger, be canceled and
the holder will receive an amount, in cash, equal to the number of Shares
purchasable pursuant to the applicable stock purchase right multiplied by $10.
Any such payment shall be subject to all applicable federal, state and local tax
withholding requirements. The Stock Purchase Plan will be terminated as of the
effective time of the Merger. Messrs. Hammes, Anderson-Ray, Jaye, Tarbet and
Radak are participants in the Stock Purchase Plan (see Item 6 of this
Schedule 14D-9). A copy of the Stock Purchase Plan is filed as Exhibit (e)(10)
hereto and is incorporated by reference herein.
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EMPLOYEE BENEFITS.
The Merger Agreement also requires the Surviving Corporation to maintain
until the first anniversary of the Effective Time (as defined below) employee
benefit plans and arrangements with overall employee benefits which are
substantially comparable in the aggregate to the benefits provided by the
Company Benefit Plans (as defined in the Merger Agreement) as of October 16,
2000 (not taking into account the value of any benefits under any such Company
Benefit Plans which are equity-based). For purposes of determining eligibility
to participate or vesting where length of service is relevant under any employee
benefit plan or arrangement of the Surviving Corporation or any of its
Subsidiaries, employees of the Company and its Subsidiaries as of the Effective
Time shall receive service credit for service with the Company and its
Subsidiaries to the same extent such service credit was granted under the
Company Benefit Plans, subject to offsets for previously accrued benefits and no
duplication of benefits.
Except as otherwise consented to by the applicable employee, the Surviving
Corporation and its Subsidiaries shall assume and honor in accordance with their
respective terms (i) all written employment, indemnification, severance and
termination plans and agreements (including change in control provisions and
agreements) applicable to employees of the Company and its Subsidiaries, and
(ii) the severance pay policies to the extent identified in certain Company
disclosure schedules. See "Special Factors--the Merger Agreement." Certain of
these agreements shall be terminated and/or new agreements shall be entered into
as a result of the Merger, as set forth in the section in the Offer to Purchase
titled "Interests of Certain Persons in the Transaction."
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.
The Merger Agreement provides that until the sixth anniversary of the
Effective Time, the Surviving Corporation shall, to the fullest extent permitted
under applicable law, indemnify and hold harmless each present and former
director and officer of the Company (each an "Indemnified Party" and
collectively, the "Indemnified Parties") against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any pending,
threatened or completed claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, arising out of or
pertaining to any action or omission occurring prior to the Effective Time
(including, without limitation, any claim, action, suit, proceeding or
investigation arising out of or pertaining to the transactions contemplated by
the Merger Agreement). In the event of any such claim, action, suit, proceeding
or investigation (whether arising before or after the Effective Time), to the
extent permitted under applicable law, (i) the Company or the Surviving
Corporation shall advance expenses to each such Indemnified Party, including the
payment of the fees and expenses of counsel selected by such Indemnified Party,
which counsel shall be reasonably satisfactory to the Company or the Surviving
Corporation, as the case may be, promptly after statements therefor are
received, and (ii) the Company and the Surviving Corporation will cooperate
fully in the defense of any such matter. Neither the Company nor the Surviving
Corporation shall be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld).
The Merger Agreement provides that the Company shall and, from and after the
Effective Time, the Surviving Corporation shall maintain the same right to
indemnification and exculpation of officers and directors as provided for in the
Certificate of Incorporation, Bylaws and any other organizational documents of
the Company as in effect on the date of the Merger Agreement, with respect to
indemnification and exculpation for acts and omissions occurring prior to the
Effective Time, including, without limitation, the transactions contemplated by
the Merger Agreement.
The Merger Agreement also provides that until the sixth anniversary of the
Effective Time, the Surviving Corporation shall maintain officers' and
directors' liability insurance covering the officers and
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directors who are covered by the Company's officers' and directors' liability
insurance policies on the date of the Merger Agreement with respect to actions
and omissions occurring prior to the Effective Time, by obtaining tail coverage
of such existing insurance policies on terms which are not less favorable than
the terms of such current insurance in effect for the Company on the date of the
Merger Agreement and providing coverage only with respect to matters occurring
prior to the Effective Time, to the extent that such tail coverage can be
maintained at an annual cost to the Surviving Corporation of not greater than
225% of the annual premium for the Company's insurance policies in effect on the
date of the Merger Agreement and, if such tail coverage cannot be so maintained
at such cost, providing as much of such insurance as can be so maintained at a
cost equal to 225% of the annual premium for the Company's current insurance
policies.
The Merger Agreement also provides that the Surviving Corporation shall
maintain policies of insurance of the Company on the terms and conditions set
forth in any indemnification agreement to which the Company is party for all
periods extending until the expiration of any statute of limitations applicable
with respect to actions and omissions occurring prior to the Effective Time.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) SOLICITATION OR RECOMMENDATION. The Company's Board of Directors (the
"Board"), at a special meeting held October 16, 2000, unanimously
- approved and adopted the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger;
- recommended that the stockholders of the Company accept the Offer and
tender their Shares pursuant to the Offer and adopt the Merger Agreement;
- determined that the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, are fair to and in the best
interests of the stockholders of the Company; and
- declared the Merger and the Merger Agreement to be advisable.
A copy of the Company's letter to its stockholders, dated as of October 30,
2000, is filed as Exhibit (a)(1)(D) hereto and is attached hereto.
(b) REASONS.
BACKGROUND OF THE MERGER
The Company has in recent years faced an increasingly competitive business
environment. Margins in the health care products industry have been pressured by
government and private sector payment restrictions, as well as increased cost
competition which added downward pressure on the Company's stock market
valuation. This pressure, when combined with the general market disfavor for
small capitalization enterprises, has in turn made it difficult for the Company
to provide appropriate equity-based incentives for its employees.
During the same period a number of the Company's institutional and retail
stockholders made clear to the Board their dissatisfaction with the Company's
financial and stock market performance. Facing these challenges, the Board in
recent years pursued a series of restructuring initiatives and management
modifications. None of these steps led, however, to the improvements in
performance sought by the Company's stockholders and the Board.
On October 5, 1999, the Company issued a press release announcing the
resignation of Richard Chandler, the Company's founder and chief executive
officer, and the retention of Deutsche Bank Securities Inc. (also operating as
and referred to herein as "Deutsche Banc Alex. Brown") to assist the
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Company in its evaluation of alternatives. Following the press release, the
Company received inquiries from a number of third parties, primarily financial
buyers, interested in a potential transaction with the Company.
On November 17, 1999, the Board held a telephonic meeting which included
members of the Company's senior management, the Company's outside counsel,
Latham & Watkins, and representatives of Deutsche Banc Alex. Brown. The matters
considered by the Board at this meeting included the continuing decline in the
Company's stock price, the Company's growth prospects and its financing options,
particularly in light of the prospectively required refinancing of the Company's
Third Amended and Restated Credit Agreement dated August 28, 1997, as amended
(the "BofA Credit Agreement"), which was becoming due in January 2001. The Board
directed management to continue to pursue financing alternatives. At this
meeting, the Board was also updated by representatives of Deutsche Banc Alex.
Brown as to the inquiries received from third parties after the Company's
October 1999 press release.
On January 18, 2000, the Company announced that Michael Hammes had been
hired as its new chief executive officer. At that time, Mr. Hammes and members
of management began to develop plans for a restructuring program, which included
obtaining additional financing for the Company.
In the spring of 2000, members of the Company's senior management continued
to formulate and revise a series of internal restructuring plans and examined
various secured and unsecured financing alternatives. On February 29 and
April 25, 2000, the Board met and received briefings on these matters. Also,
members of senior management reported to the Board as to the inquiries they had
received from potential financial partners.
Following these Board meetings, at the request of the Board, members of the
Company's senior management met with representatives of a number of prospective
financial partners, answering questions regarding the Company and its business
and prospects. On May 11, 2000, the Company held a preliminary meeting with
representatives of Park Avenue Equity Partners, L.P. ("Park Avenue") and Vestar
Capital Partners IV, L.P. ("Vestar"). Also on that same day, members of senior
management held a preliminary meeting with a representative of a consortium
consisting of four prospective merchant banking partners which indicated
interest in exploring a possible leveraged buyout or recapitalization involving
the Company.
The members of senior management again met with representatives of the
merchant banking consortium on June 1, 2000. On June 7, 2000, members of the
Company's senior management, together with representatives of Deutsche Banc
Alex. Brown, met with the consortium and senior management made a presentation.
On June 14, 2000, members of the Company's senior management, together with
representatives of Deutsche Banc Alex. Brown, met with Vestar and Park Avenue.
At this meeting, members of the Company's senior management made a presentation
to representatives of Vestar and Park Avenue. Also at this meeting,
representatives of Vestar and Park Avenue discussed their preliminary interest
in pursuing with the Company a leveraged recapitalization transaction that
potentially would value the Company's common stock at a price per share of
$10.00.
In mid-June 2000, members of the Company's senior management, together with
representatives of Deutsche Banc Alex. Brown, met again with representatives of
the consortium of four merchant banking firms to discuss further the
consortium's proposed leveraged buyout or recapitalization transaction. In the
week that followed, a member of the consortium contacted the Company and orally
suggested another form of transaction. During this time, members of the
Company's senior management, together with Deutsche Banc Alex. Brown, also met
with another merchant banking firm to discuss a potential transaction.
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On June 21, 2000 the Board met to discuss, among other matters, the progress
made with respect to the Company's internal restructuring plan and financing
efforts. The Board was also updated as to the interest of, and discussions held
with, Vestar, Park Avenue and the other merchant banking firms referenced above.
In light of the high level of interest that was expressed by potential financial
partners at the previous meetings, the Board directed senior management and
Deutsche Banc Alex. Brown to continue to pursue discussions with Vestar, Park
Avenue and one other financial partner that had proposed the highest transaction
values. At this Board meeting, Deutsche Banc Alex. Brown reviewed with the Board
a list of potential strategic partners, and the Board authorized Deutsche Banc
Alex. Brown to contact the two strategic partners that the Board believed would
be likely to consider and consummate a possible business combination or other
strategic transaction with the Company.
In late June and July of 2000, discussions with Vestar, Park Avenue and the
other prospective financial partner continued.
On August 1, 2000, the other prospective financial partner returned the
information regarding the Company with which it had been provided, expressing
its unwillingness to proceed in a transaction that valued the Company's common
stock at or above $10 per share. After some discussion, the two strategic
partners that had been contacted also expressed no interest in pursuing a
transaction.
In late July 2000, members of the Company's senior management and
representatives of Deutsche Banc Alex. Brown met with another prospective
financial partner. Shortly thereafter, that entity declined any further interest
in pursuing a transaction.
On August 3, 2000, members of the Company's senior management and
representatives of Deutsche Banc Alex. Brown met with representatives of Vestar
and Park Avenue. At that meeting the parties discussed the historical
performance of the Company and its proposed restructuring plans. Around that
time, the Company provided to Vestar and Park Avenue certain confidential
information and access to the Company's employees in connection with Vestar's
and Park Avenue's business diligence.
On August 10, 2000, the Company requested a formal bid from Vestar and Park
Avenue. Vestar and Park Avenue were requested to submit a proposal by
August 24, 2000 and to comment on the proposed form of merger agreement prepared
by the Company's outside counsel.
On August 17, 2000, a primary competitor of the Company ("Competitor")
delivered to Mr. Hammes, on an unsolicited basis, a confidential letter setting
forth a preliminary proposal for a business combination that placed a stated
value for the Company's common stock of between $10.00 and $12.00 per share.
From time to time in the past Competitor had broached to the Company the
possibility of such a business combination, with the Company responding, in
part, that such a transaction did not seem feasible in light of the antitrust
obstacles such a combination would likely face under the competition laws of the
United States and Europe. Apparently anticipating this concern, the August 17
letter suggested that those antitrust concerns be analyzed by an independent law
firm, which would then report its results to the two companies. Mr. Hammes
advised the chief executive officer of Competitor that the proposal would be
referred to the Board for consideration at its next meeting. In response, the
Company's general counsel requested that antitrust experts from the Company's
regular outside counsel, Latham & Watkins, and from a second firm, Brobeck,
Phleger & Harrison LLP, analyze the viability of a combination with Competitor
under applicable competition laws.
On August 24, 2000, Parent's representatives submitted a formal proposal to
acquire the Company in a leveraged transaction that placed a cash value of $9.50
per share on the Company's common stock. The transaction would involve a cash
tender offer for all of the outstanding shares of such stock, to be followed by
a second-step merger. Certain proposed break-up fee and expense reimbursement
arrangements also were proposed. The proposal was subject to a number of
conditions, including the receipt of required third-party financing and the
completion of Parent's representatives' due diligence
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investigation of the Company. Parent's representatives also delivered a
preliminary commitment letter covering the required third-party debt financing
with its offer.
On August 25, 2000, the Board met to discuss the proposal submitted by
Parent's representatives (the "Proposal") and the letter sent by Competitor.
Because Mr. Hammes, as a member of senior management of the Company, was likely
to have a continuing financial interest in any transaction resulting from the
Proposal, the Board determined to establish a special committee of the Board
(the "Special Committee") to consider the Proposal. Messrs. Lee A. Ault III,
Murray H. Hutchison, William Pierpoint, Joseph Stemler and J. R. Woodhull were
named as the members of the Special Committee, and these individuals selected
Mr. Hutchison as their chairman. These directors were chosen because of their
independence in relation to Mr. Hammes and all of the known prospective
financial partners. The Board authorized the Special Committee to establish such
procedures, review such information and engage such financial advisors and legal
counsel as it deemed necessary to fully and adequately make determinations about
the proposals received and any matters that came before it. The Special
Committee was given authority to negotiate with respect to any such proposal or
matter, and was asked to make a recommendation to the full Board with respect to
a suggested course when and as it thought it appropriate to do so.
On August 25, 2000, the Special Committee discussed the selection of legal
counsel and a financial advisor. Following discussion of their qualifications
and prior contacts with members of the Company's management and Parent, the
Special Committee determined to retain Latham & Watkins as its legal counsel and
Deutsche Banc Alex. Brown as its financial advisor. The Special Committee,
however, reserved the option of retaining additional counsel and a second
investment banking firm if deemed advisable. Latham & Watkins then reviewed for
the Special Committee the procedures to be followed by the Special Committee and
the role of the Special Committee.
The Special Committee then deliberated with respect to the appropriate
response to the letter from Competitor. The antitrust counsel from Latham &
Watkins reported that both Latham & Watkins and Brobeck Phelger & Harrison LLP
shared the view that the Department of Justice and the Federal Trade Commission
would likely challenge a merger between the Company and Competitor, and that
there was a strong likelihood that the challenge would be successful, and both
delivered written opinions to that effect to the Company. Both concurred as well
that structural remedies such as divestitures were unlikely to satisfy
regulators in light of the very high percentage of the relevant market that the
combined firms would hold. The representatives of Latham & Watkins also observed
that it would be difficult, as a practical matter, to craft an agreement that
would unconditionally commit Competitor to a transaction, irrespective of
ensuing antitrust objections.
Subsequent to the receipt of this advice, the members of the Special
Committee agreed that the prospects of a successful combination with Competitor
seemed highly uncertain at best and concluded that a failed transaction with
Competitor could deprive the Company of the option to pursue other available
alternatives, and could alienate customers and regulators. Nonetheless, in light
of the stated transaction value asserted by Competitor, the Special Committee
directed both Latham & Watkins and Brobeck Phleger & Harrison LLP to reconsider
their respective views, and to report back to the Special Committee as to
whether, upon such reconsideration, a possible combination of the two companies
could be consummated.
The members of the Special Committee then reviewed the Proposal. The
principal issues of concern to the Special Committee were the price, the
conditionality of the offer (particularly the financing and diligence
conditions) and the proposed break-up fee and other termination arrangements.
The Special Committee directed Deutsche Banc Alex. Brown to communicate these
concerns to Parent's representatives, and directed Latham & Watkins not to
participate in further discussions regarding the proposed form of merger
agreement until Parent's representatives responded.
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On August 28, 2000, as directed by the Special Committee, representatives of
Deutsche Banc Alex. Brown approached Parent's representatives to discuss the
terms of the Proposal. After considerable discussion, Parent's representatives
agreed to raise its proposed offer price to $10.00 per share, but indicated that
such price was its final offer and no further price increases would be
forthcoming (the "Revised Proposal"). In addition, Parent's representatives
agreed to limit and to accelerate their remaining due diligence investigation,
but insisted that any transaction must be conditioned upon the availability of
financing.
On August 29, 2000, the Special Committee held a telephonic meeting to
discuss developments since its previous meeting. The initial item of business
concerned the retention of the firm of Richards, Layton & Finger as special
Delaware counsel to the Special Committee. Mr. Hutchison said that he had
determined, after discussing the matter with representatives of Latham & Watkins
and a representative of Richards, Layton & Finger, that the retention of a firm
with no significant prior relationship with the Company was appropriate, and the
other members of the Special Committee agreed. A representative of Deutsche Banc
Alex. Brown then updated the Special Committee as to the status of the
discussions with Parent's representatives and informed the Special Committee
that Parent's representatives had increased Parent's offer price to $10.00 per
share. The Special Committee also was informed that certain business issues had
arisen during the due diligence review conducted by Parent's representatives and
that Parent's representatives had indicated that further diligence would be
required. At the meeting, the Special Committee determined that it was in the
best interests of the Company's stockholders to continue to consider the Revised
Proposal in detail. The Special Committee did, however, express its concern that
if, after entering into an agreement, Parent did not receive the financing and
the transaction were terminated, it could have a material adverse effect on the
Company's stock and market perception.
In late August 2000 and early September of 2000, Parent's representatives
proceeded with their due diligence investigation of the Company, which included
written requests for information, inspections of documents and telephone
conferences with representatives of the Company.
On September 8, 2000, the Special Committee held a telephonic meeting, which
included representatives of Latham & Watkins and Deutsche Banc Alex. Brown. At
this meeting, the Special Committee discussed the status of ongoing due
diligence of the Company by Parent's representatives, the principal issues
raised by the Revised Proposal, the efforts in arranging the required
third-party debt financing and the status of discussions regarding management's
prospective participation as equity investors in Parent. The Special Committee
was informed that Parent's representatives were conducting negotiations with
proposed lenders to discuss the provision of binding commitment letters. The
Special Committee again directed Deutsche Banc Alex. Brown to convey to Parent's
representatives that a financing condition was not desirable.
On September 11, 2000, the Company's general counsel traveled to New York to
discuss management's prospective participation as equity investors in Parent. On
or about September 11, 2000, the members of management retained separate
counsel, Debevoise & Plimpton, to represent them in their negotiations with
Parent.
On September 14, 2000, the Special Committee held a telephonic meeting which
included representatives of Latham & Watkins, Richards, Layton & Finger and
Deutsche Banc Alex. Brown. At the meeting, the Special Committee was informed
that Parent's accountants were continuing their review of the Company, focusing
on its cash flow and EBITDA. The Special Committee directed Latham & Watkins to
forward to Parent's counsel a revised version of the draft merger agreement,
incorporating the points that had been agreed to and circulating a list of the
business and legal points that remained open. Deutsche Banc Alex. Brown informed
the Special Committee that Parent's representatives were in discussions with one
of its affiliates as a possible source of all or a portion of the financing
Parent would need to consummate the transaction. The Special Committee discussed
the
9
<PAGE>
possible retention of a second investment banking firm to provide a supplemental
opinion if an affiliate of Deutsche Banc Alex. Brown participated in such
financing. Thereafter Latham & Watkins engaged in extensive discussions of the
draft merger agreement with Parent's counsel, Simpson Thacher & Bartlett.
On September 22, 2000, the Special Committee held a telephonic meeting which
included representatives of Latham & Watkins, Richards, Layton & Finger and
Deutsche Banc Alex. Brown. At this meeting, the Special Committee was updated
regarding Parent's efforts to secure the required debt financing.
Representatives of Latham & Watkins summarized for the members of the Special
Committee the principal legal issues that remained, in the view of that firm and
of Richards, Layton & Finger. Counsel suggested that they had concerns regarding
several terms of the proposed merger agreement, including, among others:
- the limitation on the Company's ability to consider unsolicited
acquisition proposals;
- the ability of the Company to compel an extension of the tender offer; and
- the circumstances under which the Company might be obligated to pay a
break-up fee to Parent or to reimburse Parent for its expenses.
On September 26, 2000, the Special Committee held a telephonic meeting,
which included representatives of Latham & Watkins, Richards, Layton & Finger
and Deutsche Banc Alex. Brown. At this meeting, the Special Committee was
informed that Parent had indicated that the most likely source of debt financing
for the transaction would, in fact, be a corporate affiliate of Deutsche Banc
Alex. Brown. In light of that fact, the members of the Special Committee
directed Mr. Hutchison to retain formally a second investment banking firm to
consider the fairness of any transaction that might be considered by the full
Special Committee. Mr. Hutchison noted that he had contacted several firms, and
had determined that the Special Committee should retain the firm of
Batchelder & Partners, LLC ("Batchelder"). Mr. Hutchison was authorized to
negotiate and execute, on behalf of the Special Committee, any engagement letter
(or other appropriate document or instrument) necessary or advisable to evidence
such retention.
On September 29, 2000 the Special Committee held a telephonic meeting, which
included representatives of Latham & Watkins, Richards, Layton & Finger and
Deutsche Banc Alex. Brown. Latham & Watkins reported that the new comments
received from Parent's representatives included a proposed additional
transaction condition, which required that certain members of management enter
into equity subscription and employment arrangements with Parent between the
execution of the merger agreement and the closing of the tender offer. Latham &
Watkins recommended, and the Special Committee unanimously agreed, that the
offer should not be conditioned upon arrangements with management. The Special
Committee again was updated as to Parent's financing and was informed that the
only prospective source of that financing appeared to be Deutsche Banc Alex.
Brown's affiliate, Bankers Trust Company.
Throughout the balance of September 2000 until the execution of the merger
agreement in October 2000, representatives of Latham & Watkins and Simpson
Thacher & Bartlett continued to negotiate the terms of the Revised Proposal and
the unresolved legal and business issues. These issues included, among others, a
proposed cap on the Company's damages under the draft merger agreement, the
ability of the Company to require extension of the tender offer, the fees
payable by the Company in the event of a termination, the financing contingency,
and the conditions to the tender offer.
On October 5, 2000, the Special Committee held a telephonic meeting, which
included representatives of Latham & Watkins, Deutsche Banc Alex. Brown and
Batchelder. Latham & Watkins reported on the status of its negotiations with
Simpson Thacher & Bartlett. A principal set of issues continued to surround the
circumstances under which the Company could be obligated to pay a break-up fee
to Parent, or to reimburse Parent for its expenses. The members of the Special
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<PAGE>
Committee gave negotiating instructions to Latham & Watkins, advocating, among
other matters, more limited payment arrangements from the Company's perspective.
On October 11, 2000, the Special Committee had a telephonic meeting, which
included representatives of Richards, Layton & Finger, Latham & Watkins and
Deutsche Banc Alex. Brown. The Special Committee was informed at this meeting
that the Company had fallen short of its internal earnings estimates for
September 2000, but that Parent's representatives had not proposed a price
reduction or indicated that it would not otherwise continue with the
transaction.
On October 16, 2000, the Special Committee held a telephonic meeting, which
included representatives of Latham & Watkins and Richards, Layton & Finger,
Deutsche Banc Alex. Brown and Batchelder. At that meeting, a representative of
Latham & Watkins summarized for the Special Committee the terms of management's
equity arrangements with Vestar, noting that members of senior management
collectively would have the opportunity to rollover a portion of their current
option position in the Company and would collectively hold approximately 10% of
the equity interest in Vestar's acquisition vehicle (of which approximately
one-third would be held by Mr. Hammes). Management would also be granted options
representing an additional 12.1% of the equity interests in Parent, which would
vest over time and upon the realization of certain performance standards. The
Latham & Watkins representatives also apprised the members of the Special
Committee of the other material details of Vestar's proposed economic
arrangements with members of the Company's management.
After being advised by representatives of Latham & Watkins and Richards,
Layton & Finger regarding the scope of their fiduciary duties under applicable
law, the members of the Special Committee then considered the status of the
Revised Proposal, as well as the potential business combination with Competitor.
Addressing the latter topic first, antitrust counsel from Latham & Watkins
advised the members of the Special Committee that both Latham & Watkins and
Brobeck Phelger & Harrison LLP had delivered written opinions reaffirming their
original legal conclusions. Specifically, both firms had concluded that a
possible business combination of the Company and Competitor faced extremely
significant, and potentially insurmountable, regulatory impediments under United
States antitrust laws. In light of this advice, and considering the other issues
with respect to the Competitor proposal, the members of the Special Committee
determined not to consider further the prospect of such a business combination
with Competitor.
The Special Committee then discussed the Revised Proposal. Representatives
of Latham & Watkins and Richards, Layton & Finger advised the members of the
Special Committee on the results of the negotiations that had occurred since the
preceding meeting, and confirmed that all remaining legal issues had been
resolved, subject to the Special Committee's approval, with Parent's legal
counsel. The results of the negotiations that had transpired since that meeting
were summarized for the members of the Special Committee. The representatives of
the two law firms then reviewed with the members of the Special Committee the
draft Merger Agreement, as so negotiated, including the ability of the Company
under the provisions of the Merger Agreement to solicit acquisition proposals
and the amount of the termination fee and circumstances under which such
termination fee would be payable if the Company accepted an alternative
acquisition proposal. In this regard, Deutsche Banc Alex. Brown reviewed for the
Special Committee the range of termination fees payable under comparable
transactions, which indicated that the termination fee payable in the proposed
transaction with Parent was within the range of termination fees paid in such
transactions.
Each of Deutsche Banc Alex. Brown and Batchelder then reviewed with the
Special Committee its financial analysis of the consideration payable in the
Offer and Merger. Thereafter, Deutsche Banc Alex. Brown and Batchelder delivered
separate oral opinions to the Special Committee to the effect that, as of the
date of such opinions and based on and subject to the matters described in such
opinions, the $10.00 per share cash consideration to be received in the Offer
and the Merger by
11
<PAGE>
holders of the Company's common stock (other than Parent, the Management Group
and their respective affiliates) was fair, from a financial point of view, to
such holders.
After discussion and consideration, the Special Committee unanimously
approved the Merger Agreement and the transactions contemplated thereby,
determined that the terms of the Merger are fair to, and in the best interests
of, the Company's public stockholders and recommended that the Board approve and
adopt the Merger Agreement.
Following the Special Committee meeting, a meeting of the full Board was
convened. All directors were present, except for Mr. Pierpoint who participated
by telephone. Representatives of Deutsche Banc Alex. Brown, Batchelder,
Latham & Watkins and Richards, Layton & Finger were also present.
Mr. Hutchison, on behalf of the Special Committee, reported that the Special
Committee had resolved to recommend to the Board that the pending proposal from
Parent be accepted. He indicated that the Special Committee had received a
presentation from Latham & Watkins and Richards, Layton & Finger on the terms of
the proposed Merger Agreement, including various provisions that had been
negotiated to improve the draft Agreement from the perspective of the Company's
public stockholders. He also indicated that the Special Committee had received a
financial presentation and opinion from each of Deutsche Banc Alex. Brown and
Batchelder as to the fairness, from a financial point of view, of the $10.00 per
share cash consideration to be received in the Offer and the Merger by holders
of the Company's Common Stock (other than Parent, the Management Group and their
respective affiliates). Representatives of Latham & Watkins and Richards,
Layton & Finger also summarized the fiduciary standards applicable to directors
in approving transactions of this nature. Representatives from Latham & Watkins
then reviewed with the Board draft resolutions relating to the proposed
transaction.
Following further discussion, there was a motion to approve and adopt the
resolutions pertaining to the Merger Agreement and related transactions. The
resolutions were approved and adopted by the Board unanimously.
Immediately following the meeting of the full Board, the Company, Parent,
Holdings, Purchaser and Park Avenue entered into the definitive Merger Agreement
and promptly thereafter the Company, Vestar and Park Avenue issued a press
release announcing that the Company's Board had accepted Parent's proposal and
entered into the definitive Merger Agreement.
(c) REASONS FOR THE RECOMMENDATION OF THE BOARD OF DIRECTORS.
In reaching its recommendation described above in paragraph (a) of this Item
4, the Board considered a number of factors, including the following:
1. The fact that the Revised Proposal represented the most attractive
offer received by the Board after a select group of potential parties
which had been given an opportunity to receive confidential
information about the Company declined to submit a proposal or
submitted a proposal that the Company Board considered to be less
attractive to the Company's stockholders than the Revised Proposal.
2. The Board considered the relationship of the Offer Price to the
historical market prices of the Shares, and the fact that the cash
consideration that the Company's stockholders would receive for each
Share under the Revised Proposal was at a significant premium to the
Company's then-current market price.
3. The fact that the Board had explored the possibility of pursuing
various other possible transactions that would enhance stockholder
value, including the Company's alternative to remain an independent
public company and the possibility of curtailing operations in an
attempt to increase profitability, and other extraordinary corporate
transactions, as well as the risks and uncertainties associated with
such alternatives. The Board considered the current and historical
financial condition and results of operations of the Company, as
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<PAGE>
well as the prospects and strategic objectives of the Company,
including the risks involved in achieving those prospects and
objectives, and the current and expected conditions in the industry
in which the Company's business operates.
4. The Company's business, prospects, financial condition, current
business strategy and competitive position in the healthcare
industry.
5. The separate financial presentations of the Special Committee's
financial advisors, including their respective opinions to the
Special Committee as to the fairness, from a financial point of view
and as of the date of such opinions, of the cash consideration
payable in the Offer and the Merger, as more fully described in
"Special Factors--Opinions of the Financial Advisors."
6. The terms and conditions of the Merger Agreement, including the fact
that the Offer is subject to various conditions, including the
Financing Condition, and that the Merger Agreement contemplates the
payment or reimbursement to Parent and Purchaser of certain fees and
expenses (including financing commitment fees and related expenses)
and a termination fee under certain circumstances. In analyzing the
conditions to the Offer, the Board considered, among other things,
the risks of failing to consummate the Offer and the Merger. In
assessing the expense payment and termination fee provisions, the
Board recognized that their effect would be to increase by the amount
of such fees and expenses the cost of acquiring the Company in a
third party offer made by someone other than the Parent and its
subsidiaries.
7. The nature of the financing commitments received by Parent and its
subsidiaries with respect to the Offer and the Merger, including the
identity of the institutions providing such commitments and their
proven experience in consummating transactions such as the Offer and
the Merger and the conditions to the obligations of such institutions
to fund such commitments.
8. The likelihood of soliciting a firm offer from a third party to
acquire the Company at a price in excess of that to be paid in the
Offer and the Merger, the timing of the receipt of any such offer,
and the possible consequences of unsuccessfully seeking to solicit
such an offer.
9. The provisions of the Merger Agreement, which provide that neither
the Company nor any of its Subsidiaries may (whether directly or
indirectly through advisors, agents or other intermediaries),
authorize or permit any of its or their officers, directors, agents,
representatives or advisors to (a) solicit, initiate, knowingly
encourage (including by way of furnishing information) or take any
action knowingly to facilitate the submission of any inquiries,
proposals or offers (whether or not in writing) from any Person
(other than Parent and its affiliates) relating to, other than the
transactions contemplated by this Agreement, any Acquisition Proposal
(as defined in the Merger Agreement) or agree to or endorse any
Acquisition Proposal, or (b) enter into or participate in any
discussions or negotiations regarding any Acquisition Proposal, or
furnish to any other Person any information with respect to its
business, properties or assets in connection with the foregoing, or
otherwise cooperate in any way with, or participate in or knowingly
assist, facilitate, or encourage, any effort or attempt by any other
Person (other than any of the Parent, Holdings, Merger Sub and their
affiliates) to do or seek any of the foregoing; PROVIDED, HOWEVER,
that the foregoing shall not prohibit the Company (A) from complying
with Rule 14e-2 and Rule 14d-9 under the Exchange Act with regard to
a bona fide tender offer or exchange offer; (B) from making such
disclosure to the Company's stockholders or otherwise which, the
Board concludes in good faith, after consultation with its legal
counsel, is necessary under applicable law or the rules of the NYSE
or is
13
<PAGE>
reasonably necessary in order to comply with its fiduciary duties to
the Company's stockholders under applicable law; (C) from
participating in negotiations or discussions with or furnishing
information to any Person in connection with an Acquisition Proposal
not solicited after the date hereof which is submitted in writing by
such Person to the Company Board after the date of this Agreement;
PROVIDED, HOWEVER, that prior to participating in any such
discussions or negotiations or furnishing any information, the
Company receives from such Person an executed confidentiality
agreement on terms not less favorable to the Company than the
Confidentiality Agreement; and PROVIDED, FURTHER, that the Company
Board shall have concluded in good faith, after consultation with its
outside legal counsel and financial advisors, that such Acquisition
Proposal is reasonably likely to constitute a Superior Proposal (as
defined below) and, after consultation with its outside legal
counsel, that participating in such negotiations or discussions or
furnishing such information is reasonably necessary in order to
comply with its fiduciary duties to the stockholders of the Company
under applicable law; and PROVIDED, FURTHER, that the Company Board
shall not (unless it is prohibited from doing so in good faith by the
terms of the Acquisition Proposal) take any of the foregoing actions
prior to two business days after it provides the Parent with prompt
(but in no event later than 24 hours after the occurrence or
commencement of such action) written notice thereof. The Board
considered the possible effect of these provisions of the Merger
Agreement on third parties who might be interested in exploring an
acquisition of the Company. In this regard, the Board recognized that
the provisions of the Merger Agreement relating to termination fees
and expense reimbursement and solicitation of acquisition proposals
were insisted upon by Parent as a condition to entering into the
Merger Agreement and that the amount of the termination fees and
expense reimbursement that would be payable if the Merger Agreement
were to be terminated to accept an alternative acquisition proposal
was within the range of the amounts of termination fees and expense
reimbursement customarily paid under similar circumstances in
transactions comparable to those provided for in the Merger
Agreement.
10. The Board considered the opinions of Latham & Watkins and Brobeck
Phelger & Harrison LLP concluding that it was highly likely that a
possible business combination of the Company and Competitor would
face extremely significant, and potentially insurmountable,
regulatory impediments under United States antitrust laws.
In view of the wide variety of factors considered in connection with its
evaluation of the Offer and the Merger, the Board did not find it practicable
to, and did not, qualify or otherwise assign relative weights to the individual
factors considered in reaching its determinations. As discussed above, the
Merger Agreement does not require the transactions contemplated thereby to be
approved by a majority of the unaffiliated stockholders of the Company.
OPINION OF DEUSTCHE BANC ALEX. BROWN. The Special Committee engaged
Deutsche Banc Alex. Brown to act as its financial advisor in connection with the
Offer and the Merger. On October 16, 2000, at a meeting of the Special Committee
held to evaluate the Offer and the Merger, Deutsche Banc Alex. Brown rendered to
the Special Committee an oral opinion, confirmed by delivery of a written
opinion dated October 16, 2000, to the effect that, as of that date and based on
and subject to the matters described in its opinion, the $10.00 per Share cash
consideration to be received in the Offer and the Merger by holders of Shares
was fair, from a financial point of view, to such holders (other than Parent,
the Management Group and their respective affiliates).
The full text of Deutsche Banc Alex. Brown's written opinion dated
October 16, 2000, which describes the assumptions made, matters considered and
limitations of the review undertaken, is attached as Annex B and is incorporated
into this document by reference. DEUTSCHE BANC ALEX. BROWN'S OPINION IS DIRECTED
TO THE SPECIAL COMMITTEE AND ADDRESSES ONLY THE FAIRNESS OF THE $10.00 PER SHARE
14
<PAGE>
CASH CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF SHARES
(OTHER THAN PARENT, THE MANAGEMENT GROUP AND THEIR RESPECTIVE AFFILIATES). THE
OPINION DOES NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY THE COMPANY TO
ENGAGE IN THE OFFER AND THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO WHETHER SUCH HOLDER SHOULD TENDER SHARES IN THE OFFER OR
AS TO ANY OTHER MATTERS RELATING TO THE OFFER OR THE MERGER. The summary of
Deutsche Banc Alex. Brown's opinion described below is qualified in its entirety
by reference to the full text of its opinion.
In arriving at its opinion, Deutsche Banc Alex. Brown:
- reviewed publicly available financial and other information concerning the
Company and internal analyses and other information furnished to or
discussed with Deutsche Banc Alex. Brown by the Company and its advisors;
- held discussions with members of the senior management of the Company
regarding the business and prospects of the Company;
- reviewed the reported prices and trading activity for the Shares;
- compared financial and stock market information for the Company with
similar information for other companies whose securities are publicly
traded;
- reviewed the financial terms of recent business combinations which
Deutsche Banc Alex. Brown deemed comparable in whole or in part;
- reviewed the terms of the Merger Agreement; and
- performed other studies and analyses and considered other factors as
Deutsche Banc Alex. Brown deemed appropriate.
Deutsche Banc Alex. Brown did not assume responsibility for independent
verification of, and did not independently verify, any information, whether
publicly available or furnished to Deutsche Banc Alex. Brown, concerning the
Company, including, without limitation, any financial information, forecasts or
projections considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, Deutsche Banc Alex. Brown assumed and
relied on the accuracy and completeness of all information that it reviewed and
did not conduct a physical inspection of any of the properties or assets, or
prepare or obtain any independent evaluation or appraisal of any of the assets
or liabilities, contingent or otherwise, of the Company. With respect to the
financial forecasts and projections made available to Deutsche Banc Alex. Brown
and used in its analyses, Deutsche Banc Alex. Brown assumed that they were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the Company as to the matters covered by the forecasts and
projections. In rendering its opinion, Deutsche Banc Alex. Brown expressed no
view as to the reasonableness of the forecasts and projections used by it or the
assumptions on which the forecasts and projections were based. In connection
with its engagement, Deutsche Banc Alex. Brown was authorized to approach, and
held discussions with, third parties to solicit indications of interest with
respect to the acquisition of the Company. Deutsche Banc Alex. Brown's opinion
was necessarily based on economic, market and other conditions as in effect on,
and the information made available to Deutsche Banc Alex. Brown as of, the date
of its opinion.
For purposes of rendering its opinion, Deutsche Banc Alex. Brown assumed
that, in all respects material to its analysis, the representations and
warranties of the Company, Parent, Holdings and Purchaser contained in the
Merger Agreement were true and correct, the Company, Parent, Holdings and
Purchaser would each perform all of the covenants and agreements to be performed
by it under the Merger Agreement and all conditions to the obligations of each
of the Company, Parent, Holdings and Purchaser to consummate the Offer and the
Merger would be satisfied without any waiver. Deutsche Banc Alex. Brown also
assumed that all material governmental, regulatory or other approvals and
consents required in connection with the consummation of the Offer and the
Merger would be
15
<PAGE>
obtained and that in connection with obtaining any necessary governmental,
regulatory or other approvals and consents, or any amendments, modifications or
waivers to any agreements, instruments or orders to which the Company, Parent,
Holdings, or Purchaser is a party or is subject or by which it is bound, no
limitations, restrictions or conditions would be imposed or amendments,
modifications or waivers made that would have a material adverse effect on the
Offer or the Merger. No other instructions or limitations were imposed by the
Special Committee on Deutsche Banc Alex. Brown with respect to the
investigations made or the procedures followed by it in rendering its opinion.
In connection with rendering its opinion to the Special Committee, Deutsche
Banc Alex. Brown performed a variety of financial analyses which are summarized
below. The following summary does not purport to be a complete description of
all analyses performed and factors considered by Deutsche Banc Alex. Brown in
connection with its opinion. A copy of Deutsche Banc Alex. Brown's written
presentation to the Special Committee in connection with its opinion has been
filed as an exhibit to the Tender Offer Statement and Schedule 13E-3 on the
Schedule TO (the "Schedule TO") filed by Parent, Holdings and Purchaser with the
Securities and Exchange Commission and will be available for inspection and
copying at the principal executive offices of the Company during regular
business hours by any interested stockholder of the Company or representatives
of such stockholder who has been so designated in writing, and also may be
inspected and copied, and obtained by mail, from the Securities and Exchange
Commission. The Securities and Exchange Commission maintains an Internet
worldwide web site that contains reports, proxy statements and other information
about issuers, including the Company, which file electronically with the
Securities and Exchange Commission. The address of that site is
http://:www.sec.gov. You can find a copy of Deutsche Banc Alex. Brown's written
presentation at that site.
The following is a summary of the material financial analyses performed by
Deutsche Banc Alex. Brown in connection with its opinion to the Special
Committee dated October 16, 2000. THE FINANCIAL ANALYSES SUMMARIZED BELOW
INCLUDE INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND
DEUTSCHE BANC ALEX. BROWN'S FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER
WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE
DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA SET FORTH BELOW IN
THE TABLES WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL
ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES,
COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF DEUTSCHE BANC ALEX. BROWN'S
FINANCIAL ANALYSES.
ANALYSIS OF SELECTED PUBLIC COMPANIES.
Deutsche Banc Alex. Brown compared financial and stock market information
for the Company and the following five selected publicly held companies in the
medical device and equipment sector of the health care industry:
- Arrow International, Inc.
- CONMED Corporation
- Hillenbrand Industries, Inc.
- Invacare Corporation
- Respironics, Inc.
Deutsche Banc Alex. Brown reviewed enterprise values, calculated as equity
market value, plus debt, less cash and cash equivalents, as multiples of latest
12 months earnings before interest, taxes, depreciation and amortization,
commonly referred to as EBITDA, and earnings before interest and taxes, commonly
referred to as EBIT. Deutsche Banc Alex. Brown also reviewed equity market
values as a multiple of latest 12 months and estimated calendar years 2000 and
2001 net income. All multiples were based on closing stock prices on
October 13, 2000, the latest trading day prior to public
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<PAGE>
announcement of the Offer and the Merger. Estimated financial data for the
selected companies were based on publicly available research analysts'
estimates. Estimated financial data for the Company were based on publicly
available research analysts' estimates, referred to as the "Street Case", and
internal estimates of the Company's management (excluding restructuring
charges), referred to as the "Management Case."
Deutsche Banc Alex. Brown applied a range of selected multiples derived from
the selected companies of latest 12 months EBITDA and EBIT and latest 12 months
and estimated calendar years 2000 and 2001 net income to corresponding financial
data of the Company. This analysis yielded the following implied per Share
equity reference ranges for the Company, as compared to the cash consideration
payable in the Offer and the Merger of $10.00 per Share:
<TABLE>
<CAPTION>
IMPLIED EQUITY REFERENCE
RANGE PER SHARE
--------------------------
MEAN RANGE
-------- ---------------
<S> <C> <C>
ENTERPRISE VALUE AS A MULTIPLE OF:
Latest 12 Months EBITDA................................... $13.53 $ 8.14 - $15.48
Latest 12 Months EBIT..................................... $ 8.63 $ 4.12 - $11.11
EQUITY VALUE AS A MULTIPLE OF:
Latest 12 Months Net Income............................... $ 5.21 $ 2.57 - $ 6.51
Estimated Calendar Year 2000 Net Income based on the
Street Case............................................. $ 5.65 $ 3.84 - $ 6.95
Estimated Calendar Year 2000 Net Income based on the
Management Case......................................... $ 5.87 $ 3.99 - $ 7.22
Estimated Calendar Year 2001 Net Income based on the
Street Case............................................. $ 5.98 $ 3.95 - $ 6.94
Estimated Calendar Year 2001 Net Income based on the
Management Case......................................... $15.00 $10.41 - $17.16
</TABLE>
In reviewing the results of its analysis, Deutsche Banc Alex. Brown took
into consideration the following:
- the mean historical three-year compounded annual revenue growth rate of
the selected companies was 19.9% as compared to the Company's compounded
annual revenue growth rate over the same period of negative 0.9%;
- the mean of the latest 12 months EBITDA margin of the selected companies
was 21.2% as compared to the Company's latest 12 months EBITDA margin of
8.1%; and
- the mean historical three-year compounded annual net income growth rate of
the selected companies was 11.1% as compared to the Company's compounded
annual net income growth rate over the same period of negative 36.2%.
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS.
Deutsche Banc Alex. Brown reviewed the purchase prices and implied
transaction multiples in the following 10 selected transactions in the medical
device and equipment sector of, and six selected leveraged recapitalization
transactions in, the health care industry:
SELECTED MEDICAL DEVICE AND EQUIPMENT TRANSACTIONS
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C> <C>
- Invacare Corporation Scandinavian Mobility International A/S
- Thermo Electron Corporation Bear Medical Systems, Inc. (subsidiary of
Allied Healthcare Products, Inc.)
- Richard C. Blum and Associates, L.P. and Kinetic Concepts, Inc.
Fremont Partners, L.P.
- Graham-Field Health Products, Inc. Fuqua Enterprises, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C> <C>
- Kimberly-Clark Corporation TECNOL Medical Products, Inc.
- Nellcor Puritan Bennett, Inc. Aequitron Medical, Inc.
- Respironics, Inc. LIFECARE International, Inc.
- Graham-Field Health Products, Inc. Everest & Jennings International Ltd.
- Thermo Electron Corporation Bird Medical Technologies, Inc.
- Sunrise Medical Inc. Corona Group
</TABLE>
SELECTED HEALTH CARE LEVERAGED RECAPITALIZATION TRANSACTIONS
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C> <C>
- Kohlberg, Kravis, Roberts & Co. Alliance Imaging, Inc.
- TA MergerCo, Inc. Physicians' Specialty Corp.
- Kelso & Company Unilab Corporation
- Vestar/Sheridan Holdings, Inc. Sheridan Heathcare, Inc.
- Madison Dearborn Partners, Inc. et al. Team Health, Inc.
- Welsh, Carson, Anderson & Stowe VIII L.P. Concentra Managed Care, Inc.
</TABLE>
Deutsche Banc Alex. Brown reviewed enterprise values in the selected
transactions as multiples of latest 12 months EBITDA and EBIT, and equity market
values as a multiple of latest 12 months and one-year forward net income. All
multiples for the selected transactions were based on publicly available
information at the time of announcement of the relevant transaction. Deutsche
Banc Alex. Brown then applied a range of selected multiples derived from the
selected transactions of latest 12 months EBITDA and EBIT and latest 12 months
and one-year forward net income to corresponding financial data of the Company.
Estimated financial data for the selected transactions were based on research
analysts' estimates. Estimated financial data for the Company were based on the
Street Case and the Management Case. This analysis yielded the following implied
per Share equity reference ranges for the Company, as compared to the cash
consideration payable in the Offer and the Merger of $10.00 per Share:
SELECTED MEDICAL DEVICE AND EQUIPMENT TRANSACTIONS
<TABLE>
<CAPTION>
IMPLIED EQUITY REFERENCE
RANGE PER SHARE
--------------------------
MEAN RANGE
-------- ---------------
<S> <C> <C>
ENTERPRISE VALUE AS A MULTIPLE OF:
Latest 12 Months EBITDA................................... $18.13 $14.49 - $22.12
Latest 12 Months EBIT..................................... $10.89 $ 3.98 - $16.99
EQUITY VALUE AS A MULTIPLE OF:
Latest 12 Months Net Income............................... $ 7.27 $ 3.46 - $11.23
Estimated Fiscal Year 2001 Net Income based on Street
Case.................................................... $ 8.06 $ 6.95 - $ 9.95
Estimated Fiscal Year 2001 Net Income based on Management
Case.................................................... $12.51 $10.81 - $15.69
</TABLE>
18
<PAGE>
SELECTED HEALTH CARE LEVERAGED RECAPITALIZATION TRANSACTIONS
<TABLE>
<CAPTION>
IMPLIED EQUITY REFERENCE
RANGE PER SHARE
-------------------------
MEAN RANGE
-------- --------------
<S> <C> <C>
ENTERPRISE VALUE AS A MULTIPLE OF:
Latest 12 Months EBITDA................................... $11.95 $7.59 - $17.04
Latest 12 Months EBIT..................................... $ 7.06 $2.58 - $10.07
EQUITY VALUE AS A MULTIPLE OF:
Latest 12 Months Net Income............................... $ 5.14 $2.98 - $ 6.96
Estimated Fiscal Year 2001 Net Income based on Street
Case.................................................... $ 5.51 $3.82 - $ 7.36
Estimated Fiscal Year 2001 Net Income based on Management
Case.................................................... $ 8.88 $6.42 - $11.36
</TABLE>
In reviewing the results of its analysis, Deutsche Banc Alex. Brown took
into consideration the following:
- the mean historical three-year compounded annual revenue growth rate of
the selected medical device and equipment and the selected health care
leveraged recapitalization transactions was 6.7% and 21.9%, respectively,
as compared to the Company's compounded annual revenue growth rate over
the same period of negative 0.9%;
- the mean of the latest 12 months EBITDA margin of the target companies
involved in the selected medical device and equipment transactions and the
selected health care leveraged recapitalization transactions was 16.4% and
20.3% as compared to the Company's latest 12 months EBITDA margin of 8.1%;
and
- the mean historical three-year compounded annual net income growth rate of
the target companies involved in the selected medical device and equipment
transactions and the selected health care leveraged recapitalization
transactions was 23.5% and 16.1%, respectively, as compared to the
Company's compounded annual net income growth rate over the same period of
negative 36.2%.
PREMIUMS ANALYSIS.
Deutsche Banc Alex. Brown reviewed the premiums paid in 527 selected merger
and acquisition transactions in various industries and 54 selected merger and
acquisition transactions in the health care industry involving a change in
control of the target company, in each case effected since January 1, 1998 and
having an enterprise value of $100 million to $500 million. Deutsche Banc Alex.
Brown also reviewed the premiums paid in 10 selected merger and acquisition
transactions in the medical device and equipment sector of, and six selected
leveraged recapitalization transactions in, the health care industry. Deutsche
Banc Alex. Brown analyzed the premiums in these transactions based on the target
company's closing stock price one day and one month prior to public announcement
of the transaction. Deutsche Banc Alex. Brown then applied a selected range of
premiums derived from the selected transactions to the average closing stock
price of the Shares for corresponding periods prior to October 13, 2000. This
analysis indicated the following implied per Share equity reference ranges for
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<PAGE>
the Company, as compared to the cash consideration payable in the Offer and the
Merger of $10.00 per Share:
<TABLE>
<CAPTION>
IMPLIED EQUITY REFERENCE
RANGE PER SHARE
-------------------------
MEAN RANGE
-------- --------------
<S> <C> <C>
SELECTED MERGER AND ACQUISITION TRANSACTIONS
One Day Prior............................................. $8.43 $6.28 - $14.53
One Month Prior........................................... $8.67 $5.78 - $20.35
SELECTED HEALTH CARE MERGER AND ACQUISITION TRANSACTIONS
One Day Prior............................................. $8.16 $6.39 - $12.61
One Month Prior........................................... $8.71 $5.93 - $12.55
SELECTED MEDICAL DEVICE AND EQUIPMENT MERGER AND ACQUISITION
TRANSACTIONS
One Day Prior............................................. $7.70 $ 5.69 -$ 8.89
One Month Prior........................................... $8.43 $5.29 - $10.90
SELECTED HEALTH CARE LEVERAGED RECAPITALIZATION TRANSACTIONS
One Day Prior............................................. $9.00 $6.80 - $14.32
One Month Prior........................................... $8.82 $6.75 - $13.82
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS.
Deutsche Banc Alex. Brown performed a discounted cash flow analysis to
estimate the present value of the unleveraged, after-tax free cash flows that
the Company could generate during estimated fiscal years 2001 through 2005 based
on two scenarios reflecting the potential for different revenue growth rates and
EBITDA margins for the Company. For purposes of this analysis, Deutsche Banc
Alex. Brown utilized internal estimates of the Company's management. The first
scenario, Case 1, assumed a six-year compounded annual revenue growth rate for
the Company of 5.0% and a fiscal year 2005 EBITDA margin of 17.4%. The second
scenario, Case 2, reflected certain adjustments to the Case 1 estimates and
assumed a six-year compounded annual revenue growth rate of 0.0% and a fiscal
year 2005 EBITDA margin of 11.7%. The range of estimated terminal values was
calculated by applying terminal value multiples ranging from 6.5x to 8.5x to the
Company's estimated fiscal year 2005 EBITDA. The present value of the cash flows
and terminal values were calculated using discount rates ranging from 12.0% to
16.0%. This analysis yielded the following implied per Share equity reference
ranges for the Company, as compared to the cash consideration payable in the
Offer and the Merger of $10.00 per Share:
<TABLE>
<CAPTION>
IMPLIED EQUITY REFERENCE
SCENARIO RANGE PER SHARE
-------- ------------------------
<S> <C>
Case 1.................................................. $17.12 - $26.42
Case 2.................................................. $ 8.11 - $12.99
</TABLE>
In reviewing the results of this analysis, Deutsche Banc Alex. Brown took
into consideration the following:
- the projected six-year compounded annual revenue growth rate was assumed
to be 5.0% under Case 1 and 0.0% under Case 2 as compared to the
historical three-year compounded annual revenue growth rate of negative
0.9%;
- the 2005 EBITDA margin was assumed to be 17.4% under Case 1 and 11.7%
under Case 2 as compared to the latest 12 months margin of 8.1%; and
- the profitability targets under both Case 1 and Case 2 were predicated on
the success of the restructuring program and implementation of a global
information technology system.
20
<PAGE>
OTHER FACTORS.
In rendering its opinion, Deutsche Banc Alex. Brown also reviewed and
considered, among other things:
- historical market prices and trading volumes for the Shares and the
relationship between movements in the common stock of the selected
companies and movements in the S&P 500 Index;
- the Company's earnings performance; and
- selected published analysts' reports, including analysts' estimates as to
the Company's earnings per Share.
The above summary is not a complete description of Deutsche Banc Alex.
Brown's opinion to the Special Committee or the financial analyses performed and
factors considered by Deutsche Banc Alex. Brown in connection with its opinion.
The preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
summary description. Deutsche Banc Alex. Brown believes that its analyses and
the summary above must be considered as a whole and that selecting portions of
its analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
underlying Deutsche Banc Alex. Brown's analyses and opinion.
In performing its analyses, Deutsche Banc Alex. Brown considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
the control of the Company. No company, transaction or business used in the
analyses as a comparison is identical to the Company or the Offer or the Merger,
and an evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed.
The estimates contained in Deutsche Banc Alex. Brown's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by its analyses. In addition, analyses
relating to the value of businesses or securities do not necessarily purport to
be appraisals or to reflect the prices at which businesses or securities
actually may be sold. Accordingly, Deutsche Banc Alex. Brown's analyses and
estimates are inherently subject to substantial uncertainty.
The type and amount of consideration payable in the Offer and the Merger
were determined through negotiation among the Company, Vestar Capital Partners
IV, L.P. and Park Avenue Equity Partners, L.P. and the decision to enter into
the Merger Agreement was solely that of the Company Board and the Special
Committee. Deutsche Banc Alex. Brown's opinion and financial analyses were only
one of many factors considered by the Special Committee in its evaluation of the
Offer and the Merger and should not be viewed as determinative of the views of
the Special Committee with respect to the Offer or the Merger or the
consideration payable in the Offer and the Merger.
Deutsche Banc Alex. Brown is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. The Special Committee
selected Deutsche Banc Alex. Brown as its financial advisor based on Deutsche
Banc Alex. Brown's reputation and expertise.
21
<PAGE>
OPINION OF BATCHELDER & PARTNERS, INC.
The Special Committee of the Board of Directors of the Company retained
Batchelder & Partners, Inc. ("Batchelder"), to act as a non-exclusive financial
advisor to the Special Committee in connection with the Offer and the Merger
pursuant to the terms of the Agreement and Plan of Merger dated as of
October 16, 2000 (the "Merger Agreement"). Batchelder is a nationally recognized
investment banking and financial advisory firm and, as part of its investment
banking activities, is regularly engaged in the valuation of businesses and
their securities in connection with merger transactions and other types of
acquisitions, dispositions, business combinations, private placements, and
valuations for corporate and other purposes.
On October 16, 2000, at a meeting of the Special Committee, Batchelder
delivered an oral opinion to the Special Committee, and subsequently confirmed
the opinion in writing as of that date, and subject to the considerations set
forth in its written opinion, that, as of the date of the opinion, the $10.00
per share cash consideration to be received by the holders of Shares (other than
the Parent, the Management Group, any other members of management who have
agreed to invest in the Parent and their affiliates) pursuant to the Merger
Agreement was fair to such holders from a financial point of view. The full text
of Batchelder's opinion, dated October 16, 2000, which sets forth the
qualifications, assumptions made, matters considered, limitations on the review
undertaken in connection with the opinion, and circumstances where the opinion
should not be relied upon, is attached as Annex C and is incorporated by
reference. Some of these assumptions relate to future market conditions and
other matters beyond the control or influence of Sunrise Medical. No limitations
were imposed by the Special Committee on Batchelder with respect to the
investigations made or procedures followed in rendering its opinion. Batchelder
was not retained or requested to consider any strategic or financial
alternatives to the Merger or to seek indications of interest from other
potential buyers in connection with rendering its opinion nor did Batchelder do
so.
The summary of Batchelder's opinion in this Schedule 14D-9 is qualified in
its entirety by the full text of its written opinion. Sunrise Medical urges you
to read the full written opinion carefully. A copy of Batchelder's written
presentation to the Special Committee in connection with its opinion has been
filed as an exhibit to the Schedule TO filed by Parent, Holdings and Purchaser
with the Securities and Exchange Commission and will be available for inspection
and copying at the principal executive offices of the Company during regular
business hours by any interested stockholder of the Company or representatives
of such stockholder who has been so designated in writing, and also may be
inspected and copied, and obtained by mail, from the Securities and Exchange
Commission. The Securities and Exchange Commission maintains an Internet
worldwide web site that contains reports, proxy statements and other information
about issuers, including the Company, which file electronically with the
Securities and Exchange Commission. The address of that site is
http://:www.sec.gov. You can find a copy of Batchelder's written presentation in
that site.
BATCHELDER'S OPINION IS DIRECTED SOLELY TO THE SPECIAL COMMITTEE FOR ITS
CONSIDERATION IN CONNECTION WITH THE MERGER AND IS NOT A RECOMMENDATION TO ANY
HOLDER OF SHARES AS TO WHETHER ANY HOLDER SHOULD TENDER SHARES IN THE OFFER OR
AS TO ANY OTHER MATTERS RELATING TO THE OFFER OR THE MERGER. BATCHELDER'S
OPINION ADDRESSES ONLY THE FINANCIAL FAIRNESS OF THE CONSIDERATION TO BE
RECEIVED BY THE STOCKHOLDERS OF SUNRISE MEDICAL (OTHER THAN THE PARENT, THE
MANAGEMENT GROUP, ANY OTHER MEMBERS OF MANAGEMENT WHO HAVE AGREED TO INVEST IN
THE PARENT AND THEIR AFFILIATES) AS OF OCTOBER 16, 2000, AND DOES NOT ADDRESS
ANY OTHER ASPECT OF THE OFFER OR THE MERGER. Batchelder's opinion states that it
is not a report or valuation within the meaning of Section 11 of the Securities
Act, and Batchelder has not assumed responsibility under the terms of its
engagement for performing the level of diligence or independent verification
that would be required for Batchelder to render a report or valuation within the
meaning of the applicable provisions of the Securities Act.
22
<PAGE>
In connection with its opinion, Batchelder, among other things:
- reviewed publicly available and internal financial and other data of
Sunrise Medical including the details of the Parker Bath divestiture;
- reviewed the audited financial statements of Sunrise Medical for the last
three years ended June 30, 2000, July 2, 1999 and July 3, 1998 and
reviewed quarterly unaudited financial statements for the last three years
as filed with the Securities and Exchange Commission;
- reviewed the financial terms and conditions of various draft Merger
Agreements and subsequently reviewed the final Merger Agreement dated
October 16, 2000;
- reviewed publicly available information concerning the trading of, and the
trading market for, the Shares;
- compared Sunrise Medical from a financial point of view with other
publicly traded companies deemed to be comparable;
- considered the financial terms, as they relate to Sunrise Medical and, to
the extent publicly available, of recent business combinations deemed to
be comparable in whole or in part;
- discussed with Sunrise Medical's management the prospects for, and
business challenges facing, Sunrise Medical without the Merger;
- reviewed and discussed with management representatives of Sunrise Medical,
business and financial information regarding Sunrise Medical furnished to
Batchelder, including, management's financial forecasts and the related
assumptions including the projections of restructuring charges;
- made inquires regarding and discussed the Merger and the Merger Agreement
and other related matters with Sunrise Medical's legal counsel; and
- performed other analyses and examinations as Batchelder deemed
appropriate.
In connection with its review, Batchelder did not assume any obligation to
verify independently this information, whether publicly available or furnished
to Batchelder by Sunrise Medical, and relied on its accuracy and completeness in
all material respects. With respect to the financial forecasts provided to
Batchelder by the management of Sunrise Medical, including projections of
expected reorganization costs, Batchelder assumed that (i) the forecasts
accurately reflect the judgment of management, (ii) the forecasts were
reasonably prepared on bases reflecting the best available estimates and
judgments as to the future financial performance of Sunrise Medical, and
(iii) these projections provide a reasonable basis upon which Batchelder can
form its opinion. In rendering its opinion, Batchelder expressed no view as to
the reasonableness of the forecasts provided to Batchelder by the Company's
management or the assumptions on which such forecasts are based. Batchelder also
assumed that there had been no material changes in Sunrise Medical's assets,
financial condition, results of operations, business, or prospects since the
date of their last financial statements made available to Batchelder. The
management of Sunrise Medical advised Batchelder, and Batchelder assumed, that
management was not aware of any facts or circumstances that would make the
information reviewed by Batchelder inaccurate or misleading. Batchelder relied
on advice of Sunrise Medical's legal counsel and independent accountants as to
all legal and financial reporting matters with respect to Sunrise Medical, the
Merger, and the Merger Agreement. Batchelder also assumed that the Merger will
be completed in a manner that complies in all respects with the applicable
provisions of the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, and all other applicable federal and state statutes, rules, and
regulations, including applicable laws of foreign regulatory authorities. In
addition, Batchelder did not make an independent evaluation, appraisal, or
physical inspection of any of the assets or liabilities of Sunrise Medical, nor
has Batchelder been furnished with any appraisals.
23
<PAGE>
Batchelder's opinion is based on economic, monetary, currency exchange,
financial market and other conditions as in effect on, and the information made
available to Batchelder as of October 16, 2000. Although subsequent developments
may affect its opinion, and except to the extent provided below, Batchelder did
not assume any obligation to update, revise, or reaffirm its opinion.
Batchelder further assumed that the representations and warranties of each
party in the Merger Agreement are true and correct, that each party to the
Merger Agreement will perform all of the covenants and agreements required to be
performed by that party under the Merger Agreement, and that the Merger will be
completed in accordance with the terms described in the Merger Agreement,
without any amendment, and without waiver by Sunrise Medical of any of the
conditions to its obligations. Batchelder also assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Merger, no restrictions, amendments, or modifications will
be imposed that will have a material adverse effect on the contemplated benefits
of the Merger.
The following is a summary of the report presented by Batchelder to the Special
Committee on October 16, 2000 in connection with its written opinion dated
October 16, 2000.
COMMON STOCK PERFORMANCE. Batchelder reviewed Sunrise Medical's common
stock performance including a historical analysis of closing prices and trading
volumes for the period beginning October 14, 1999 and ending on October 13,
2000, which included a high of $7.13, a low of $3.75, and an average of $5.26
for the period, for the period beginning October 14, 1997 and ending on
October 13, 2000, which included a high of $16.75, a low of $3.75, and an
average of $9.11, and for the period beginning October 14, 1995 and ending on
October 13, 2000 which indicated a high of $24.75, a low of $3.75, and an
average of $11.74 for the period. Batchelder's analysis of Sunrise Medical's
common stock performance also included a historical analysis of Sunrise
Medical's indexed performance relative to the S&P 500 and an index of the
Selected Companies (hereinafter defined) (i) for the period beginning June 30,
2000 and ending September 29, 2000, (ii) for the period beginning March 31, 1999
and ending September 29, 2000, (iii) for the period beginning September 30, 1999
and ending September 29, 2000, (iv) for the period beginning September 30, 1997
and ending September 29, 2000, and (v) for the period beginning September 29,
1995, and ending September 29, 2000. In periods (ii) through (v), Sunrise
Medical underperformed the S&P 500 and the Selected Companies. In period (i),
Sunrise Medical outperformed the S&P 500 and the Selected Companies.
COMPARABLE PUBLIC COMPANY ANALYSIS. Batchelder reviewed and compared
certain financial information relating to the Company to corresponding financial
information, ratios and public market trading multiples of seven public
companies: Invacare Corporation, Respironics, Inc., Hillendbrand
Industries, Inc., Conmed Corporation, Vital Signs, Inc., Mallinckrodt Inc. and
Arrow International, Inc. (the "Selected Companies"). The Selected Companies
were chosen because they are publicly traded companies with operations that for
purposes of analysis may be considered similar to the Company. Using publicly
available information and other information provided by Sunrise Medical,
Batchelder calculated a range of implied values for Sunrise Medical common stock
based on a comparison of the last twelve months' revenues ("LTM Revenues"), last
twelve months' earnings before interest, taxes, depreciation, and amortization
("LTM EBITDA"), last twelve months' earnings before interest and taxes ("LTM
EBIT") and last twelve months' pre-tax income ("LTM Pre-tax Income"). Batchelder
adjusted this information for non-recurring charges as necessary. With respect
to the Selected Companies, Batchelder considered enterprise value (i.e., market
value of common equity plus preferred stock, plus debt, less cash) as a multiple
of LTM Revenues, as a multiple of LTM EBITDA, as a multiple of LTM EBIT and
considered equity market capitalization as a multiple of LTM Pre-tax Income and
last twelve months' earnings ("LTM Price/Earnings"). Batchelder's analysis of
the Selected Companies indicated enterprise value multiples of LTM revenues,
which ranged from a low of 1.35x, to a high of 2.64x, with a median of 1.53x;
LTM EBITDA, which ranged from a low of 6.01x, to a high of 11.62x, with a median
of 9.16x; LTM EBIT, which ranged from a low of 8.25x, to a high of 16.58x, with
24
<PAGE>
a median of 12.26x; LTM Pre-tax Income which ranged from a low of 5.63x, to a
high of 16.64x, with a median of 11.39x; and LTM price/earnings ratios, which
ranged from a low of 8.82x, to a high of 25.31x, with a median of 17.35x. Using
publicly available information on the Selected Companies, Batchelder calculated
a range of implied values for Sunrise Medical common stock based on a comparison
of projected twelve months' revenues ("Projected Revenues"), projected twelve
months' earnings before interest, taxes, depreciation, and amortization
("Projected EBITDA"), projected twelve months' earnings before interest and
taxes ("Projected EBIT") and projected twelve months' pre-tax income ("Projected
Pre-tax Income"). With respect to the Selected Companies, Batchelder considered
enterprise value (i.e., market value of common equity plus preferred stock, plus
debt, less cash) as a multiple of Projected Revenues, as a multiple of Projected
EBITDA, as a multiple of Projected EBIT and considered equity market
capitalization as a multiple of Projected Pre-tax Income and projected twelve
months' earnings ("Projected Price/Earnings"). Batchelder's analysis of the
Selected Companies indicated enterprise value multiples of Projected Revenues,
which ranged from a low of 1.22x, to a high of 2.39x, with a median of 1.47x;
Projected EBITDA, which ranged from a low of 6.65x, to a high of 9.13x, with a
median of 8.31x; Projected EBIT, which ranged from a low of 9.50x, to a high of
12.35x, with a median of 10.39x; Projected Pre-tax Income which ranged from a
low of 7.00x, to a high of 11.79x, with a median of 10.23x; and Projected
Price/Earnings ratios, which ranged from a low of 11.23x, to a high of 18.67x,
with a median of 15.52x. Batchelder gave more weight to the multiples of
reported EBITDA, EBIT, pre-tax income, and net income in this analysis and
considered that the comparable companies had a mean three-year revenue
compounded annual growth rate and profitability levels in excess of those for
Sunrise Medical.
COMPARABLE TRANSACTION ANALYSIS. In order to estimate the value per share
of Sunrise Medical common stock assuming Sunrise Medical were sold, Batchelder
reviewed the consideration paid in seven mergers and acquisition transactions in
the medical device and equipment industry announced since June 1996 for which
financial data was available (the "Selected Transactions"). Batchelder analyzed
the consideration paid in these transactions as a multiple of (1) enterprise
value to the target companies' LTM Revenues, LTM EBITDA, and LTM EBIT and
(2) equity value to the target companies' LTM Pre-tax Income, LTM net income and
book value. Such analysis indicated that for the Selected Transactions
(i) enterprise value as a multiple of revenue ranged from a low of 0.9x, to a
high of 2.6x with a mean of 1.7x and a median of 1.5x, compared to enterprise
value to be received in the Merger as a multiple of 2000 revenue of 0.6x, and
estimated 2001 revenues of 0.6x; (ii) enterprise value as a multiple of EBITDA
ranged from a low of 8.7x, to a high of 16.3x, with a mean of 11.5x, and a
median of 9.0x, compared to enterprise value to be received in the Merger as a
multiple of 2000 EBITDA of 7.8x, and estimated 2001 EBITDA of 9.8x;
(iii) enterprise value as a multiple of EBIT ranged from a low of 12.2x, to a
high of 20.1x, with a mean of 15.0x, and a median of 14.1x, compared to
enterprise value to be received in the Merger as a multiple of 2000 EBIT of
17.2x, and estimated 2001 EBIT of 28.6x; (iv) equity value as a multiple of
Pre-tax Income ranged from a low of 10.9x, to a high of 28.8x, with a mean of
18.7x, and a median of 14.2x, compared to equity value to be received in the
Merger as a multiple of 2000 pre-tax income of 53.0x, and estimated 2001 pre-tax
income of 253.2x; (v) equity value as a multiple of net income ranged from a low
of 17.2x to a high of 48.1x, with a mean of 28.0x, and a median of 22.1x,
compared to equity value to be received in the Merger as a multiple of 2000 net
income of 115.3x, and estimated 2001 net income of 422.1x; and (vi) equity value
as a multiple of book value ranging from a low of 2.3x, to a high of 6.6x,
compared to equity value to be received in the Merger as a multiple of 2000 book
value of 1.4x. Batchelder noted that one of the acquirors involved in two of the
seven mergers and acquisitions selected above, had recently filed for voluntary
bankruptcy. Batchelder excluded these two comparable transactions and analyzed
the consideration paid in these transactions as a multiple of (1) enterprise
value to the target companies' LTM Revenues, LTM EBITDA, and LTM EBIT and
(2) equity value to the target companies' LTM Pre-tax Income, LTM net income and
book value. Such analysis indicated that for the Selected Transactions
(i) enterprise value as a multiple of revenue ranged from a low of 1.2x, to a
high of 2.6x with a mean
25
<PAGE>
of 1.8x and a median of 1.5x, compared to enterprise value to be received in the
Merger as a multiple of 2000 revenue of 0.6x, and estimated 2001 revenues of
0.6x; (ii) enterprise value as a multiple of EBITDA ranged from a low of 8.7x,
to a high of 16.3x, with a mean of 11.3x, and a median of 9.0x, compared to
enterprise value to be received in the Merger as a multiple of 2000 EBITDA of
7.8x, and estimated 2001 EBITDA of 9.8x; (iii) enterprise value as a multiple of
EBIT ranged from a low of 12.2x, to a high of 20.1x, with a mean of 14.8x, and a
median of 14.1x, compared to enterprise value to be received in the Merger as a
multiple of 2000 EBIT of 17.2x, and estimated 2001 EBIT of 28.6x; (iv) equity
value as a multiple of Pre-tax Income ranged from a low of 10.9x, to a high of
28.8x, with a mean of 18.3x, and a median of 14.2x, compared to equity value to
be received in the Merger as a multiple of 2000 pre-tax income of 53.0x, and
estimated 2001 pre-tax income of 253.2x; (v) equity value as a multiple of net
income ranged from a low of 17.2x to a high of 48.1x, with a mean of 27.4x, and
a median of 22.1x, compared to equity value to be received in the Merger as a
multiple of 2000 net income of 115.3x, and estimated 2001 net income of 422.1x;
and (vi) equity value as a multiple of book value ranging from a low of 3.2x, to
a high of 6.6x, compared to equity value to be received in the Merger as a
multiple of 2000 book value of 1.4x. Batchelder gave more weight to the
multiples of reported EBITDA, EBIT, pre-tax income and net income in this
analysis and considered that the companies acquired had a mean three-year
revenue compounded annual growth rate and a mean EBITDA margin in excess of
those for Sunrise Medical.
PREMIUMS PAID ANALYSIS. Batchelder compared certain premiums represented by
the Merger price to premiums offered in 64 completed acquisitions of
$250 million to $500 million in size which were announced from the beginning of
1999 to October 13, 2000, excluding technology and biotechnology transactions
(the "Comparable Acquisitions"). Such analysis indicated that for the Comparable
Acquisitions, (i) premiums to market price one day prior to announcement ranged
from a low of 0.2%, to a high of 100.0%, with a mean of 34.6% and a median of
29.6%, compared to the Merger price premium of 55.3% to market price one day
prior to the announcement of the Merger price of October 17, 2000 (the
"Announcement Date"); (ii) premiums to market price one week prior to
announcement ranged from a low of 1.0%, to a high of 107.4%, with a mean of
41.4% and a median of 33.9%, compared to the Merger price premium of 64.9% to
market price one week prior to the Announcement Date; (iii) premiums to market
price one month prior to announcement ranged from a low of 2.8%, to a high of
253.8%, with a mean of 52.3%, and a median of 41.1%, compared to the Merger
price premium of 66.7% one month prior to the Announcement Date.
DISCOUNTED CASH FLOW ANALYSIS. In order to calculate an estimate of the
value of Sunrise Medical from a cash flow perspective, Batchelder performed a
discounted cash flow analysis using the financial forecasts for Sunrise Medical
for 2001 through 2005 prepared and supplied by Sunrise Medical's management.
Using these financial projections, Batchelder considered management's estimate
of the future unlevered, after-tax free cash flows that Sunrise Medical could
produce through 2005 and then calculated a range of Sunrise Medical terminal
values at the end of 2005 by applying a range of EBITDA exit multiples from 7.0x
to 9.0x to Sunrise Medical's estimated EBITDA in 2005. The cash flow stream and
terminal values were discounted to present values using discount rates ranging
from 12.0% to 16.0%, which were chosen to reflect reasonable ranges of Sunrise
Medical's estimated cost of capital. This analysis indicated an implied equity
value of Sunrise Medical of between $17.25 and $24.18 per share. Batchelder
ascribed less weight to this discounted cash flow analysis using management's
projections because (i) the five-year compounded annual revenue growth rate was
projected to be 5.8% compared to the historical three-year compounded annual
growth rate for Sunrise Medical of negative 1.3%; (ii) in 2005 the EBITDA
margins were projected to reach 17.5% compared to the current EBITDA margins for
the most recent fiscal year of 7.3%; (iii) the Company has not historically
achieved the projected EBITDA margins and profitability levels; (iv) the levels
of profitability and growth assume the successful execution of a significant
restructuring effort and the implementation of a global information technology
system; and (v) the Company has historically initiated several restructuring
efforts which have not resulted in the anticipated levels of profitability.
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No company or transaction used in the comparable company analysis, the
comparable transaction analysis, or the premiums paid analysis is identical to
Sunrise Medical. Accordingly, an evaluation of the results of these analyses is
not simply a mathematical calculation. It involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies being analyzed. The summary above is not a comprehensive
description of all analyses and examinations actually conducted by Batchelder in
the preparation of its opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Selecting portions of the analyses and of the factors
considered by Batchelder, without considering all analyses and factors, would
create an incomplete view of the process underlying Batchelder's presentation to
the Special Committee. In addition, Batchelder may have given some analyses more
or less weight than other analyses and may have deemed various assumptions more
or less probable than other assumptions. Accordingly, the ranges of valuations
resulting from any particular analysis described above should not be taken to be
Batchelder's or Sunrise Medical's view of the actual value of Sunrise Medical or
the Shares. To the contrary, Batchelder expressed no opinion on the actual value
of Sunrise Medical, the Shares, or the actual value of the consideration to be
received by Sunrise Medical stockholders in exchange for their Shares. Its
opinion, which is addressed and limited to the Special Committee, extends only
to the opinion expressed by Batchelder that the value of the Consideration to be
received by holders of Shares (other than the Parent, the Management Group, any
other members of management who have agreed to invest in the Parent and their
affiliates), from a financial point of view under the Merger, based on facts and
circumstances existing at the date of the opinion and in reliance on material
assumptions described in this summary, is within the range of values that might
fairly be ascribed to the Shares as of October 16, 2000, the date of
Batchelder's opinion.
In performing its analyses, Batchelder made numerous assumptions with
respect to industry performance, general business and economic conditions, and
other matters, many of which are beyond the control of Sunrise Medical. The
analyses performed by Batchelder are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
those suggested by these analyses. Batchelder prepared these analyses solely as
part of Batchelder's analysis for the Special Committee of the fairness of the
Offer and Merger to Sunrise Medical stockholders from a financial point of view
and provided these analyses solely to the Special Committee in connection with
the Special Committee's consideration of the Offer and Merger. The analyses do
not purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at any time in
the future. Batchelder used in its analyses various projections of future
performance prepared by the management of Sunrise Medical. The projections are
based on numerous uncertain variables and assumptions that are inherently
unpredictable. Accordingly, actual results could vary significantly from those
assumed in these projections.
The opinion of Batchelder and the presentation to the Special Committee
summarized above were among the many factors taken into consideration by the
Special Committee in determining whether to approve and to recommend that the
Sunrise Medical stockholders accept the offer and tender their Shares pursuant
to the Offer and adopt the Merger Agreement. Batchelder, however, does not make
any recommendation to any holders of Shares or to any other person or entity as
to whether any stockholder should tender Shares into the Tender Offer pursuant
to the Merger Agreement. Batchelder's opinion did not address the relative
merits of the Merger, any alternatives to the Merger, or Sunrise Medical's
underlying business decision to proceed with or effect the Merger.
Pursuant to the terms of its engagement, Sunrise Medical paid Batchelder a
fee of $250,000 upon presentation of its fairness opinion, which would have been
payable regardless of the conclusions of the opinion. In addition, Sunrise
Medical has agreed to reimburse Batchelder for its out-of-pocket expenses and to
indemnify Batchelder and related parties against specified liabilities,
including liabilities under the federal securities laws.
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(c) INTENT TO TENDER. To the best of the Company's knowledge, all of its
executive officers, and directors, currently intend to tender all Shares which
are held of record or beneficially owned by such persons pursuant to the Offer,
other than Shares, if any, held by such persons which, if tendered, could cause
such person to incur liability under the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended.
Prior to the execution and delivery of the Merger Agreement, Michael Hammes,
Ben Anderson-Ray, Raymond Huggenberger, Steven Jaye and John Radak, as a part of
a group of eleven officers who hold Roll-Over Options, entered into letter
agreements with Parent whereby the after tax proceeds of any cash payment
attributable to the vesting of the Roll-Over Options held by such individuals
would be used to purchase Parent Units as described in "SPECIAL
FACTORS--Interests of Certain Persons in the Transaction" in the Offer to
Purchase and as set forth in the form of letter agreement filed as
Exhibit (d)(iii) to the Schedule TO. The eleven officers have agreed that the
Stock Price Securities held by each of them shall be canceled without vesting or
consideration.
ITEM 5. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
(a) SOLICITATIONS OR RECOMMENDATIONS. The Special Committee has retained
Deutsche Banc Alex. Brown and Batchelder & Partners, Inc. as its financial
advisors to the Special Committee in connection with the Offer and the Merger.
Neither the Company nor any person acting on its behalf has employed, retained
or compensated any other person to make solicitations or recommendations to
stockholders on its behalf concerning the Offer or the Merger.
DEUTSCHE BANC ALEX. BROWN
Under the terms of Deutsche Banc Alex. Brown's engagement, the Company has
agreed to pay Deutsche Banc Alex. Brown for its financial advisory services upon
the completion of the Offer and the Merger an aggregate fee based on a
percentage of the total consideration, including liabilities assumed, payable in
the Offer and the Merger. It is currently estimated that the aggregate fee
payable to Deutsche Banc Alex. Brown for such financial advisory services will
be approximately $3.7 million, of which $3.3 million is payable at closing. In
addition, the Company has agreed to reimburse Deutsche Banc Alex. Brown for its
reasonable travel and other out-of-pocket expenses, including reasonable fees
and disbursements of counsel, and to indemnify Deutsche Banc Alex. Brown and
related parties against liabilities, including liabilities under the federal
securities laws, relating to, or arising out of, Deutsche Banc Alex. Brown's
engagement.
Deutsche Banc Alex. Brown and its affiliates in the past have provided
financial services to the Company and Vestar Capital Partners IV, L.P. and its
affiliates unrelated to the Offer and the Merger, for which services Deutsche
Banc Alex. Brown and its affiliates have received compensation. Deutsche Banc
Alex. Brown and its affiliates also have an outstanding bank credit facility
with the Company and investments in affiliates of Vestar Capital Partners IV,
L.P. In addition, Deutsche Banc Alex. Brown and its affiliates will participate
in the financing of the Offer and the Merger, for which services Deutsche Banc
Alex. Brown and its affiliates will receive compensation.
Deutsche Banc Alex. Brown maintains a market in, and regularly publishes
research reports regarding, publicly traded companies in the health care
industry. In the ordinary course of business, Deutsche Banc Alex. Brown and its
affiliates may actively trade or hold the securities and other instruments and
obligations of the Company and Vestar Capital Partners IV, L.P., Park Avenue
Equity Partners, L.P. and their respective affiliates for Deutsche Banc Alex.
Brown's and its affiliates' accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in those securities,
instruments or obligations.
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BATCHELDER & PARTNERS, INC.
Pursuant to the terms of their engagement, the Company has agreed to pay
Batchelder & Partners, Inc. a cash fee of $250,000, $125,000 of which is due
upon request by the Board to commence its analysis in preparation for rendering
a fairness opinion and the remaining $125,000 of which is due upon delivery of
the fairness opinion to the Board.
The Company also has agreed to reimburse Batchelder & Partners, Inc. for
reasonable out-of-pocket expenses and for all reasonable fees and disbursements
of its counsel. Batchelder & Partners, Inc. will not incur expenses in excess of
$5,000 without the Company's approval. In addition, the Company agrees to
indemnify Batchelder & Partners, Inc. and related parties against certain
liabilities arising out of their engagement.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
(b) SECURITIES OWNERSHIP. Except as set forth below no transactions in the
Shares have been effected during the past 60 days by the Company or, to the best
of the Company's knowledge, by any executive officer, director, affiliate or
subsidiary of the Company.
Messrs. Hammes, Anderson-Ray, Jaye, Tarbet, and Radak purchased 5,000,
2,904, 5,000, 5,000, and 2,429 Shares, respectively, on August 31, 2000 through
the Company's Stock Purchase Plan at a price of $3.5598 per share.
Messrs. Hammes, Anderson-Ray, Jaye, Tarbet, and Radak were to have made
purchases of 1,871, 673, 1,887, 1,303, and 635 Shares, respectively, in the
current Stock Purchase Plan Offering Period from payroll deductions at a price
of $4.7285 per Share. However, according to the plan, if the strike price is
lower on the closing date, the number of Shares purchased is adjusted to take
this decreased price into account. Pursuant to the terms of the Merger
Agreement, however, these purchases will not occur and these rights to purchase
stock under the Stock Purchase Plan will be handled as summarized in Item 3
above and qualified in its entirety by reference to the Merger Agreement, a copy
of which is filed as Exhibit (e)(1) hereto and is incorporated herein by
reference.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
(d) SUBJECT COMPANY NEGOTIATIONS.
Prior to entering into the Merger Agreement, the Company had contacts and
negotiations with other entities that had expressed interest in the Company.
Prior to execution of the Merger Agreement, the Company ceased contacts with
such other entities. No discussions are underway or are being undertaken by the
Company in response to the Offer that relate to or would result in a tender
offer or other acquisition of the Company by the Company or any of its
subsidiaries, or any other person or (1) any extraordinary transaction, such as
a merger, reorganization or liquidation, involving the Company or any of its
subsidiaries, (2) any purchase, sale or transfer of a material amount of assets
of the Company or any of its subsidiaries or (3) any material change in the
present dividend rate or policy, or indebtedness or capitalization of the
Company.
There is no transaction, board resolution, agreement in principle or signed
contract entered into in response to the Offer that relates to or would result
in a tender offer or other acquisition of the Company by the Company or any of
its subsidiaries, or any other person or (1) any extraordinary transaction, such
as a merger, reorganization or liquidation, involving the Company or any of its
subsidiaries, (2) any purchase, sale or transfer of a material amount of assets
of the Company or any of its subsidiaries or (3) any material change in the
present dividend rate or policy, or indebtedness or capitalization of the
Company.
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The Company intends to continue implementing its restructuring plan as
provided for in the Merger Agreement.
ITEM 8. ADDITIONAL INFORMATION.
(b) OTHER MATERIAL INFORMATION.
SECTION 14(F) INFORMATION STATEMENT. The Information Statement attached as
Annex A hereto is being furnished in connection with the possible designation by
Purchaser, pursuant to the Merger Agreement, of certain persons to be appointed
to the Board of Directors of the Company other than at a meeting of the
Company's stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. As a Delaware
corporation, the Company is subject to Section 203 ("Section 203") of the
Delaware General Corporation Law ("DGCL"). Under Section 203, "business
combinations" between a Delaware corporation whose stock is listed on a national
securities exchange, authorized for quotation on the NASDAQ stock market or held
of record by more than 2,000 stockholders and an "interested stockholder" are
prohibited for a three-year period following the time that such a stockholder
became an interested stockholder, unless, among other possible exemptions, the
business combination or transaction in which the stockholder became an
interested stockholder was approved by the board of directors of the corporation
before such other party to the business combination became an interested
stockholder. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the sale or
other disposition of assets of the corporation having a market value of 10% or
more of the aggregate market value of the assets or stock of the corporation and
transactions which increase an interested stockholder's proportionate ownership
of stock. The term "interested stockholder" is defined generally as a
stockholder who, together with affiliates and associates, owns 15% or more of a
Delaware corporation's outstanding voting stock. An owner includes a person who
has the right to acquire such stock, including upon the exercise of an option or
who has the right to vote such stock pursuant to an agreement (but not if such
right arises from certain revocable proxies).
In accordance with the Merger Agreement and pursuant to Section 203, at its
meeting on October 16, 2000, the Board of Directors of the Company unanimously
approved the Offer and the Merger and determined to make the restrictions of
Section 203 inapplicable to the Offer and the Merger.
SECTION 253 OF THE DELAWARE GENERAL CORPORATION LAW. Under Section 253 of
the DGCL, if Purchaser acquires, pursuant to the Offer or otherwise, at least
90% of the outstanding Shares, Purchaser will be able to effect the Merger after
the consummation of the Offer without a meeting of the Company's stockholders.
However, if Purchaser does not acquire at least 90% of the outstanding Shares
pursuant to the Offer or otherwise, a meeting of the Company's stockholders will
be required under the DGCL to effect the Merger. If the Purchaser does not
acquire at least 90% of the outstanding Shares the vote of a majority of the
outstanding voting stock of the Company, which will include shares acquired by
Purchaser, must be voted in favor of the adoption of the Merger Agreement for
the Merger to be consummated.
APPRAISAL RIGHTS UNDER SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW.
Under Delaware law, holders of shares are entitled to appraisal rights in
connection with the Merger. If stockholders object to the Merger, stockholders
may elect to have their Shares appraised under the procedures of the DGCL and to
be paid the fair value of the Shares. The fair value of the Shares will not
include any value arising from the Merger but may include a fair rate of
interest. It is possible that the fair value determined may be more or less than
the Offer Price. In order to assert
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their rights, stockholders must follow the procedures set forth in Section 262
of the DGCL ("Section 262"). These rights are commonly referred to as "appraisal
rights" or "dissenters' rights." This Schedule 14D-9 affords stockholders of the
Company the notice required by Section 262(d)(1) of the DGCL. The following
summary of appraisal rights is not a complete summary of the law pertaining to
appraisal rights under the Delaware law and is qualified in its entirety by the
text of Section 262 of the DGCL, which is reproduced in Schedule IV to the
Schedule TO and is incorporated by reference herein.
This summary does not constitute a recommendation that stockholders exercise
their appraisal rights or otherwise constitute any legal or other advice. If
stockholders wish to exercise appraisal rights, the stockholders are urged to
contact their legal counsel or advisors. Failure to follow strictly the
procedures set forth in Section 262 will result in a loss of these appraisal
rights. If a stockholder loses appraisal rights, the stockholder will be
entitled to receive the cash consideration described in the Merger Agreement.
Appraisal rights are available only to the record holder of Shares.
References in Section 262 to "stockholders" are to record holders. References in
the summary below to "stockholders" assume that stockholders are a record
holder. If stockholders wish to exercise appraisal rights but have a beneficial
interest in Shares which are held of record by or in the name of another person,
such as a broker or nominee, stockholders should act promptly to cause the
record holder to follow the procedures set forth in Section 262 to perfect
appraisal rights.
To claim stockholders appraisal rights and receive fair value for the
Shares, stockholders must do each of the following:
- deliver to the Company a written demand for an appraisal of Shares;
- continuously hold their Shares from the date stockholders make a written
demand for an appraisal through the Effective Time of the Merger;
- not vote in favor of the Merger; and
- file within 120 days after the Effective Time, if the Company or another
stockholder does not file within the time, a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the
Shares. None of the Company, the Surviving Corporation, Parent, Holdings
or Purchaser is under obligation nor has an intent to file any petition.
If stockholders sell or otherwise transfer or dispose of Shares before the
Effective Time, stockholders will lose their appraisal rights with respect
to those Shares. If neither any stockholder who has demanded appraisal
rights nor the Company has filed a petition in the Delaware Court of
Chancery within 120 days after the Effective Time, then all stockholders'
appraisal rights will cease.
In the event a stockholders' meeting is called, voting against the Merger or
otherwise failing to vote for the Merger will not by itself constitute a demand
for an appraisal or sufficient notice of a stockholder's election to exercise
appraisal rights. Any demand for an appraisal must be in writing, signed and
mailed or delivered to the Company. A written demand must reasonably inform the
Company of the identity of the stockholder and of the stockholder's intent to
demand appraisal of his, her or its Shares.
A written demand for appraisal should be executed by or on behalf of the
stockholder of record exactly as the stockholder's name appears on the stock
certificates. If the Shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the written demand should be executed in
that capacity, and if the Shares are owned of record by more than one person, as
in a joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a written demand for appraisal on behalf of a stockholder of
record; however, in the written demand the agent must identify the record
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owner or owners and expressly disclose that the agent is executing the demand as
an agent for the record owner or owners. A beneficial owner of Shares of the
Company held in "street name" who desires appraisal should take such actions as
may be necessary to ensure that a timely and proper demand for appraisal is made
by the record holder of such Shares. Shares held through brokerages firms, banks
and other financial institutions are frequently deposited with and held of
record in the name of a nominee of a central security depository. Any beneficial
holder desiring appraisal who holds Shares through a brokerage firm, bank or
other financial institute is responsible for ensuring that the demand for
appraisal is made by the record holder. The beneficial holder of such Shares
should instruct such firm, bank or institution that the demand for appraisal may
be made by the record holder of the Shares, which may be the nominee of a
central security depository if the Shares have been so deposited. As required by
Section 262, demand for appraisal must reasonably inform the Company of the
identity of the holder of record and of such holder's intention to seek
appraisal of such Shares. A record holder such as a broker who holds Shares as
nominee for several beneficial owners may exercise appraisal rights for the
Shares held for one or more beneficial owners and not exercise rights for the
Shares held for other beneficial owners. In this case, the written demand should
state the number of Shares for which appraisal rights are being demanded. When
no number of Shares is stated, the demand will be presumed to cover all Shares
held of record by the broker or nominee.
The Company will send notice of the Effective Time to each stockholder who
has properly demanded appraisal rights under Section 262 of the DGCL and who has
not voted in favor of the Merger, if applicable. The Company will send this
notice within 10 days after the Effective Time.
If stockholders have complied with the requirements for claiming appraisal
rights under Section 262, then within the 120 days following the Effective Time,
stockholders may request in writing from the Company a statement as to the
aggregate number of Shares not voted in favor of the Merger and with respect to
which demands for appraisal have been received and the number of holders of
those Shares. Upon the Company's receipt of such request, which must be made in
writing, the Company will mail a statement of that information to stockholders
within 10 days.
If a petition for an appraisal is filed timely and a copy is delivered to
the Company, the Company will then be obligated within 20 days to provide the
Register in Chancery with a duly verified list containing the names and
addresses of all stockholders of the Company who have demanded an appraisal of
their Shares and with whom agreements as to the value of their Shares have not
been reached by the Company. The Delaware Court of Chancery will hold a hearing
on the petition to determine the stockholders who have complied with
Section 262 and who have become entitled to appraisal rights. After determining
the stockholders entitled to appraisal, the Delaware Court of Chancery shall
appraise the Shares, determining their fair value. The determination of fair
value will not include any element of value arising from the accomplishment or
expectation of the Merger. The Court will also determine a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value of
the Shares. The Court may determine that the fair value of the Shares is more
than, the same as or less than the value of the cash stockholders would have
received under the Merger Agreement. An investment banking opinion as to
fairness from a financial point of view is not necessarily an opinion as to fair
value under Section 262. The Delaware Supreme Court has stated that "proof of
value by any technique or methods that are generally considered acceptable in
the financial community and otherwise admissible in court" should be considered
in the appraisal proceedings.
The Delaware Court of Chancery may require the holders of Shares who have
demanded an appraisal of their Shares to submit their stock certificates to the
Register in Chancery for notation of the appraisal proceeding; and if any
stockholder fails to comply with such direction, the Delaware Court of Chancery
may dismiss the proceeding as to that stockholder.
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The costs of the appraisal proceeding may be determined by the Delaware
Court of Chancery and taxed upon the parties as the court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order that all
or a portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys' fees
and the fees and expenses of experts, to be charged pro rata against the value
of all of the Shares entitled to appraisal.
From and after the Effective Time, if stockholders have duly demanded an
appraisal of their Shares, stockholders will not, be entitled to vote those
Shares for any purpose, nor will they be entitled to the payment of dividends or
other distributions on those Shares, except for dividends or other distributions
payable to stockholders of record at a date prior to the Effective Time.
Stockholders may withdraw their demand for appraisal of their Shares at any
time within 60 days after the Effective Time and accept the terms offered
pursuant to the Merger. Any attempt to withdraw appraisal demand more than
60 days after the Effective Time will require the written approval of the
Company. Once a petition for appraisal is filed with the Delaware Court of
Chancery, the appraisal proceeding may not be dismissed without court approval.
If stockholders properly demand appraisal of their Shares, but fail to
perfect their appraisal rights, otherwise lose appraisal rights or effectively
withdraw their demand for an appraisal, the Shares will be cancelled and
extinguished and be converted into the right to receive the cash consideration
described in the Merger Agreement, without interest.
UNITED STATES ANTITRUST COMPLIANCE. Under the HSR Act and the rules that
have been promulgated thereunder by the Federal Trade Commission (the "FTC"),
certain acquisition transactions may not be consummated unless certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and certain waiting period
requirements have been satisfied. The acquisition of Shares pursuant to the
Offer is subject to such requirements.
Vestar Capital Partners, L.P. filed on October 18, 2000 and the Company
filed on October 24, 2000, with the FTC and the Antitrust Division a Premerger
Notification and Report Form in connection with the purchase of Shares pursuant
to the Offer. Under the provisions of the HSR Act applicable to the Offer, the
purchase of Shares pursuant to the Offer may not be consummated until the
expiration of a 15-calendar day waiting period following such filing, unless
such waiting period is extended by a request from the FTC or the Antitrust
Division for additional information or documentary material prior to the
expiration of the waiting period. If either the FTC or the Antitrust Division
were to request additional information or documentary material from Vestar
Capital Partners, the waiting period would expire at 11:59 p.m., New York City
time, on the tenth calendar day after the date of substantial compliance by
Vestar Capital Partners with such request. Thereafter, the waiting period could
be extended only by court order or by an agreement involving the Parent and the
Company. If the acquisition of Shares is delayed pursuant to a request by the
FTC or the Antitrust Division for additional information or documentary material
pursuant to the HSR Act, the Offer may, but need not, be extended and in any
event the purchase of and payment for Shares will be deferred until ten days
after the request is substantially complied with, unless the waiting period is
sooner terminated by the FTC and the Antitrust Division. See Section 2
("Acceptance for Payment and Payment for Shares"). Only one extension of such
waiting period pursuant to a request for additional information is authorized by
the HSR Act and the rules promulgated thereunder, except by court order. Any
such extension of the waiting period will not give rise to any withdrawal rights
not otherwise provided for by applicable law. See Section 4 ("Withdrawal
Rights").
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the proposed acquisition of Shares by
Purchaser pursuant to the Offer. At any time before or after the purchase by
Purchaser of Shares pursuant to the Offer, either of the FTC or the Antitrust
Division could take such action under the antitrust laws as it deems necessary
or desirable in
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the public interest, including seeking to enjoin the purchase of Shares pursuant
to the Offer or seeking the divestiture of Shares purchased by Purchaser or the
divestiture of substantial assets of the Parent, its subsidiaries or the
Company. Private parties and state attorneys general may also bring legal action
under federal or state antitrust laws under certain circumstances.
Although Purchaser believes that the acquisition of Shares pursuant to the
Offer would not violate the antitrust laws, there can be no assurance that a
challenge to the Offer on antitrust grounds will not be made or, if such
challenge is made, what the outcome will be.
RIGHTS AGREEMENT. The Company has rendered the rights issued pursuant to
the Amended and Restated Rights Agreement, as amended, dated as of May 16, 1997,
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, inapplicable to the Offer, the Merger, the Merger Agreement and the other
transactions contemplated thereby.
OTHER FILINGS. The Company conducts operations in a number of foreign
countries, and filings may have to be made with foreign governments under their
competition laws. The filing requirements of various nations are being analyzed
by the parties and, where necessary, such filings will be made.
PENDING LITIGATION. On October 17, 18 and 20, 2000, purported class action
lawsuits entitled KRIM V. SUNRISE MEDICAL INC., ET AL., ROGERS V. SUNRISE
MEDICAL INC., ET AL. and HARBOR FINANCE PARTNERS V. SUNRISE MEDICAL INC., ET AL
were filed in the Court of Chancery of the State of Delaware, California
Superior Court and the Court of Chancery of the State of Delaware, respectively,
by holders of Shares. All three complaints name as defendants the Company and
the directors of the Company, and ROGERS also includes unknown defendants
alleged to have contributed to the purported conduct of the Company and
directors of the Company. Among other things, the plaintiffs in the three cases
allege generally that:
(1) the purchase price of the Shares is inadequate relative to the true
value of the Company;
(2) the terms of the transactions contemplated by the Merger Agreement are
the product of a conflict of interest and self-dealing on the part of
defendants; and
(3) the defendants violated their fiduciary duties owed to the public
stockholders of the Company by agreeing to the terms of the transactions
contemplated by the Merger Agreement.
The lawsuits seek unspecified damages and costs and to enjoin or rescind the
transactions contemplated by the Merger Agreement, among other things. The
Company, Purchaser, Holdings and Parent believe that these lawsuits are wholly
without merit and intend to defend them vigorously.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
---------------------
<S> <C>
(a)(1)(A) Offer to Purchase dated October 30, 2000 ("Offer to
Purchase") (incorporated herein by reference to Exhibit
(a)(1)(i) to Schedule TO filed by Purchaser with respect to
the Company on October 30, 2000 ("Schedule TO")).
(a)(1)(B) Letter of Transmittal (incorporated herein by reference to
Exhibit (a)(1)(ii) to Schedule TO).
(a)(1)(C) Information Statement Pursuant to Section 14(f) of the
Securities Exchange Act of 1934 and Rule 14f-1 thereunder
(incorporated by reference herein and attached hereto as
Annex A).
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
---------------------
<S> <C>
(a)(1)(D) Letter to Stockholders of the Company dated October 30, 2000
(incorporated by reference herein and attached hereto as
Annex D).
(a)(1)(E) Notice of Guaranteed Delivery (incorporated herein by
reference to Exhibit (a)(1)(iii) to Schedule TO).
(a)(1)(F) Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9. (incorporated herein by
reference to Exhibit (a)(1)(iv) to Schedule TO).
(a)(1)(G) Form of letter to brokers, dealers, commercial banks, trust
companies and other nominees (incorporated herein by
reference to Exhibit (a)(1)(v) to Schedule TO).
(a)(1)(H) Form of letter to be used by brokers, dealers, commercial
banks, trust companies and other nominees to their clients
(incorporated herein by reference to Exhibit (a)(1)(vi) to
Schedule TO).
(a)(1)(I) Summary newspaper advertisement, dated October 30, 2000,
published in The Wall Street Journal (incorporated herein by
reference to Exhibit (a)(1)(vii) to Schedule TO).
(a)(1)(J) Direction form for the 401(K) Plan (incorporated herein by
reference to Exhibit (a)(1)(viii) to Schedule TO)
(a)(5)(A) Text of Press Release dated October 16, 2000 (incorporated
herein by reference to Exhibit (a)(5)(A) of the Company's
Schedule 14D-9 filed with the Securities and Exchange
Commission (the "Commission") on October 17, 2000 (the
"October 17 Schedule 14D-9").
(a)(5)(B) Letter to Associates of the Company dated October 17, 2000
(incorporated herein by reference to Exhibit (a)(5)(B) of
the October 17 Schedule 14D-9).
(a)(5)(C) Letter to Option Holders of the Company, dated October 17,
2000 (incorporated herein by reference to Exhibit (a)(5)(C)
of the October 17 Schedule 14D-9).
(a)(5)(D) Letter to Performance Bonus Unit Holders of the Company,
dated October 17 (incorporated herein by reference to
Exhibit (a)(5)(D) of the October 17 Schedule 14D-9).
(a)(5)(E) "Questions and Answers" Memorandum to Associates
(incorporated herein by reference to Exhibit (a)(5)(E) of
the October 17 Schedule 14D-9).
(a)(5)(F) Script for Michael Hammes videotaped address for employees,
delivered October 17, 2000 (incorporated herein by reference
to Exhibit (a)(5)(F) of the October 17 Schedule 14D-9).
(a)(5)(G) Summary Advertisement as published in The Wall Street
Journal on October 30, 2000 (incorporated herein by
reference to Exhibit (a)(5)(B) to Schedule TO).
(a)(5)(H) Complaint of Frank Rogers against Sunrise Medical Inc., et.
al. filed in the Superior Court of the State of California,
County of San Diego, on October 17, 2000 (incorporated
herein by reference to Exhibit (a)(5)(vii) to schedule TO).
(a)(5)(I) Complaint of Jerry Krim against Sunrise Medical Inc., et.
al. filed in the Court of Chancery of the State of Delaware
on October 18, 2000 (incorporated herein by reference to
Exhibit (a)(5)(viii) to Schedule TO).
(a)(5)(J) Complaint of Harbor Finance Partners against Sunrise Medical
Inc., et. al. filed in the Court of Chancery of the State of
Delaware on October 20, 2000 (incorporated herein by
reference to Exhibit (a)(5)(iv) to Schedule TO).
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
---------------------
<S> <C>
(b)(i) Commitment Letter, dated October 16, 2000, to V.S.M.
Acquisition Corp. from Bankers Trust Company re: Acquisition
Financing (incorporated herein by reference to
Exhibit (b)(i) to Schedule TO).
(b)(ii) Commitment Letter, dated October 16, 2000, to V.S.M.
Acquisition Corp. from Bankers Trust Company re:
Subordinated Debt Financing (incorporated herein by
reference to Exhibit (b)(ii) to Schedule TO).
(e)(1) Agreement and Plan of Merger, dated as of October 16, 2000,
by and among Parent, Holdings, Purchaser and the Company
(incorporated herein by reference to the Company's Current
Report on Form 8-K filed with the Commission on October 24
and included as Schedule V to the Offer to Purchase).
(e)(2) Confidentiality/Standstill Agreement among the Company,
Vestar Capital Partners IV, L.P. and Park Avenue Equity
Partners, L.P. dated May 4, 2000.
(e)(3) Opinion of Deutsche Bank Securities Inc., dated October 16,
2000 (incorporated by reference herein and attached hereto
as Annex B).
(e)(4) Opinion of Batchelder & Partners, Inc., dated October 16,
2000 (incorporated by reference herein and attached hereto
as Annex C).
(e)(5) Presentation of Deutsche Bank Securities Inc. to the Special
Committee on October 16, 2000 (incorporated herein by
reference to Exhibit (c)(iv) to Schedule TO).
(e)(6) Presentation of Batchelder & Partners, Inc. to the Special
Committee on October 16, 2000 (incorporated herein by
reference to Exhibit (c)(iii) to Schedule TO).
(e)(7) Form of Change in Control Agreements dated June 27, 1997
between Sunrise Medical Inc. and certain employees.
(e)(8) Supplemental Executive Retirement Plan.
(e)(9) Third Amended and Restated 1993 Stock Option Plan.
(e)(10) Associate Stock Purchase Plan 2000.
(e)(11) 2000 Stock Option Plan.
(e)(12) Form of Indemnification Agreement.
(e)(13) Form of Letter Agreement, dated October 14, 2000, between
V.S.M. Investors, LLC and each of Ben Anderson-Ray, Geoffrey
Cooper, Jim Fetter, Michael N. Hammes, Raymond Huggenberger,
Steven Jaye, Robert J. Logemann, John Radak, Peter Riley,
Sam Sinasohn and Carey Winkel, respectively, and the forms
of Equity Term Sheet, Employment Agreements, Management Unit
Subscription Agreement, Securityholders Agreement and
Management Agreement attached as exhibits thereto
(incorporated herein by reference to Exhibit (d)(13) to
Schedule TO).
(e)(14) Equity Commitment Letter, dated October 16, 2000, from
Vestar Capital Partners IV, L.P. to V.S.M. Acquisition Corp
(incorporated herein by reference to Exhibit (d)(14) to
Schedule TO).
</TABLE>
36
<PAGE>
SIGNATURE
After due inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
SUNRISE MEDICAL INC.
By: /s/ MURRAY H. HUTCHISON
--------------------------------------
Murray H. Hutchison
Chairman
Dated: October 30, 2000
37
<PAGE>
ANNEX A
SUNRISE MEDICAL INC.
2382 FARADAY ROAD, SUITE 200
CARLSBAD, CALIFORNIA 92008
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about October 30, 2000, as
part of the Company's Solicitation/Recommendation Statement on Schedule 14D-9
(the "Schedule 14D-9"). Capitalized terms used and not otherwise defined herein
shall have the meaning ascribed to them in the Schedule 14D-9. You are receiving
this Information Statement in connection with the possible election of persons
designated by Purchaser to at least a majority of the seats on the Board of
Directors of the Company (the "Board"). The Merger Agreement requires the
Company, after the purchase by Purchaser pursuant to the Offer of such number of
Shares representing not less than a majority of the outstanding Shares on a
fully diluted basis, to cause Purchaser's designees to be elected to at least a
majority of the seats on the Board as set forth below. This Information
Statement is required by Section 14(f) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Rule 14f-1 thereunder. You are urged to
read this Information Statement carefully. However, you are not required to take
any action.
Pursuant to the Merger Agreement, on October 16, 2000, Parent, Holdings and
Purchaser commenced the Offer. The Offer is initially scheduled to expire on
November 28, 2000.
The information contained in this Information Statement (including
information listed in Schedule I attached hereto) concerning Purchaser,
Holdings, Parent and the Purchaser designees has been furnished to the Company
by Purchaser, Holdings, and Parent, and the Company assumes no responsibility
for the accuracy or completeness of such information.
The common stock of the Company, par value $1.00 per share (the "Shares"),
is the only class of voting securities of the Company outstanding. Each Share
has one vote. As of October 16, 2000, there were 22,359,218 Shares outstanding.
BOARD OF DIRECTORS
GENERAL
The Board is currently composed of six members. Pursuant to the Company's
Bylaws (the "Bylaws"), directors are elected annually. All directors of the
Company hold office until the election and qualification of their successors.
DESIGNEES
The Merger Agreement provides that promptly upon the acceptance for payment
of, and payment by Purchaser in accordance with the Offer for, not less than a
majority of the total issued and outstanding Shares of the Company on a fully
diluted basis (assuming the exercise of all outstanding options (other than
options held by the Management Group) and any other rights to acquire Shares of
the Company on the date of purchase) pursuant to the Offer, Purchaser shall be
entitled to designate ("Purchaser Designees") such number of members of the
Board, rounded up to the next whole number, equal to that number of directors
which equals the product of the total number of directors on the Board (giving
effect to the directors elected pursuant to this sentence) multiplied by the
percentage
Annex A-Page 1
<PAGE>
that such number of Shares owned in the aggregate by Purchaser or the Parent,
upon such acceptance for payment, bears to the number of Shares then
outstanding; provided, however, that until the effective time of the Merger the
parties hereto shall use their respective reasonable best efforts to ensure that
there shall be at least two Continuing Directors (as defined in the Merger
Agreement) such Continuing Directors initially to be selected by a majority of
the Continuing Directors as of the date of the Merger Agreement.
The Company shall, if requested by Purchaser, also take all action necessary
to cause Purchaser's Designees to constitute at least the same percentage
(rounded up to the next whole number) as such designees represent on the Board
of (i) each committee of the Board, (ii) each board of directors (or similar
body) of each subsidiary of the Company and (iii) each committee (or similar
body) of each such subsidiary board of directors.
The Company's obligation to cause the Purchaser Designees to be elected or
appointed to the Board and committees thereof shall be subject to Section 14(f)
of the Exchange Act and Rule 14f-1 promulgated thereunder. The Company shall
promptly take all actions required pursuant to such Section 14(f) and
Rule 14f-1 in order to fulfill its obligations under the Merger Agreement to
cause the Purchaser Designees to be elected to the Board, and shall include in
the Schedule 14D-9 such information with respect to the Company and its officers
and directors as is required under Section 14(f) and Rule 14f-1. Parent,
Holdings and Purchaser have supplied to the Company any information with respect
to any of them and Purchaser's Designees, and the officers, directors and
affiliates of the Parent, Holdings and Merger Sub required by such
Section 14(f) and Rule 14f-1 and applicable rules and regulations.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
Set forth below, for each current director of the Company, is information
regarding his age as of October 26, 2000, position(s) with the Company, the
period they have served as a director, any family relationship with any other
director or executive officer of the Company, and the directorships currently
held by them in corporations whose shares are publicly registered.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
---- -------- -------------------------------------- --------
<S> <C> <C> <C>
Lee A. Ault III....................... 64 Director 1988
Michael N. Hammes..................... 58 Director, President and Chief 1998
Executive Officer
Murray H. Hutchison................... 61 Chairman of the Board of Directors 1983
William L. Pierpoint.................. 62 Director 1985
Joseph Stemler........................ 69 Director 1989
John R. Woodhull...................... 66 Director 1986
</TABLE>
Except as set forth below, each of the directors has been engaged in the
principal occupation set forth next to his or her name above during the past
five years. There is no family relationship between any director or executive
officer of the Company.
Mr. Ault has served as Chairman of the Board of IN-Q-Tel, Inc., an
information technology company since August 1999. He was Chief Executive Officer
from 1968 through January 1992 of Telecredit, Inc., a payment services company.
In 1990 Telecredit, Inc. merged with Equifax, Inc., a New York Stock Exchange
("NYSE") listed information services company. He serves on the board of
Annex A-Page 2
<PAGE>
directors of Equifax, Inc., Office Depot, Inc. (a NYSE listed office supplies
retailer), American Variable Insurance Series, and Pacific Crest Outward Bound
School.
Mr. Hammes has served as the President and Chief Executive Officer of the
Company since January 2000. From 1998 to January 2000, Mr. Hammes served as the
Chairman of the Board and Chief Executive Officer of Guide Corporation, a
privately held company which purchased the automotive lighting business of
General Motors. From October 1993 to February 1997, Mr. Hammes was Chairman of
the Board and Chief Executive Officer of The Coleman Company, Inc., a global
manufacturer and distributor of camping and outdoor recreational products and
hardware/home products. From 1990 to 1993, he was Vice Chairman of the Black &
Decker Corporation and President of its Power Tool and Home Products Group. From
1986 to 1990, Mr. Hammes was President of International Operations for Chrysler
Corporation and a Vice President of that company. Mr. Hammes also served in a
number of positions for Ford Motor Company, with which he was affiliated for
over 20 years, including President of Mexican Operations and President of
European Truck Operations. Mr. Hammes is also a board member of Navistar
Corporation, Johns Manville Corporation and the Board of Visitors of Georgetown
University's School of Business.
Mr. Hutchison has served as Chairman of the Board of the Company since
January 2000. He served as Interim Chairman of the Board of Directors from
October 1999 to January 2000 and Interim Chief Executive Officer and President
from October 1999 to January 2000, following Richard H. Chandler's resignation
from those positions. From 1976 through 1996, Mr. Hutchison was Chairman of the
Board and from 1976 through 1994 also served as Chief Executive Officer of
International Technology Corporation, a NYSE listed environmental management
company. Mr. Hutchison serves on the board of directors of Epic Solutions, Olson
Company, Senior Resource Group, and Huntington Hotel Corporation, all privately
held companies, and Cadiz, Inc. and Jack in the Box Inc., both publicly traded
companies.
Mr. Pierpoint was President and Chief Executive Officer of Summit
Health Ltd., a publicly traded, integrated health care company from 1977 to
1988. Mr. Pierpoint is a certified public accountant and since 1988 has been a
private investor. In 1995 he became Vice Chairman of Strategic Partners Inc. (d/
b/a Cherokee Uniforms), a privately held company.
Mr. Stemler served as Chief Executive Officer and Chairman of the Board of
Directors of the Maret Corporation, a privately held company from 1997 to 1999.
He is a Director of the Scholle Corporation, a privately held company and served
as its CEO and Chairman in 1996. From 1989 through 1996, Mr. Stemler served as
Chairman of the Board of La Jolla Pharmaceutical Company, a publicly held
biotechnology company and as its President and CEO from 1989 through 1995.
Mr. Stemler became President and Chief Executive Officer of Quidel Corporation
in 1985, Chairman and Chief Executive Officer in 1988, Chairman in 1990 and Vice
Chairman in 1991. Mr. Stemler was President and Chief Executive Officer of
Bentley Laboratories, Inc. from 1978 to 1985.
Mr. Woodhull was Chairman, President and CEO, from 1969 through 1998, of
Logicon, Inc., then a NYSE listed company, which provided electronic systems and
high-technology services to industry and government. Mr. Woodhull is currently a
private investor. He also serves on the board of directors of FirstFed Financial
Corp., a NYSE listed company, First Federal Bank of California, a subsidiary of
FirstFed Financial Corp., the Chief Executives Organization, and the YMCA of
Metropolitan Los Angeles.
Annex A-Page 3
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company, their ages as of October 27, 2000,
and their positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ------------------------------------------
<S> <C> <C>
Michael N. Hammes......................... 58 President and Chief Executive Officer
(elected January 17, 2000)
Ben Anderson-Ray.......................... 45 Corporate Senior Vice President and
President, Global Business Group
Raymond Huggenberger...................... 40 President European Operations and
Corporate Senior Vice President
Steven A. Jaye............................ 44 Senior Vice President, Chief
Administrative Officer, General Counsel
and Secretary
Thomas H. O'Donnell....................... 57 Corporate Senior Vice President and
President North America
John M. Radak............................. 40 Vice President and Controller; Vice
President of Finance, Global Business
Group
Ted N. Tarbet............................. 47 Senior Vice President and Chief Financial
Officer
Richard H. Chandler....................... 57 Former Chairman of the Board, Chief
Executive Officer and President (resigned
effective October 4, 1999)
</TABLE>
The principal occupations of each executive officer and key employee of the
Company for at least the last five years are as follows:
MICHAEL N. HAMMES. On January 17, 2000, Michael H. Hammes was elected
president and chief executive officer of Sunrise Medical Inc. Mr. Hammes joined
Sunrise from Guide Corporation, a privately held company that is the largest
producer of automotive lighting in North America and was formerly the automotive
lighting division of General Motors, where he served as chairman of the board
and chief executive officer from 1997 to 1999. Mr. Hammes' prior executive
positions include chairman and CEO of The Coleman Company, a global manufacturer
of outdoor recreational equipment, from 1993 to 1997; corporate vice chairman
and president of Worldwide Consumer Product Operations of the Black & Decker
Corporation from 1990 to 1993 and president of International Operations for
Chrysler Corporation from 1986 to 1990. Mr. Hammes has been a member of the
Sunrise Medical board since 1998, where he served as the Audit Committee
chairman.
BEN ANDERSON-RAY. Mr. Anderson-Ray was elected senior vice president of
Sunrise and President of the Global Business Group in March 2000. From 1998 to
this election he served as group president of the Continuing Care Group, which
manufactures JOERNS and CORONA beds and furniture and PARKER BATH bathing
equipment for nursing homes and other healthcare institutions. The Parker unit
has since been sold by the Company. From November 1996 to 1998,
Mr. Anderson-Ray was president of the Mobility Products Division of Sunrise
Medical HHG, Inc. From 1994 to 1996 he served as vice president of marketing and
business development for the Rubbermaid Home Products Division. Prior to this,
he was general manager of cooking, cleaning and beverage products for Black &
Decker Corporation. From 1984 to 1993 Mr. Anderson-Ray held positions at General
Electric including manager of Asia-Pacific marketing and sales, manager of
international automotive products and product manager of lighting products.
Annex A-Page 4
<PAGE>
RAYMOND HUGGENBERGER. Mr. Huggenberger was elected president of European
Operations and senior vice president of Sunrise in March 2000. From 1998 to this
election, Mr. Huggenberger was President of Sunrise Germany. From 1996 to 1998,
Mr. Huggenberger was managing director of Triumph Adler's healthcare group,
which included two home medical equipment divisions well known in Europe. From
1994 to 1996, Mr. Huggenberger was Sunrise Germany's vice president of
marketing. From 1989 to 1994 he was International Sales director for Heidolph
Electro GmbH.
STEVEN A. JAYE. Mr. Jaye was elected chief administrative officer in
March 2000 and has served as senior vice president, general counsel and
secretary since August 1996, after joining Sunrise as vice president and general
counsel in August 1995. From 1991 through 1995, Mr. Jaye served as the vice
president--legal affairs for Magma Power Company, a publicly traded
international power producer. From 1984 through 1991, he served as a business
attorney with the law firm of Latham & Watkins. Prior to receiving his legal
degree, Mr. Jaye served as a design, production and quality assurance engineer
for a subsidiary of Hughes Aircraft company. In addition to his legal duties,
Mr. Jaye is responsible for the worldwide human resources, risk management and
real estate operations for Sunrise.
THOMAS H. O'DONNELL. Mr. O'Donnell was elected president, North America and
senior vice president of Sunrise in August 2000. He was formerly the president
of the Home Healthcare Group from July 1997 until March 2000. Mr. O'Donnell
resigned from employment with the Company in March 2000 and was subsequently
rehired after the June 30, 2000 fiscal year end. He served as executive vice
president--operations of Sunrise from January 1987 until August 1988, when he
was elected president of Quickie Designs Inc. (then a Sunrise subsidiary). In
January 1996 he was named senior vice president, North America. Prior to joining
Sunrise in 1986, Mr. O'Donnell was president and chief operating officer of
General Computer Company, a manufacturer and distributor of personal computer
peripherals. From 1984 to 1985, he was chief executive officer of Connecting
Point of America, Inc., a chain of computer retail stores. From 1967 to 1984, he
was with IBM Corporation in a variety of management positions, most recently as
vice president--product management for the Entry Systems Division.
JOHN M. RADAK. Mr. Radak was elected vice president of finance for the
Global Business Group in March 2000 and has served as vice president and
controller since January 1995. From 1992 to 1995, Mr. Radak was vice president,
finance for the respiratory care subsidiary of Bird Medical Technologies Inc., a
medical device manufacturer. Prior to joining Bird, he held various financial
management positions with Calcomp Inc., a Lockheed/Martin subsidiary that
manufactures printers and plotters for computer graphics applications.
Mr. Radak is a certified public accountant.
TED N. TARBET. Mr. Tarbet was elected senior vice president and chief
financial officer in August 1993. Mr. Tarbet joined the Company in 1986 as
corporate controller. In 1988 he was made a vice president and in 1989 he was
elected to the position of vice president, chief financial officer and
secretary. From 1981 to 1986, Mr. Tarbet served as controller and then as vice
president and chief financial officer of Anadex Inc., a manufacturer of personal
computer products. Mr. Tarbet is a certified public accountant.
RICHARD H. CHANDLER. Mr. Chandler, who founded the Company in 1983 and
served as its chief executive officer since that time, resigned from his
positions as chairman of the board of directors, president and chief executive
officer, as well as his seat on the board, effective October 4, 1999.
Mr. Chandler has a continuing relationship with the Company whereby he serves as
a consultant under an agreement providing for three years of services and a
covenant not to compete with or solicit employees from the company. In addition,
Mr. Chandler has been employed by Freedom Scientific, Inc. as President, Chief
Executive Officer and Chairman since October 1999. From 1982 to 1983, he was
president of Richard H. Chandler Company, a management-consulting firm, during
which period he planned the formation of Sunrise. From 1979 to 1982, he was
president and chief executive officer of
Annex A-Page 5
<PAGE>
Abbey Medical, Inc., the nation's largest chain of home medical equipment stores
at the time. Mr. Chandler participated in the leveraged buy-out of Abbey Medical
from Sara Lee Corporation in June 1979 and arranged for Abbey's sale to American
Hospital Supply Corporation in April 1981. From 1974 to 1979, he held senior
management positions with Sara Lee Corporation, ending as a group vice president
and including two years when he was president of the Abbey Medical/Abbey Rents
division.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors met eleven times during the fiscal year ended
June 30, 2000. The Audit Committee met three times, and the Compensation
Committee met sixteen times in fiscal 2000 and acted once by written consent.
The Nominating Committee acted once by unanimous written consent. The Executive
Committee did not meet in fiscal 2000. The Special Committee that was
established by the Board on August 25, 2000 met ten times since that time. All
Directors attended at least three-fourths of the aggregate of the total number
of Board meetings and Committee meetings on which such Directors served.
COMMITTEES
AUDIT COMMITTEE. The Audit Committee of the Board of Directors is comprised
solely of outside Directors. The Audit Committee meets periodically with the
company's independent auditors, the internal audit department and financial
management of the company to ensure that each is carrying out its
responsibilities in compliance with the Audit Committee Charter previously
approved by the Board of Directors. Both the independent auditors and the
internal audit department have free and direct access to the Audit Committee.
The company's independent auditors are recommended by the Audit Committee and
selected by the Board of Directors. Members of the Audit Committee are
Messrs. Ault, Pierpoint and Stemler, with Mr. Pierpoint serving as Chair.
COMPENSATION COMMITTEE. The Compensation Committee meets with management
and makes recommendations to the Board concerning (i) Executive Officer and key
Associate compensation, (ii) payments to be made under the Management Incentive
Bonus Plan, and (iii) company contributions to be made under the 401(k) Profit
Sharing/Savings Plan. The Compensation Committee also administers the stock
option plans of the company. In addition, this Committee functions as a
Nominating Committee regarding nominations for the Board of Directors. Members
of the Compensation Committee are Messrs. Ault, Hutchison and Woodhull, with
Mr. Ault serving as Chair.
EXECUTIVE COMMITTEE. The Executive Committee, consisting of
Messrs. Hutchison, Ault and Hammes, meets on an as-needed basis with the
authority to make Board-level decisions between regularly scheduled Board
meetings. Mr. Hutchison is Chair of this Committee.
SPECIAL COMMITTEE. The Special Committee, consisting of Messrs. Hutchison,
Ault, Pierpoint, Stemler and Woodhull, was established on August 25, 2000 as an
independent committee to consider strategic alternatives available to the
Company. The Chairman of the Special Committee is Mr. Hutchison. The Board of
Directors determined that each member of the Special Commitee would receive,
irrespective of whether any proposed transaction was entered into or completed,
$25,000 and per meeting compensation of $1,200 per meeting for attendance in
person and $500 per meeting for telephonic attendance.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended June 30, 2000, July 2, 1999 and July 3, 1998 of those persons
who were either:
- Chief Executive Officer at any time during the last completed fiscal year;
or
Annex A-Page 6
<PAGE>
- one of the Company's four other most highly compensated executive officers
as of the end of the last completed fiscal year whose annual salary and
bonuses exceeded $100,000; or
- up to two other executive officers who would have qualified under the
preceding clause but for the fact that the person was not serving as an
executive officer at June 30, 2000 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------
FISCAL -------------------- STOCK OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) GRANTS COMPENSATION(7)
--------------------------- -------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Michael N. Hammes(2) .................. 2000 $ 230,577 $137,500 1,000,000 $129,993(8)
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Murray H. Hutchison(3) ................ 2000 202,500 0 30,000 0
FORMER, PRESIDENT & CHIEF EXECUTIVE
OFFICER
Richard H. Chandler(4) ................ 2000 212,337 0 25,000 4,483
FORMER, PRESIDENT & CHIEF EXECUTIVE 1999 506,634 0 75,000 43,542
OFFICER 1998 492,500 0 60,000 46,967
Thomas H. O'Donnell(5) ................ 2000 381,540 150,000 10,000 2,948
SENIOR VICE PRESIDENT, OPERATIONS; 1999 318,076 0 30,000 26,554
GROUP PRESIDENT, HOME HEALTHCARE 1998 310,000 0 25,000 28,230
Ben Anderson-Ray ...................... 2000 312,210(9) 27,930 285,000 93,882
SENIOR VICE PRESIDENT, OPERATIONS; 1999 311,565 0 40,000 137,677
GROUP PRESIDENT, CONTINUING CARE 1998 280,000 0 7,000 13,964
Raymond Huggenberger(6) ............... 2000 187,841 168,259 280,000 7,681
PRESIDENT EUROPEAN OPERATIONS; 1999 166,647 57,099 15,000 8,088
CORPORATE SENIOR VICE PRESIDENT 1998 51,286 0 10,000 8,242
Ted N. Tarbet ......................... 2000 283,273 80,325 265,000 21,063
SENIOR VICE PRESIDENT AND CHIEF 1999 246,730 0 30,000 18,477
FINANCIAL OFFICER 1998 233,000 0 25,000 19,587
Steven A. Jaye ........................ 2000 267,887 80,325 265,000 19,517
SENIOR VICE PRESIDENT, CHIEF 1999 226,153 0 30,000 16,629
ADMINISTRATIVE OFFICER; GENERAL 1998 228,289 0 22,000 16,582
COUNSEL
</TABLE>
------------------------
(1) The amounts reflect the bonuses earned under the Management Incentive Bonus
Plan ("MIB") in the designated fiscal years, but paid in the following
fiscal year, except for Mr. Hammes, whose bonus provisions were contractual.
(2) Mr. Hammes became President and Chief Executive Officer of the Company and
its subsidiaries on January 17, 2000. Compensation presented does not
include directors' fees paid and stock options granted to Mr. Hammes in his
capacity as a Non-employee Director of the Company prior to his employment
by the Company.
(3) Mr. Hutchison served as interim Chief Executive Officer and President from
October 1999 to January 2000. Compensation presented reflects consulting
fees paid and stock options granted to Mr. Hutchison for his services as
Interim Chief Executive Officer and President. Compensation presented does
not include directors' fees paid and stock options granted to Mr. Hutchison
in his capacity as a Non-employee Director of the Company.
Annex A-Page 7
<PAGE>
(4) Mr. Chandler resigned as an officer and director of the Company and its
subsidiaries on October 4, 1999. See "Certain Relationships and Related
Transactions".
(5) Mr. O'Donnell resigned from employment effective March 31, 2000. He was
subsequently rehired after the June 30, 2000 fiscal year end.
(6) Mr. Huggenberger commenced employment on March 1, 1998.
(7) Includes amounts shown below allocated by the Company for the accounts of
the Named Officers in fiscal 2000. The Company has no defined benefit or
other actuarial plan covering the Named Officers.
<TABLE>
<CAPTION>
SUPPLEMENTAL
EXECUTIVE LIFE
FISCAL PROFIT SHARING/ RETIREMENT INSURANCE RELOCATION
NAME YEAR SAVINGS PLAN PLAN PREMIUMS EXPENSES
---- -------- --------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Michael N. Hammes....................... 2000 $ 0 $ 0 $ 0 $109,795
Murray H. Hutchison..................... 2000 0 0 0 0
Richard H. Chandler..................... 2000 400 0 4,083 0
1999 10,464 28,126 4,952 0
1998 10,584 31,814 4,569 0
Thomas H. O'Donnell..................... 2000 400 0 2,548 0
1999 10,464 12,901 3,189 0
1998 10,584 14,693 2,953 144,581
Ben Anderson-Ray........................ 2000 10,296 12,177 977 70,432
1999 10,584 12,209 1,055 113,949
1998 10,584 2,417 963 0
Raymond Huggenberger.................... 2000 7,681 0 0 0
1999 8,088 0 0 0
1998 8,242 0 0 0
Steven A. Jaye.......................... 2000 10,296 8,675 547 0
1999 10,584 5,348 697 0
1998 10,464 5,512 606 0
Ted N. Tarbet........................... 2000 10,296 9,929 839 0
1999 10,464 7,018 995 0
1998 10,584 8,128 875 0
</TABLE>
(8) Also includes $20,198 reimbursement for legal expenses incurred in
connection with the negotiation of his compensation package. Does not
include $21,867 earned by Mr. Hammes in fiscal year 2000 in directors' fees
as a Non-employee Director prior to his appointment as Chief Executive
Officer and President in January 2000.
(9) This amount includes a tax reimbursement in fiscal year 2000 of $20,000.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information concerning options granted under
the Company's option plans to the Named Officers during the 2000 fiscal year.
Annex A-Page 8
<PAGE>
OPTION/SAR GRANTS IN 2000 FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
----------------------------------------------------------------------------- ASSUMED ANNUAL RATE OF STOCK
PERCENT OF TOTAL EXERCISE PRICE APPRECIATION FOR OPTION
OPTIONS OPTIONS GRANTED OR BASE TERM(2)
GRANTED TO EMPLOYEES IN PRICE PER EXPIRATION ------------------------------
NAME (#)(1) FISCAL YEAR SHARE DATE 5% 10%
---- --------- ---------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael N. Hammes..... 1,000,000 26.67% $ 5.563 1/24/10 $ 3,395,920 $ 8,702,583
Murray H. Hutchison... 10,000 * 5.438 10/26/09 31,137 81,791
20,000 * 4.188 3/2/10 57,367 140,962
Richard H. Chandler... 25,000 * 6.313 8/24/09 99,255 251,532
Thomas H.
O'Donnell(3).......... 10,000 * 6.313 8/24/09(3) 0(3) 0(3)
Ben Anderson-Ray...... 275,000 7.33 4.188 3/1/10 724,298 1,835,514
10,000 * 6.313 8/24/09 39,702 100,613
Raymond Huggenberger.. 275,000 7.33 4.188 3/1/10 724,298 1,835,514
5,000 * 6.313 8/24/09 19,851 50,306
Ted N. Tarbet......... 245,000 6.53 4.188 3/1/10 645,284 1,635,275
20,000 * 6.313 8/24/09 79,404 201,226
Steven A. Jaye........ 245,000 6.53 4.188 3/1/10 645,284 1,635,275
20,000 * 6.313 8/24/09 79,404 201,226
==============================================================================================================
</TABLE>
------------------------
* Represents less than 1%
(1) Options grants specified above with expiration dates in 2009 were made under
the Company's 3rd Amended and Restated 1993 Stock Option Plan, and vest 25%
per year and automatically accelerate (except for the option grant to
Mr. O'Donnell) upon a change in control of the Company. Option grants
specified above with expiration dates in 2010 were made under the Company's
Year 2000 Non-Qualified Stock Option Plan, and as to Mr. Hammes' options,
under the Michael N. Hammes Stock Option Agreement (collectively, the "Year
2000 Options"). The Year 2000 Options vest in three equal tranches
(i) equal time vesting over four years ( 1/12 of total grant each year);
(ii) performance vesting based on attainment of earnings per share targets
(subject to seven year cliff vesting) and (iii) performance vesting based on
attainment of stock price targets (subject to seven year cliff vesting). The
options specified under clauses (i) and (ii) automatically accelerate upon a
change of control and the options specified under clause (iii) accelerate
upon a change of control only if and to the extent the change in control
stock price exceeds the stock price targets.
(2) Potential realizable value is calculated as the aggregate difference between
the market price of the Common Stock and the option exercise price assuming
that the stock price appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the option term. These
amounts are calculated based on the requirements promulgated by the SEC and
are not an estimate of future stock price growth.
(3) All of these options held by Mr. O'Donnell were cancelled in connection with
Mr. O'Donnell's termination of employment on March 31, 2000. Mr. O'Donnell
was subsequently rehired in Fiscal Year 2001. The original expiration date
was 8/24/09, although these options are no longer exercisable. As a
consequence of the cancellation, these options have no Potential Realizable
Value, as defined.
Annex A-Page 9
<PAGE>
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the Named
Officers concerning the exercise of options during fiscal year 2000 and
unexercised options held as of the end of fiscal year 2000.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 2000 AND JUNE 30, 2000 OPTION/SAR
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT JUNE 30, OPTIONS/SARS AT JUNE 30,
SHARES 2000(1) 2000(3)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael N. Hammes............... 0 $ 0 4,000 1,000,000 $ 0 $ 0
Murray H. Hutchison............. 0 0 29,000 20,000 6,870 6,870
Richard H. Chandler............. 0 0 150,000 117,500 0 0
Thomas H. O'Donnell(4).......... 6,000 11,238 0 0 0 0
Ben Anderson-Ray................ 0 0 24,000 322,000 0 188,925
Raymond Huggenberger............ 0 0 8,750 296,250 0 188,925
Ted N. Tarbet................... 9,000 19,665 70,500 302,500 0 168,315
Steven A. Jaye.................. 0 0 32,000 301,000 0 168,315
</TABLE>
------------------------
(1) Includes 4,000 exercisable options (with a value of $0) held by Mr. Hammes
that were granted to him in the capacity as a Non-employee Director.
(2) Based on the market value of the underlying shares on the exercise date
minus the option exercise price per share.
(3) Calculated on the basis of the fair market value of the underlying shares as
of June 30, 2000 ($4.875 per share) minus the exercise price.
(4) All options held by Mr. O'Donnell were cancelled in connection with
Mr. O'Donnell's termination of employment on March 31, 2000. Mr. O'Donnell
was subsequently rehired in Fiscal Year 2001.
LONG-TERM INCENTIVE PLAN
The Named Officers received no long-term incentive awards in fiscal years
1999 and 2000 that could be paid in fiscal years 2001 or 2002.
EMPLOYMENT AGREEMENTS
Each of Messrs. Hammes, Anderson-Ray, Huggenberger, Jaye and Tarbet are also
parties to offer letters which set forth the basic terms of the employment of
such person. In pertinent part, the offer letter of Mr. Hammes provides that
(i) his salary will be $550,000 per year, (ii) his fiscal year 2000 bonus for
meeting specified goals was set at 50% of annual salary, prorated to account for
the number of months worked in the fiscal year, (iii) the Company will reimburse
moving expenses, plus pay a tax gross-up thereon, (iv) the Company will
reimburse reasonable legal fees incurred in negotiating the employment package
and (v) the Company will indemnify Mr. Hammes up to $500,000 to the extent he is
not paid any salary, bonus, deferred compensation or other benefits owed to him
by his former employer, subject to certain conditions. The Company will enter
into an employment agreement with each of Messrs. Hammes, Anderson-Ray,
Huggenberger, Jaye and Radak, which employment agreements shall become effective
as of the first date on which Shares are purchased pursuant to the Offer and
will provide for the termination of all previous agreements and arrangements
between these executive officers and the Company covering the same subject
matter, as described under the caption "Certain Effects of the
Transaction--Employment Agreements" in the Offer to Purchase and which are
Annex A-Page 10
<PAGE>
qualified in their entirety by reference to the forms of Employment Agreement
copies of which are filed as Exhibit (d)(iii) of the Schedule TO).
CHANGE IN CONTROL AGREEMENTS
The Company's executive officers other than Mr. O'Donnell are each a party
to a Change in Control Agreement (each a "CIC Agreement"). The Company has four
forms of CIC Agreements, Each CIC Agreement contains a double trigger. First a
Change in Control (as defined in the CIC Agreement) must have occurred and
second, the executive officer, following such a Change in Control, must have
been terminated by the Company other than for Cause (as defined in the CIC
Agreements) or resigned for Good Reason (as defined in the CIC Agreements). The
CIC Agreements of Messrs. Hammes, Jaye, Tarbet, Anderson-Ray and Huggenberger
include a provision that allows the employee to terminate his employment for any
or no reason during the 30-day period commencing on the first anniversary of the
date of the Change in Control (which termination is deemed a termination for
good cause) and receive the full benefits under the CIC Agreement.
The payments due pursuant to a CIC Agreement are equal to a multiplier of
the sum of (i) the greater of the executive officer's annual salary in effect as
of the date of termination or immediately prior to the Change in Control, plus
(ii) the greater of the amount of the executive officer's target bonus under the
Management Incentive Bonus Plan in effect for the fiscal year during which the
date of termination occurs or during the fiscal year during which the Change in
Control occurs (referred to herein as the "Maximum Annual Compensation"). The
following executive officers of the Company have a CIC Agreement: Mr. Hammes has
a Type A1 CIC Agreement which provides for 3.0x the Maximum Annual Compensation;
Messrs. Anderson-Ray, Huggenberger, Jaye and Tarbet have a Type A CIC Agreement
which provides for a severance payment of 2x the Maximum Annual Compensation;
and Mr. Radak has a Type C CIC Agreement which provides that if the date of
termination occurs at any time during the first year following the Change in
Control, severance equals the Maximum Annual Compensation, plus an amount
determined by multiplying the Maximum Annual Compensation by a fraction, the
numerator of which is the number of days left in the year following the
termination and the denominator of which is 365 and if the termination occurs at
any time during the second year following the Change in Control, severance
equals the Maximum Annual Compensation. The executive officers shall also
receive the amount the Company would have contributed to his 401(k) Plan account
and health insurance benefits throughout the payout period. Each of
Messrs. Hammes, Anderson-Ray, Huggenberger, Jaye and Radak will enter into the
employment agreements referenced above that shall provide for the termination
of, among other things, the CIC Agreements for these executives, as set forth
under the caption "Interests of Certain Persons in the Transaction--Employment
Agreements" and as qualified in their entirety by reference to the forms of
Employment Agreement copies of which are filed as Exhibit (d)(iii) to the
Schedule TO.
SEVERANCE AGREEMENTS
The Company has various severance agreements with each of its executive
officers. Under the agreements of Messrs. Hammes, Jaye, Tarbet, Anderson-Ray,
Huggenberger and Radak, in the event of (i) termination of employment by the
Company for reasons other than Cause (as defined in the CIC Agreement), or
(ii) resignation by the employee for Good Reason (as defined in the CIC
Agreement, plus relocation) the Company is to pay the executive:
- three years' base salary for Mr. Hammes, two years' base salary for
Messrs. Jaye, Tarbet, Anderson-Ray and Huggenberger, and 18 month's base
salary for Mr. Radak, at the then current annual rate (or prior rate if
higher); plus
- two times for Messrs. Jaye and Tarbet, and 18 months for Mr. Radak, of the
full amount of his target bonus, and the pro-rated amount of his target
bonus for Messrs. Hammes, Anderson-Ray
Annex A-Page 11
<PAGE>
and Huggenberger, under the MIB in effect for the fiscal year in which the
termination or resignation occurs; plus
- continuation for three years for Mr. Hammes, two years for Messrs. Jaye,
Tarbet, Anderson-Ray and Huggenberger, and 18 months for Mr. Radak, of all
perquisites including health, life and disability insurance, benefit and
pension plan (401(k)) contributions and the like to which the employee
would have been entitled to but for employment ceasing; plus
- outplacement services or (at the employee's option) cash payment in lieu
thereof equal to 25% of annual compensation (salary for all, plus target
bonus for Messrs. Jaye, Tarbet and Radak); plus
- for Messrs. Jaye, Tarbet and Radak all stock options immediately vest in
full and the employee has an extended time period in which to exercise
such options (two years for Messrs. Jaye and Tarbet, one year for
Mr. Radak).
In addition, Messrs. Anderson-Ray and Huggenberger have agreed to not
compete with the Company for a period of two years following a termination of
employment that qualifies for severance payments.
The Company also has an agreement with Mr. O'Donnell which provides that in
the event of termination of employment for any reason, Mr. O'Donnell will (upon
execution of a release) (a) become a part time consultant for 24 months at a
rate of $83,750 per year, (b) be provided with health benefits throughout the
consulting period, (c) receive a lump sum payment of one year's salary, and
(d) not compete with the Company during the 24 month consulting period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Ault, Hutchison and Woodhull, with Mr. Ault serving as chair, are
the members of the Compensation Committee. Mr. Hutchison served as the interim
Chairman of the Board of Directors, Chief Executive Officer and President of
Sunrise Medical from October 4, 1999 to January 16, 2000. Mr. Hutchison was paid
a consulting fee of $50,000 per month during such period and was granted stock
options covering 10,000 shares (at an exercise price of $5.438 per share), for
such services.
DIRECTOR COMPENSATION
Non-employee directors are paid an annual retainer of $16,000 paid in
monthly installments (or upon the election of the Director, in stock options
with a 25% gross-up) and $1,200 for each Board meeting attended ($600 if a Board
meeting is telephonic). The Chairman of the Board, Mr. Hutchison, receives in
addition to the compensation for Non-employee Directors, $30,000 per year paid
in monthly installments and $2,500 for each day over one day per month for
Chairman of the Board services performed on behalf of the Company. In addition,
committee members are paid $1,000 per meeting if attended in person or $500 per
meeting if a committee meeting is telephonic. Committee chairs receive an
additional $2,000 annual retainer paid in semi-annual installments.
See "The Board of Directors and its Committees" for information on
compensation for service on the Special Committee.
Generally, upon the first Board meeting of each calendar year, each
non-employee director is granted an option to purchase 14,000 shares of Common
Stock under the Company's 3rd Amended and Restated 1993 Stock Option Plan. These
options vest 50% on the date of grant and 50% on the first anniversary of the
grant. In fiscal year 2000, Messrs. Ault, Hutchison, Pierpoint, Stemler and
Woodhull each received an option grant covering 20,000 options, and Mr. Hammes
did not receive an option grant as a Non-Employee Director during fiscal year
2000.
Annex A-Page 12
<PAGE>
See "Compensation Committee Interlocks and Insider Participation" for
Compensation paid to Mr. Hutchison for his services as Interim Chief Executive
Officer and President.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
responsible for establishing and overseeing the policies that govern Company
compensation and benefit practices. As part of these functions, the Committee
evaluates the performance of the Chief Executive Officer, reviews with senior
management the performance of other highly compensated officers, and determines
their respective compensation levels in terms of salary, bonuses and related
benefits. The Committee has established a number of objectives, which serve as
guidelines in making all compensation decisions, including:
- The integration of compensation programs with the Company's strategic
direction in order to achieve its long-term competitive objectives and
strategic intent;
- The reward of annual operating and financial performance through
individual and group bonus incentives that pay for improved quantitative
performance versus annual targets;
- The encouragement of consistent, long-term enhancement of stockholder
value by providing multi-year performance incentives through a contingent
long-term bonus plan and equity ownership through stock options; and
- The development and implementation of a competitive total compensation
program that enables the Company to attract and retain high-caliber
Associates at all levels.
The Company's compensation philosophy rewards individual and team
performance on the basis of both quantitative and qualitative factors.
Associates at all levels participate in one or more of the Company's various
bonus plans. The six plans currently in effect are aimed broadly at different
groups including senior and middle managers, engineers, technical specialists,
sales Associates and hourly factory and office Associates.
The Committee believes that the components of executive compensation should
include base salary, annual and long-term incentive compensation, stock option
grants and other benefits described below. A brief summary of each component
follows.
BASE SALARY
Base salaries are intended to be competitive with market rates and are based
on an internal evaluation of the responsibilities of each position. The
Committee reviews hiring and turnover patterns within the Company and relies
from time to time on outside industry surveys to assess salary competitiveness.
The companies included in such surveys are typically companies having revenues
and businesses similar to those of Sunrise and/or which draw from the same
geographic area. The composition of such companies is generally a peer group of
U.S. medical equipment manufacturers similar (but not identical) in composition
to the Peer Group Index shown on the stock performance chart included herein.
The Committee believes that total cash compensation for Company executives
should be targeted within the 25th to 75th percentile of executives at companies
having businesses and revenues comparable to those of Sunrise. Where executives
fall within a salary range will depend on their seniority and their performance.
The Committee's objective is to link executive compensation with the Company's
financial performance, while also reflecting competitive market factors.
Salary increases are based on annual supervisor reviews and are intended to
reflect individual as well as business unit performance, along with the results
of industry survey results. Annual increases for salaried Associates are all
awarded on the same day, the first Monday in September, so as to ensure fairness
across the Company and to incorporate both the previous fiscal year's operating
results and individual performances.
Annex A-Page 13
<PAGE>
ANNUAL INCENTIVE COMPENSATION
The Company has used throughout its history a Management Incentive Bonus
Plan (the "MIB Plan") pursuant to which members of management are eligible to
receive annual cash bonuses. Generally, each bonus will be based on both the
achievement of individual objectives agreed upon by the manager and his or her
immediate supervisor, and upon the attainment of certain earnings targets. With
regard to the Company's performance, the primary measure used for determining
bonuses is the Company's earnings per share growth. An operating unit's
performance has historically been measured against goals for earnings growth
(after a capital charge on any cash drawn), and levels of return on net assets.
No bonus is paid at either the corporate or divisional level unless earnings
exceed a minimal accepted threshold. Earnings goals are approved annually by the
Board of Directors and are tied to the Company's operating plan. Even if a bonus
is earned based on profit performance, the executive must still have
accomplished his or her personal objectives for the year in order to qualify for
the designated amount. The fiscal 2000 payout that was earned under the MIB Plan
ranged from 5% to 100% of a manager's salary, depending upon his or her
position.
STOCK OPTIONS
Certain management Associates of the Company are eligible to receive
periodic grants of non-qualified or incentive stock options pursuant to the 3rd
Amended & Restated 1993 Stock Option Plan (the "1993 Plan") and the Year 2000
Non-Qualified Stock Option Plan. The Year 2000 Plan was adopted by the Company
in February 2000, and has a total reserve of 3,000,000 shares. The Committee
establishes the terms of options granted under these plans. Options that have
been granted to Associates under the 1993 Plan become exercisable in four equal
annual increments beginning on the first anniversary date of the grant. Options
that have been granted under the Year 2000 Plan to senior management were
modeled after the options granted to Mr. Hammes, including option vesting in
three equal tranches: (i) equal time vesting over four years ( 1/12 of total
grant per year); (ii) performance vesting based on attainment of earnings per
share targets (subject to seven year cliff vesting) and (iii) performance
vesting based on attainment of stock price targets (subject to seven year cliff
vesting). The option price under both plans, which is determined by the
Committee, is generally equal to 100% of the fair market value of the shares
covered by the option on the date of grant. Options are granted to certain
management and senior technology Associates and are intended to retain them and
motivate them to improve the Company's long-term stock market performance,
aligning their interests with those of stockholders. In determining the number
of options to be granted to an Associate, the Committee makes a subjective
determination based on a number of factors, including the individual's level and
scope of responsibility, job performance, and the overall competitiveness of his
or her compensation package compared to the outside industry surveys referenced
above. About 7% of the Company's Associates qualify for stock options each year.
A portion of the option grants under the Year 2000 Plan to Associates other than
senior management had four year vesting provisions.
401(K) PROFIT SHARING CONTRIBUTIONS
The Company contributes to a 401(k) Profit Sharing/Savings Plan (the "401(k)
Plan") in which all domestic Associates (except those under certain collective
bargaining agreements) may participate after satisfying the service requirements
of the Plan. Annual awards for Associates under the profit sharing portion of
the plan typically varies from 4% to 6% of compensation (subject to the
statutory limitations on compensation referenced in the following paragraph),
contingent upon attainment of certain earnings targets by the Company as a whole
in the case of corporate office Associates, or by the division, in the case of
division Associates. In addition to the basic profit sharing contribution, the
Company contributes between 8% and 11% of compensation above $72,600 and below
$160,000 (the current Internal Revenue Code ("IRC") statutory maximum under the
401(k) Plan). The savings portion of the 401(k) Plan provides that Associates
may defer compensation (subject to statutory limitations) and provides
Associates with a Company matching contribution, which matches their
Annex A-Page 14
<PAGE>
voluntary savings on a dollar-for-dollar basis up to a maximum of $400.
Associates employed outside the United States generally participate in defined
contribution plans which mirror the United States plan, to the extent
appropriate in view of local laws and practices.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP")
The SERP provides for Company discretionary retirement contributions to a
non-qualified plan for the benefit of Associates earning a base salary of
$140,000 and above. The SERP contributions are intended to replace funds that
are not contributed to the 401(k) Plan due to the IRC statutory limitation
referenced above. Discretionary contributions may range up to 11% of
compensation over $160,000 earned in a fiscal year. In addition, these
Executives may also voluntarily defer up to 25% of their MIB bonus each year
into the SERP.
The SERP is funded through a "rabbi" trust with American Express Trust Co.
as the trustee and represents a contractual obligation of the Company to make
payments (subject to certain vesting restrictions) to the covered Executives
upon retirement, termination, disability or death. In the unlikely case that
Sunrise becomes insolvent, the assets of the Trust will be held for the benefit
of the Company's general creditors.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Richard H. Chandler resigned as President and Chief Executive Officer of the
Company effective October 4, 1999. In August 1998, the Board increased
Mr. Chandler's base salary to $510,000, which remained in effect until his
resignation. During fiscal 2000, the Board awarded Mr. Chandler non-qualified
stock options to purchase 25,000 shares (at a price of $6.313 per share), and
contributed $400 to his 401(k) account as a matching contribution. The Company
made no contribution to his SERP account. Mr. Chandler did not receive an MIB
Bonus accrual or pay-out for fiscal 2000. Pursuant to his Consulting Agreement
he is entitled to consulting payments, and he (and his wife) are entitled to
receive health, dental and visual insurance benefits through 2008 and
Mr. Chandler is entitled to continued life and accident insurance through 2002.
Additionally, upon a change in control, the Company is obligated to pay
compensation through the remainder of the agreement's term, and Chandler's
service obligation would cease.
Mr. Hammes was appointed as President and Chief Executive Officer of the
Company effective January 17, 2000. His compensation package was negotiated and
includes a base salary of $550,000 and his bonus level for meeting specified
goals was set at 50% of annual salary, prorated to account for the number of
months worked in the fiscal year, reimbursement of moving expenses (plus tax
gross upon on such payments) and of reasonable legal fees incurred in
negotiating the package. In addition, the Company will indemnify Mr. Hammes to
the extent he is not paid any salary, bonus, deferred compensation or other
benefits owed to him by his former employer, subject to certain conditions. In
addition, we established the Michael N. Hammes Stock Option Agreement, pursuant
to which Mr. Hammes was granted options covering 1,000,000 shares, granted at
the fair market value on the date of grant. These options vest in three equal
tranches (i) equal time vesting over four years ( 1/12 of total grant per year);
(ii) performance vesting based on attainment of earnings per share targets
(subject to seven year cliff vesting) and (iii) performance vesting based on
attainment of stock price targets (subject to seven year cliff vesting). Vesting
of two thirds of the options automatically accelerate upon a change of control.
Mr. Hammes has agreed to the cancellation of all of his options, as set forth in
the Letter Agreement incorporated by reference herein from Exhibit (d)(iii) to
the Schedule TO.
See "Compensation Committee Interlocks and Insider Participation" for
compensation paid to Mr. Hutchison for his services as Interim Chief Executive
Officer and President.
LEE A. AULT III MURRAY H. HUTCHISON JOHN R. WOODHULL
CHAIRMAN
Annex A-Page 15
<PAGE>
STOCK PERFORMANCE CHART
The following graph shows a five-year comparison of cumulative total returns
for the Company, the S&P 500 Index and peer group of companies ("Peer Group")(1)
selected on a line-of-business basis. The companies included in the Peer Group
are durable medical equipment manufacturers like Sunrise. The graph assumes the
value of the investment in the Company's Common Stock and each Index was $100 at
June 30, 1995, and that all dividends were reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
SUNRISE MEDICAL INC.
PRODUCED ON 10/02/2000 INCLUDING DATA TO 06/30/2000
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SUNRISE S&P 500 SELF-DETERMINED
<S> <C> <C> <C>
MEDICAL INC. Stocks Peer Group
06/1995 $100.00 $100.00 $100.00
06/1996 $61.80 $126.10 $126.40
06/1997 $48.60 $169.90 $142.10
06/1998 $48.20 $221.70 $105.70
06/1999 $22.90 $272.00 $97.90
06/2000 $15.70 $292.20 $104.50
</TABLE>
<TABLE>
LEGEND
SYMBOL CRSP TOTAL RETURNS INDEX FOR: 06/1995 06/1996 06/1997 06/1998 06/1999 06/2000
----------- ------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
/ / SUNRISE MEDICAL INC. 100.0 61.8 48.6 48.2 22.9 15.7
----------
l S&P 500 Stocks 100.0 126.1 169.9 221.7 272.0 292.2
--- ---
- - - - - u Self--Determined Peer Group 100.0 126.4 142.1 105.7 97.9 104.5
Companies in the Self-Determined Peer Group
GRAHAM FIELD HEALTH PRODS INC INVACARE CORP
RESPIRONICS INC
NOTES:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 06/30/1995.
</TABLE>
<TABLE>
<S> <C> <C>
Prepared by CRSP (www.crsp.uchicago.edu), Center for
Research in Security Prices, Graduate School of Business,
The University of Chicago. Used with permission. All rights
9963 reserved. -C-Copyright 2000
</TABLE>
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, WHICH MIGHT INCORPORATE FUTURE FILINGS,
INCLUDING THIS PROXY STATEMENT, THE PRECEDING COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION AND THE COMPANY STOCK PERFORMANCE GRAPH WILL NOT BE
INCORPORATED BY REFERENCE INTO ANY OF THOSE PRIOR FILINGS, NOR WILL SUCH REPORT
OR GRAPH BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILINGS MADE BY THE
COMPANY UNDER THOSE STATUTES.
------------------------
(1) The companies used in the Peer Group consist of Invacare, Inc. (IVC);
Respironics, Inc. (RESP); and Graham-Field Health Products, Inc. (GRIH).
Everest & Jennings International Ltd. (EJ) was acquired by Graham-Field
Health Products, Inc. in the fourth quarter of 1996. Everest & Jennings
International Ltd. shareholders received .35 common shares of Graham- Field
Health Products, Inc. for each Everest & Jennings International Ltd. common
share owned. For purposes of the above graph, the return for Everest &
Jennings International Ltd. within the peer group for the period November
27, 1996 to June 30, 1999 was calculated with the return of Graham-Field
Health Products, Inc. at the conversion rate noted above.
Annex A-Page 16
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 17, 2000, the name and
address, the total number of shares of common stock beneficially owned (as
defined in Rule 13d-3 under the Exchange Act), and the percentage of the
outstanding shares of the common stock so owned by:
- each person who is known to the Company to own beneficially 5% or more of
the outstanding shares of common stock;
- each of the directors;
- each of the Named Officers; and
- all current directors and executive officers as a group.
On October 17, 2000 there were a total of 22,359,218 shares of the Company's
common stock issued and outstanding. Except for information based on
Schedule 13G, as indicated in the footnotes hereto, beneficial ownership is
stated as of October 17, 2000, and for each person includes shares exercisable
within 60 days of October 17, 2000 held by such person, as if such shares were
outstanding on October 17, 2000.
Except to the extent indicated in the footnotes to the following table, each
of the persons or entities listed has sole voting and sole investment power with
respect to the shares which are deemed beneficially owned by such person or
entity.
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SHARES OPTIONS VESTED OR
BENEFICIALLY ACQUIRABLE APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) OWNED(2) AT MERGER PERCENT OF CLASS
---------------------------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
State of Wisconsin/Wisconsin Investment 3,259,900(3) 14.58%
Board
121 E. Wilson St
Madison, WI 53702
ICM Asset Management ...................... 2,623,351(3) 11.73%
601 W. Main Avenue, Suite #917
Spokane, WA 99201
Richard H. Chandler(4) .................... 1,921,716 267,500 9.67%(5)
Freedom Scientific Inc.
2131 Palomar Airport Road, Suite 200
Carlsbad, CA 92009
Heartland Advisors ........................ 1,907,400(3) 8.53%
789 N. Water
Milwaukee, WI 53202
Dimensional Fund Advisors ................. 1,617,900(3) 7.24%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Michael Hammes............................. 13,300 670,667 2.97%(5)
Ted N. Tarbet.............................. 41,572 283,334 1.43%(5)
Steven A. Jaye............................. 30,362 271,334 1.33%(5)
Ben Anderson-Ray........................... 15,509 254,334 1.19%(5)
Raymond Huggenberger....................... 0 213,334 *
William L. Pierpoint....................... 143,220 31,500 *
Joseph Stemler............................. 123,724 34,000 *
</TABLE>
Annex A-Page 17
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SHARES OPTIONS VESTED OR
BENEFICIALLY ACQUIRABLE APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) OWNED(2) AT MERGER PERCENT OF CLASS
---------------------------------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
John Radak................................. 16,792 57,634 *
Thomas H. O'Donnell........................ 12,978 50,000 *
John R. Woodhull........................... 33,600 39,000 *
Lee A. Ault III............................ 16,000 39,000 *
Murray H. Hutchison........................ 4,500 49,000 *
All directors & executive officers as a
group (12 persons)....................... 451,557(6) 1,993,137 10.01%(7)
</TABLE>
------------------------
* Represents less than 1%
(1) Except as otherwise indicated, the address of each of the persons named is
c/o Sunrise Medical Inc., 2382 Faraday Avenue, Suite 200, Carlsbad,
California 92008.
(2) Includes units of Common Stock held for the benefit of the named person
under the Company's Profit Sharing/Savings Plan (the "401(k) Plan") as of
September 30, 2000.
(3) Based upon holdings reported by the named institutions in filings with the
Securities and Exchange Commission on Forms 13G and/or 13F, together with
telephonic confirmation of holdings (where possible) as of October 17, 2000.
(4) Includes 82,850 shares held in a non-profit foundation of which
Mr. Chandler and family members are directors, and as to which Mr. Chandler
disclaims beneficial ownership.
(5) The number of outstanding shares of Common Stock for this purpose includes
the units of Common Stock held in the 401(k) Plan and the options shown in
Options Vested or Acquirable within 60 days for each person as follows:
<TABLE>
<CAPTION>
PERSON UNITS IN 401(K) PLAN OPTIONS OUTSTANDING SHARES
------ -------------------- -------- ------------------
<S> <C> <C> <C>
Chandler........................ 22,708 267,500 22,649,426
Anderson-Ray.................... 9,155 254,334 22,622,707
Jaye............................ 11,705 271,334 22,642,257
Hammes.......................... 0 670,667 23,029,885
Tarbet.......................... 16,472 283,334 22,659,024
</TABLE>
(6) Includes 58,473 units of Common Stock held for the benefit of executive
officers under the Company's 401(k) Plan as of September 30, 2000.
(7) The number of outstanding shares of Common Stock for this purpose is
24,379,430 (includes the 58,473 units of Common Stock held in the Company's
401(k) Plan and the 1,993,137 Options Vested or Acquirable within 60 days).
Annex A-Page 18
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENT
On October 4, 1999, Richard H. Chandler resigned from his positions as
Chairman, President, Chief Executive Officer and director of Sunrise Medical.
The Company then entered into a consulting, resignation and general release
agreement with Mr. Chandler which provides that Mr. Chandler be hired as a
consultant to the Company from October 5, 1999 through September 30, 2002 during
which time Mr. Chandler (a) will consult with and advise the Board of Directors,
(b) will hold all Company information confidential and (c) will not compete with
the Company nor solicit or hire any Company associate. As compensation,
Mr. Chandler will receive a total of $1,830,000, paid in future installments. In
addition, Mr. Chandler's stock options continue to vest until 90 days following
September 30, 2000 (unless they expire by their own terms earlier), and Mr.
Chandler is to receive health, dental and vision insurance benefits through
March 2008 and life and accident insurance through September 30, 2002.
Mr. Chandler beneficially holds approximately 9.7% of the Company's outstanding
securities.
See "Compensation Committee Interlocks and Insider Participation" for
Compensation paid to Mr. Hutchison for his services as Interim Chief Executive
Officer and President.
INDEBTEDNESS OF MANAGEMENT
Michael Hammes, the Chief Executive Officer and President of the Company,
was granted a loan on March 31, 2000 in the amount of $500,000 at a 6.875%
annual interest rate. Principal and interest must be repaid in full on the
earlier of the third anniversary of the secured Promissory Note, or within
ninety (90) days following the effective date of the termination or resignation
of Mr. Hammes from employment with the Company.
Ben Anderson-Ray, the Senior Vice President, Operations; and Group President
of Continuing Care, was granted a loan on May 31, 2000 in the amount of $100,000
at a 6.841% annual interest rate. Principal and interest must be repaid in full
on the earlier of the third anniversary of the secured Promissory Note, or
within ninety (90) days following the effective date of resignation of
Mr. Anderson-Ray from employment with the Company. No payments are due until
such time.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors, executive officers and any
persons who are beneficial owners of more than 10% of the common stock
("Reporting Persons") to report their initial ownership of common stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
("SEC"). The Exchange Act specifies deadlines for filing of these reports with
the SEC and also requires the disclosure in this report of any failure to meet
the filing deadlines.
During Fiscal Year 2000, the Company believes that all reports for the
Company's Reporting Persons were timely filed with the SEC, except that
Messrs. Hammes and Stemler each failed to timely file one Form 4 each reporting
one transaction, and Mr. Pierpoint failed to timely file two Forms 4, each
reporting one transaction.
Annex A-Page 19
<PAGE>
SCHEDULE I
PURCHASER DESIGNEES
As of the date of this Information Statement, Purchaser has not determined
who will be Purchaser Designees. However, the Purchaser's Designees will be
selected from the following list of directors and executive officers of Parent
and Parent's affiliates upon the purchase by Purchaser pursuant to the Offer of
Shares representing not less than a majority of the outstanding Shares on a
fully diluted basis. The information contained herein concerning Parent,
Holdings and Purchaser and the respective directors and executive officers of
Parent and its affiliates has been furnished by Parent and Purchaser. The
Company assumes no responsibility for the accuracy or completeness of such
information.
The following tables set forth the name, present principal occupation or
employment and material occupations, positions, offices or employment for the
past five years for each person who may be designated by Purchaser to the Board
as Purchaser Designees.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME FIVE-YEAR EMPLOYMENT HISTORY
------------------------------------------------ ---------------------------------------------------
<S> <C>
Daniel S. O'Connell............................. President and Chief Executive Officer of Vestar
c/o Vestar Associates Associates Corporation IV. Mr. O'Connell founded an
Corporation IV affiliate of Vestar Associates Corporation IV in
245 Park Avenue 1988.
41st Floor
New York, New York 10167
</TABLE>
<TABLE>
<S> <C>
Prakash A. Melwani.............................. Managing Director and Secretary of Vestar
c/o Vestar Associates Associates Corporation IV. Mr. Melwani founded an
Corporation IV affiliate of Vestar Associates Corporation IV in
245 Park Avenue 1988.
41st Floor
New York, New York 10167
James P. Kelley................................. Managing Director of Vestar Associates Corporation
c/o Vestar Associates IV. Mr. Kelley founded an affiliate of Vestar
Corporation IV Associates Corporation IV in 1988.
1225 17th Street
Suite 1660
Denver, Colorado 80202
Norman W. Alpert................................ Managing Director of Vestar Associates
c/o Vestar Associates Corporation IV. Mr. Alpert founded an affiliate of
Corporation IV Vestar Associates Corporation IV in 1988.
245 Park Avenue
41st Floor
New York, New York 10167
Arthur J. Nagle................................. Managing Director of Vestar Associates
c/o Vestar Associates Corporation IV. Mr. Nagle founded an affiliate of
Corporation IV Vestar Associates Corporation IV in 1988.
245 Park Avenue
41st Floor
New York, New York 10167
</TABLE>
SCHEDULE I-Page 1
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME FIVE-YEAR EMPLOYMENT HISTORY
------------------------------------------------ ---------------------------------------------------
<S> <C>
Sander M. Levy.................................. Managing Director of Vestar Associates
c/o Vestar Associates Corporation IV. Mr. Levy founded an affiliate of
Corporation IV Vestar Associates Corporation IV in 1988.
245 Park Avenue
41st Floor
New York, New York 10167
John R. Woodard................................. Managing Director of Vestar Associates
c/o Vestar Associates Corporation IV. Mr. Woodard joined an affiliate of
Corporation IV Vestar Associates Corporation IV. in February 1998.
1225 17th Street From March 1996 to February 1998, he served as a
Suite 1660 Managing Director of The Blackstone Group, 360 N.
Denver, Colorado 80202 Michigan Avenue, Chicago, IL 60601. From 1990 to
March 1996, Mr. Woodard was a Vice President of an
affiliate of Vestar Associates Corporation IV.
James L. Elrod, Jr.............................. Managing Director of Vestar Associates
c/o Vestar Associates Corporation IV. Mr. Elrod joined an affiliate of
Corporation IV Vestar Associates Corporation IV in 1998. From 1994
245 Park Avenue through 1997, he served as the Chief Financial
41st Floor Officer and Chief Operating Officer of Physicians
New York, New York 10167 Health Services, One Far Mill Crossing, Shelton, CT
06484.
Jack M. Feder................................... Managing Director and General Counsel of Vestar
c/o Vestar Associates Associates Corporation IV since February, 2000.
Corporation IV From July 1991 to January 2000, he was a Partner of
245 Park Avenue the law firm of Kirkland & Ellis, 655 Fifteenth
41st Floor Street, N.W., Washington, D.C. 20005.
New York, New York 10167
Steven M. Silver................................ Vice President of Vestar Associates
c/o Vestar Associates Corporation IV. Mr. Silver joined an affiliate of
Corporation IV Vestar Associates Corporation IV in 1995.
245 Park Avenue
41st Floor
New York, New York 10167
William E. Mayer................................ Since August 1999, Managing Member of Park Avenue
c/o Park Avenue Equity Equity Management, LLC, a Delaware limited
Partners, L.P. liability company that is an affiliate of Park
500 Park Avenue Avenue Equity Partners, L.P. From 1996 to July
Suite 510 1999, he was a Managing Director of Development
New York, New York 10022 Capital LLC. From 1992 to 1996, he was Dean of the
College of Business and Management at the
University of Maryland.
</TABLE>
SCHEDULE I-Page 2
<PAGE>
Purchaser has informed the Company that each of the individuals listed above
has consented to act as a director of the Company, if so designated. If
necessary, Purchaser may choose additional or other Purchaser Designees, subject
to the requirements of Rule 14f-1.
Based solely on the information set forth in the Offer to Purchase, none of
the Purchaser Designees (i) is currently a director of, or holds any position
with, the Company, (ii) has a familial relationship with any director or
executive officers of the Company, or (iii) beneficially owns any securities (or
any rights to acquire securities) of the Company. The Company has been advised
by the Parent and the Purchaser, that to the Parent's and the Purchaser's
knowledge, none of the Purchaser Designees have been involved in any
transactions with the Company or any of its directors, officers or affiliates
which are required to be disclosed pursuant to the rules and regulations of the
Securities and Exchange Commission, except as may be disclosed herein.
SCHEDULE I-Page 3
<PAGE>
ANNEX B
[LETTERHEAD OF DEUTSCHE BANK SECURITIES INC.]
October 16, 2000
Special Committee of the Board of Directors
Sunrise Medical Inc.
2382 Faraday Avenue, Suite 200
Carlsbad, California 92008
Members of the Special Committee:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial
advisor to the Special Committee of the Board of Directors (the "Special
Committee") of Sunrise Medical Inc. ("Sunrise") in connection with the proposed
transaction involving Vestar Capital Partners IV, L.P. ("Vestar"), Park Avenue
Equity Partners, L.P. ("Park Avenue" and, together with Vestar and the
respective affiliates of Park Avenue and Vestar, the "Buyer Group") and Sunrise
pursuant to an Agreement and Plan of Merger, dated as of October 16, 2000 (the
"Agreement"), by and among V.S.M. Investors, LLC, a company wholly owned by the
Buyer Group ("VSM"), V.S.M. Holdings, Inc., a wholly owned subsidiary of VSM
("VSM Holdings"), V.S.M. Acquisition Corp., a wholly owned subsidiary of VSM
Holdings ("Sub"), and Sunrise. As set forth more fully in the Agreement,
(i) Sub will commence a tender offer to purchase all outstanding shares of the
common stock, par value $1.00 per share, of Sunrise ("Sunrise Common Stock") at
a purchase price of $10.00 per share, net to the seller in cash (the "Cash
Consideration" and, such tender offer, the "Tender Offer"), and (ii) subsequent
to the Tender Offer, Sub will be merged with and into Sunrise (the "Merger" and,
together with the Tender Offer, the "Transaction") pursuant to which each
outstanding share of Sunrise Common Stock not acquired in the Tender Offer will
be converted into the right to receive the Cash Consideration. We have been
advised by representatives of Sunrise that certain members of the management of
Sunrise (the "Management Group") will, in connection with the Transaction, have
the right to acquire membership interests in VSM.
You have requested Deutsche Bank's opinion as to the fairness, from a
financial point of view, of the Cash Consideration to the holders of Sunrise
Common Stock (other than VSM, the Management Group and their respective
affiliates).
In arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning Sunrise and certain
internal analyses and other information furnished to or discussed with it by
Sunrise and its advisors. Deutsche Bank also has held discussions with members
of the senior management of Sunrise regarding the business and prospects of
Sunrise. In addition, Deutsche Bank has (i) reviewed the reported prices and
trading activity for Sunrise Common Stock, (ii) compared certain financial and
stock market information for Sunrise with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which it deemed comparable in
whole or in part, (iv) reviewed the terms of the Agreement and (v) performed
such other studies and analyses and considered such other factors as it deemed
appropriate.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning Sunrise, including, without limitation,
any financial information, forecasts or projections considered in connection
with the rendering of its opinion. Accordingly, for purposes of its opinion,
Deutsche Bank has assumed and relied upon the accuracy and completeness of all
such information, and Deutsche Bank has not conducted a physical inspection of
any of the properties or assets, and has not prepared or obtained any
independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise), of Sunrise. With respect
ANNEX B-Page 1
<PAGE>
Special Committee of the Board of Directors
Sunrise Medical Inc.
October 16, 2000
Page 2
to the financial forecasts and projections made available to Deutsche Bank and
used in its analyses, Deutsche Bank has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of Sunrise as to the matters covered thereby. In rendering its
opinion, Deutsche Bank expresses no view as to the reasonableness of such
forecasts and projections or the assumptions on which they are based. In
connection with its engagement, Deutsche Bank was authorized to approach, and
held discussions with, certain third parties to solicit indications of interest
with respect to the acquisition of Sunrise. Deutsche Bank's opinion is
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to it as of, the date hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of
Sunrise, VSM, VSM Holdings and Sub contained in the Agreement are true and
correct, Sunrise, VSM, VSM Holdings and Sub will each perform all of the
covenants and agreements to be performed by it under the Agreement and all
conditions to the obligations of each of Sunrise, VSM, VSM Holdings and Sub to
consummate the Transaction will be satisfied without any waiver thereof.
Deutsche Bank also has assumed that all material governmental, regulatory or
other approvals and consents required in connection with the consummation of the
Transaction will be obtained and that in connection with obtaining any necessary
governmental, regulatory or other approvals and consents, or any amendments,
modifications or waivers to any agreements, instruments or orders to which
Sunrise, VSM, VSM Holdings or Sub is a party or is subject or by which it is
bound, no limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on the
Transaction.
This opinion is addressed to, and is for the use and benefit of, the Special
Committee and is not a recommendation to any stockholder as to whether such
stockholder should tender shares in the Tender Offer or how such stockholder
should vote with respect to matters relating to the proposed Merger. This
opinion is limited to the fairness, from a financial point of view, of the Cash
Consideration to the holders of Sunrise Common Stock (other than VSM, the
Management Group and their respective affiliates), and Deutsche Bank expresses
no opinion as to the merits of the underlying decision by Sunrise to engage in
the Transaction.
Deutsche Bank, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. Deutsche Bank has acted as
financial advisor to the Special Committee in connection with the Transaction
and will receive a fee for its services, a significant portion of which is
contingent upon the consummation of the Transaction and a portion of which is
payable upon delivery of this opinion. Deutsche Bank and its affiliates in the
past have provided financial services to Sunrise and Vestar and its affiliates
unrelated to the proposed Transaction, for which services Deutsche Bank and its
affiliates have received compensation. Deutsche Bank and its affiliates also
have an outstanding bank credit facility with Sunrise and investments in certain
affiliates of Vestar. In addition, Deutsche Bank and its affiliates will
participate in the financing for the Transaction, for which services Deutsche
Bank and its affiliates will receive compensation. Deutsche Bank maintains a
market in the securities of, and regularly publishes research reports regarding,
publicly traded companies in the healthcare industry. In the ordinary course of
business, Deutsche Bank and its affiliates may actively trade or hold the
securities and other instruments and obligations of Sunrise and affiliates of
the Buyer Group for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities,
instruments or obligations.
ANNEX B-Page 2
<PAGE>
Special Committee of the Board of Directors
Sunrise Medical Inc.
October 16, 2000
Page 3
Based upon and subject to the foregoing, it is Deutsche Bank's opinion that,
as of the date of this letter, the Cash Consideration is fair, from a financial
point of view, to the holders of Sunrise Common Stock (other than VSM, the
Management Group and their respective affiliates).
Very truly yours,
/s/ Deutsche Bank Securities Inc.
DEUTSCHE BANK SECURITIES INC.
ANNEX B-Page 3
<PAGE>
BATCHELDER & PARTNERS, INC.
11975 EL CAMINO REAL, SUITE 300
SAN DIEGO, CALIFORNIA 92130
TELEPHONE: (858) 704-3300
TELECOPIER: (858) 704-3340
ANNEX C
October 16, 2000
Special Committee of the Board of Directors
Sunrise Medical Inc.
2382 Faraday Avenue
Suite 200
Carlsbad, CA 92008
Gentlemen:
You have asked us to advise you with respect to the fairness from a
financial point of view of the Consideration (as herein defined) to be paid by
V.S.M. Investors, LLC, V.S.M. Holdings, Inc. and V.S.M. Acquisition Corp.
(individually and collectively, the "Acquiror") to the common shareholders
(other than the Parent, the Management Group, any other members of management
who have agreed to invest in the Parent and their affiliates) of Sunrise
Medical Inc., (the "Company"), pursuant to the terms of the Agreement and Plan
of Merger dated as of October 16, 2000 (the "Merger Agreement") as of the date
hereof. The Merger Agreement provides for, among other things, the acquisition
by the Acquiror of all of the outstanding shares of common stock, $1.00 par
value per share (the "Shares") of Sunrise Medical Inc. in exchange for $10.00
per Share in cash (the "Consideration"), subject to certain terms and conditions
more fully described in the Merger Agreement (the "Merger"). We are acting as
non-exclusive financial advisor to the Company's Special Committee in connection
with the Merger (although in so acting, we are not entering into an agency or
other fiduciary relationship with the Special Committee, the Company, its Board
or stockholders or any other person) and will receive a fee from the Company for
our services. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement. Except as otherwise defined herein,
capitalized terms have the meanings ascribed to such terms in the Merger
Agreement.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available and internal financial and other data with respect to
the Company, including the financial statements for recent years (the last
audited Company financial statements provided to Batchelder & Partners, Inc.
were as of June 30, 2000) and certain other relevant financial and operating
data relating to the Company made available to us from published sources and
from the internal records of the Company; (ii) reviewed the financial terms and
conditions of the Merger Agreement; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for the Company's
common stock; (iv) reviewed and discussed with Deutsche Banc Alex. Brown, the
Company's financial advisor, the background, history and terms of the
transaction; (v) compared the Company from a financial point of view with
certain other companies that we deemed to be relevant; (vi) considered the
financial terms, as they relate to the Company and to the extent publicly
available, of selected recent business combinations of companies that we deemed
to be comparable, in whole or in part, to the Merger; (vii) discussed with the
Company's management the prospects for, and business challenges facing, the
Company absent the Merger; (viii) reviewed and discussed with representatives of
ANNEX C-Page 1
<PAGE>
the Company's management certain information of a business and financial nature
regarding the Company, furnished to us by them, including management's financial
forecasts and related assumptions of the Company and the benefits expected to
result from the Merger; (ix) made inquires regarding, and discussed, the Merger
and the Merger Agreement and other matters related thereto with Company's
counsel; and (x) performed such other analyses and examinations as we deemed
appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its
accuracy and completeness in all material respects. With respect to the
financial forecasts provided to us by representatives of the Company's
management, (i) management has advised us that the forecasts provided to us
accurately reflect the judgment of management; (ii) upon their advice and with
your consent we have assumed for purposes of our opinion that the forecasts,
including projections of restructuring charges, have been reasonably prepared on
bases reflecting the best available estimates and judgments of the Company's
management at the time and through the date hereof as to the future financial
performance of the Company; and (iii) that such projections provide a reasonable
basis upon which we can form our opinion. In rendering our opinion, we express
no view as to the reasonableness of the forecasts provided to us by the
Company's management or the assumptions on which such forecasts are based. You
have advised us and we have assumed, that there have been no material changes in
the Company's assets, financial condition, results of operations, business or
prospects since the respective dates of their last financial statements made
available to us. The management of the Company has advised us and we have
assumed that they are not aware of any facts or circumstances that would make
the information reviewed by us inaccurate or misleading. We have relied on
advice of your counsel and the independent accountants to the Company as to all
legal and financial reporting matters with respect to the Company, the Merger
and the Merger Agreement. We have assumed that the Merger will be consummated in
a manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934 and all other applicable federal and state statutes, rules
and regulations including any applicable foreign laws. In addition, we have not
assumed responsibility for making an independent evaluation, appraisal or
physical inspection of any of the assets or liabilities (contingent or
otherwise) of the Company, nor have we been furnished with any such appraisals.
We were not retained or requested to consider any strategic alternatives to the
Merger or to seek indications of interest from potential buyers in connection
with rendering an opinion nor have we done so. We have assumed that the final
form of the Merger Agreement will be substantially similar to the last draft
reviewed by us. Finally, our opinion is based on economic, monetary, currency
exchange, financial markets and other conditions as in effect on, and the
information made available to us as of, the date hereof. Accordingly, although
subsequent developments may affect this opinion, and except as specifically
provided below, we do not assume any obligation to update, revise or reaffirm
this opinion.
We have further assumed with your consent that the representations and
warranties of each party in the Merger Agreement are true and correct, that each
party to the Merger Agreement will perform all of the covenants and agreements
required to be performed by such party under the Merger Agreement, and that the
Merger will be consummated in accordance with the terms described in the Merger
Agreement, without any further amendments thereto, and without waiver by the
Company of any of the conditions to its obligations thereunder. We have also
assumed that in the course of obtaining the necessary regulatory or other
consents or approvals (contractual or otherwise) for the Merger, no
restrictions, amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Consideration to be received by the holders of Shares (other
than the Parent, the Management Group, any other members of management who have
agreed to invest in the Parent and their affiliates) pursuant to the Merger
Agreement is fair to such holders from a financial point of view.
ANNEX C-Page 2
<PAGE>
This opinion is directed to the Special Committee for use only in connection
with its consideration of the Merger and is not a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger or
otherwise. This opinion is not a recommendation to any stockholder as to whether
any stockholder should tender Shares into the Tender Offer pursuant to the
Merger Agreement. Further, this opinion addresses only the financial fairness of
the Consideration to be received by the stockholders of the Company (other than
the Parent, the Management Group, any other members of management who have
agreed to invest in the Parent and their affiliates) as of the date hereof, and
it does not address any other aspect of the Merger including, without
limitation, the relative merits of the Merger, any alternatives to the Merger or
the Company's underlying business decision to proceed with or effect the Merger
including the benefits to be obtained from ongoing independent operations. This
opinion may not be used or referred to by the Company, or quoted or disclosed to
any person in any manner, without our prior written consent except that, if
required by law, this opinion may be quoted in its entirety without deletion or
modification in any materials to be presented to the shareholders of the Company
in connection with the Merger. In furnishing this opinion, we do not admit that
we are experts within the meaning of the term "experts" as used in the
Securities Act and the rules and regulations promulgated thereunder, nor do we
admit that this opinion constitutes a report or valuation within the meaning of
Section 11 of the Securities Act.
Respectfully,
/s/ BATCHELDER & PARTNERS, INC.
BATCHELDER & PARTNERS, INC.
ANNEX C-Page 3
<PAGE>
ANNEX D
[LOGO]
October 30, 2000
Dear Stockholder:
We are pleased to inform you that on October 16, 2000, Sunrise Medical Inc.
(the "Company") entered into an Agreement and Plan of Merger (the "Merger
Agreement") with V.S.M. Acquisition Corp., a corporation organized under the
laws of the State of Delaware ("Purchaser") and a wholly owned subsidiary of
V.S.M. Holdings, Inc., a corporation organized under the laws of State of
Delaware ("Holdings") and a wholly owned subsidiary of V.S.M. Investors, LLC, a
Delaware limited liability company ("Parent"), which provides for the
acquisition of the Company by Purchaser. Under the terms of the Merger
Agreement, Purchaser today commenced a tender offer (the "Offer") to purchase
all of the Company's outstanding shares of common stock at a price of $10.00 per
share in cash.
Following the successful completion of the Offer, Purchaser will be merged
with the Company (the "Merger"), and all outstanding shares of common stock not
purchased in the Offer will receive in the Merger the same $10.00 per share in
cash. The closing of the Offer will be conditioned upon (i) at least a majority
of the Company's fully diluted shares being tendered and not withdrawn prior to
the expiration of the Offer; (ii) expiration or termination of the appropriate
waiting period under the Hart-Scott-Rodino Act; (iii) receipt of any necessary
approvals under foreign competition laws (iv) the funding under financing
commitment letters; and (v) other customary closing conditions.
THE COMPANY'S BOARD OF DIRECTORS (THE "BOARD"), AT A SPECIAL MEETING HELD ON
OCTOBER 16, 2000, UNANIMOUSLY (A) APPROVED AND ADOPTED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING THE OFFER AND THE MERGER,
(B) RECOMMENDED THAT THE STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER, TENDER
THEIR SHARES OF COMMON STOCK OF THE COMPANY PURSUANT TO THE OFFER AND ADOPT THE
MERGER AGREEMENT, (C) DETERMINED THAT THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, ARE FAIR TO AND IN THE
BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY, AND (D) DECLARED THE MERGER
AND THE MERGER AGREEMENT TO BE ADVISABLE.
In arriving at its recommendation, the Company's Board of Directors gave
careful consideration to a number of factors which are described in the enclosed
Schedule 14D-9. The Special Committee has received separate written opinions,
each dated October 16, 2000, from Deutsche Bank Securities Inc. and
Batchelder & Partners, Inc., the Special Committee's financial advisors, to the
effect that, as of the date of such opinions and based on and subject to the
matters described in such opinions, the $10.00 per share cash consideration to
be received in the Offer and the Merger by the holders of the Company's common
stock (other than Parent, Holdings, Purchaser, the Management Group and their
respective affiliates) was fair, from a financial point of view, to such
holders.
Additional information with respect to the Offer and the Merger is contained
in the enclosed Schedule 14D-9, and we urge you to consider this information
carefully.
On behalf of the management and directors of the Company, we thank you for
the support you have given the Company.
Sincerely yours,
Murray H. Hutchison
Murray H. Hutchison
Chairman of the Board of Directors
ANNEX D-Page 1
<PAGE>
EXHIBIT INDEX
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EXHIBIT
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(a)(1)(A) Offer to Purchase dated October 30, 2000 ("Offer to
Purchase") (incorporated herein by reference to Exhibit
(a)(1)(i) to Schedule TO filed by Purchaser with respect to
the Company on October 30, 2000 ("Schedule TO")).
(a)(1)(B) Letter of Transmittal (incorporated herein by reference to
Exhibit (a)(1)(ii) to Schedule TO).
(a)(1)(C) Information Statement Pursuant to Section 14(f) of the
Securities Exchange Act of 1934 and Rule 14f-1 thereunder
(incorporated by reference herein and attached hereto as
Annex A).
(a)(1)(D) Letter to Stockholders of the Company dated October 30, 2000
(incorporated by reference herein and attached hereto as
Annex D).
(a)(1)(E) Notice of Guaranteed Delivery (incorporated herein by
reference to Exhibit (a)(1)(iii) to Schedule TO).
(a)(1)(F) Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9. (incorporated herein by
reference to Exhibit (a)(1)(iv) to Schedule TO).
(a)(1)(G) Form of letter to brokers, dealers, commercial banks, trust
companies and other nominees (incorporated herein by
reference to Exhibit (a)(1)(v) to Schedule TO).
(a)(1)(H) Form of letter to be used by brokers, dealers, commercial
banks, trust companies and other nominees to their clients
(incorporated herein by reference to Exhibit (a)(1)(vi) to
Schedule TO).
(a)(1)(I) Summary newspaper advertisement, dated October 30, 2000,
published in The Wall Street Journal (incorporated herein by
reference to Exhibit (a)(1)(vii) to Schedule TO).
(a)(1)(J) Direction form for the 401(K) Plan (incorporated herein by
reference to Exhibit to Schedule TO)
(a)(5)(A) Text of Press Release dated October 16, 2000 (incorporated
herein by reference to Exhibit (a)(5)(A) of the Company's
Schedule 14D-9 filed with the Securities and Exchange
Commission (the "Commission") on October 17, 2000 (the
"October 17 Schedule 14D-9").
(a)(5)(B) Letter to Associates of the Company dated October 17, 2000
(incorporated herein by reference to Exhibit (a)(5)(B) of
the October 17 Schedule 14D-9).
(a)(5)(C) Letter to Option Holders of the Company, dated October 17,
2000 (incorporated herein by reference to Exhibit (a)(5)(C)
of the October 17 Schedule 14D-9).
(a)(5)(D) Letter to Performance Bonus Unit Holders of the Company,
dated October 17 (incorporated herein by reference to
Exhibit (a)(5)(D) of the October 17 Schedule 14D-9).
(a)(5)(E) "Questions and Answers" Memorandum to Associates
(incorporated herein by reference to Exhibit (a)(5)(E) of
the October 17 Schedule 14D-9).
(a)(5)(F) Script for Michael Hammes videotaped address for employees,
delivered October 17, 2000 (incorporated herein by reference
to Exhibit (a)(5)(F) of the October 17 Schedule 14D-9).
(a)(5)(G) Summary Advertisement as published in The Wall Street
Journal on October 30, 2000 (incorporated herein by
reference to Exhibit (a)(5)(B) to Schedule TO).
(a)(5)(H) Complaint of Frank Rogers against Sunrise Medical, Inc., et.
al. filed in the Superior Court of the State of California,
County of San Diego, on October 17, 2000 (incorporated
herein by reference to Exhibit (a)(5)(vii) to schedule TO).
</TABLE>
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<TABLE>
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EXHIBIT
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<S> <C>
(a)(5)(I) Complaint of Jerry Krim against Sunrise Medical, Inc., et.
al. filed in the Court of Chancery of the State of Delaware
on October 18, 2000 (incorporated herein by reference to
Exhibit (a)(5)(viii) to Schedule TO).
(a)(5)(J) Complaint of Harbor Finance Partners against Sunrise Medical
Inc., et. al. filed in the Court of Chancery of the State of
Delaware on October 20, 2000 (incorporated herein by
reference to Exhibit (a)(5)(iv) to Schedule TO).
(b)(i) Commitment Letter, dated October 16, 2000, to V.S.M.
Acquisition Corp. from Bankers Trust Company re: Acquisition
Financing (incorporated herein by reference to
Exhibit (b)(i) to Schedule TO).
(b)(ii) Commitment Letter, dated October 16, 2000, to V.S.M.
Acquisition Corp. from Bankers Trust Company re:
Subordinated Debt Financing (incorporated herein by
reference to Exhibit (b)(ii) to Schedule TO).
(e)(1) Agreement and Plan of Merger, dated as of October 16, 2000,
by and among Parent, Holdings, Purchaser and the Company
(incorporated herein by reference to the Company's Current
Report on Form 8-K filed with the Commission on October 24
and included as Schedule V to the Offer to Purchase).
(e)(2) Confidentiality/Standstill Agreement among the Company,
Vestar Capital Partners IV, L.P. and Park Avenue Equity
Partners, L.P. dated May 4, 2000.
(e)(3) Opinion of Deutsche Bank Securities Inc., dated October 16,
2000 (incorporated by reference herein and attached hereto
as Annex B).
(e)(4) Opinion of Batchelder & Partners, Inc., dated October 16,
2000 (incorporated by reference herein and attached hereto
as Annex C).
(e)(5) Presentation of Deutsche Bank Securities Inc. to the Special
Committee on October 16, 2000 (incorporated herein by
reference to Exhibit (c)(iv) to Schedule TO).
(e)(6) Presentation of Batchelder & Partners, Inc. to the Special
Committee on October 16, 2000 (incorporated herein by
reference to Exhibit (c)(iii) to Schedule TO).
(e)(7) Form of Change in Control Agreements dated June 27, 1997
between Sunrise Medical Inc. and certain employees.
(e)(8) Supplemental Executive Retirement Plan.
(e)(9) Third Amended and Restated 1993 Stock Option Plan.
(e)(10) Associate Stock Purchase Plan 2000.
(e)(11) 2000 Stock Option Plan.
(e)(12) Form of Indemnification Agreement.
(e)(13) Form of Letter Agreement, dated October 14, 2000, between
V.S.M. Investors, LLC and each of Ben Anderson-Ray, Geoffrey
Cooper, Jim Fetter, Michael N. Hammes, Raymond Huggenberger,
Steven Jaye, Robert J. Logemann, John Radak, Peter Riley,
Sam Sinasohn and Carey Winkel, respectively, and the forms
of Equity Term Sheet, Employment Agreements, Management Unit
Subscription Agreement, Securityholders Agreement and
Management Agreement attached as exhibits thereto
(incorporated herein by reference to Exhibit (d)(13) to
Schedule TO).
(e)(14) Equity Commitment Letter, dated October 16, 2000, from
Vestar Capital Partners IV, L.P. to V.S.M. Acquisition Corp
(incorporated herein by reference to Exhibit (d)(14) to
Schedule TO).
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