-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RwKtinOm9+1tvE4WHAn3qVefWoLdIL2ZG1FRrXB9cQDtuVM3vC/Qh0rLcDxG5Ih6 FqXk28R1rFHL7gz2rU3Ecg== 0000912057-97-031074.txt : 19970922 0000912057-97-031074.hdr.sgml : 19970922 ACCESSION NUMBER: 0000912057-97-031074 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970627 FILED AS OF DATE: 19970918 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNRISE MEDICAL INC CENTRAL INDEX KEY: 0000720577 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 953836867 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11228 FILM NUMBER: 97682259 BUSINESS ADDRESS: STREET 1: 2382 FARADAY AVENUE STE 200 CITY: CARLSBAD STATE: CA ZIP: 92008 BUSINESS PHONE: 6199301500 MAIL ADDRESS: STREET 1: 2382 FARADAY AVENUE SUITE 200 CITY: CARLSBAD STATE: CA ZIP: 92008 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 27, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ---------- Commission File No.0-12744 SUNRISE MEDICAL INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-3836867 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2382 FARADAY AVENUE, SUITE 200 CARLSBAD, CA 92008 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (760) 930-1500 - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - -------------------------------------------------------------------------------- Common Stock, par value $1.00 New York Stock Exchange Common Stock Purchase Rights New York Stock Exchange - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 91 days. YES /X/ NO / / State the aggregate market value of the voting stock held by non-affiliates of the registrant: $255,950,000 as of August 29, 1997. On August 29, 1997, the registrant had 19,304,624 outstanding shares of $1 par value common stock. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FORM 10-K REFERENCES --------- -------------------- Portions of the company's Definitive Proxy Part III, Items 10-13 (Page 50) Statement for its Annual Meeting of Stockholders to be held on November 13, 1997 - -------------------------------------------------------------------------------- SUNRISE MEDICAL INC. FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 27, 1997 INDEX PAGE ---- PART I Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 13 -- Executive Officers of the Company . . . . . . . . . . . . . . . . 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 16 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 18 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 29 Item 9. Disagreements on Accounting and Financial Disclosure. . . . . . . 29 PART III Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 51 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 51 Item 12. Security Ownership of Certain Beneficial Owners and Management. . 51 Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 51 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . 52 -- Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 1 PART I ITEM 1. BUSINESS Sunrise Medical Inc. ("Sunrise" or the "company") is a worldwide leader in the design and manufacture of medical products used in two attractive growth markets -- home healthcare and extended care. Sunrise maintains number one or number two global market share positions for many of its products. The company's core product lines include custom manual and power wheelchairs and related seating systems; ambulatory, bathing and lifting products; home respiratory devices; healthcare beds and furniture; and therapeutic mattresses and other patient support surfaces. Headquartered in Carlsbad, California, the company is publicly traded on the New York Stock Exchange under the ticker symbol "SMD". The company manufactures its products in the United States, Mexico, the United Kingdom, Germany, France and Spain and distributes them through company-owned sales and distribution organizations in those countries as well as most of the rest of Europe, Canada and Australia. It also distributes through independent importers/distributors in more than 80 other countries. International sales accounted for 44% of total company revenues in the fiscal year ended June 27, 1997, up from 27% in fiscal 1992. Sunrise was founded in 1983 to take advantage of the shift in patients from hospitals to alternate site settings. The company believes that a number of factors will contribute to continued worldwide growth in the homecare and extended care markets, including: (i) the aging of the population; (ii) greater utilization of lower-cost, alternate-site treatment; (iii) patient preference for home healthcare; (iv) advances in technology facilitating improved outpatient care; (v) greater emphasis on integrating the disabled into the community; and (vi) the increasing popularity of wheelchair sports and recreational activities among the disabled. The company's long-term strategic objective, which it calls its "strategic intent," is to achieve global market leadership positions in homecare and extended care products. Sunrise is already one of the largest firms in its industry internationally and is a leader in most of its U.S. product markets as measured by industry sales. The company seeks to achieve global market leadership through five growth strategies: - - MARKET FOCUS. Offer a full range of products and services to target customer groups -- home care providers and extended care institutions thereby leveraging the company's strong salesforces and distribution networks. Provide an exceptional level of customer service, including fast delivery, convenient financing, user friendly electronic commerce, and educational support programs. - - PRODUCT SUPERIORITY. Maintain leadership in product innovation by applying the latest technologies to solve patient problems associated with disabilities, respiratory ailements, and alternate site care. - - COST LEADERSHIP. Enhance the company's Pursuit of Excellence program, with its emphasis on continuous improvement in manufacturing methods, product cost, quality metrics, and asset management disciplines. 2 Improve margins through centralized purchasing, plant consolidations, administrative streamlining, and shifting production to lower labor cost countries such as Mexico and Spain. - - GLOBAL EXPANSION. Extend domestic market leadership internationally through an aggressive export sales function. Lead the industry in global consolidation, establishing company-owned sales/distribution organizations in major countries around the world. Leverage competitive advantages in product technology, manufacturing capacity, distribution coverage, and management systems to capitalize on worldwide market growth trends. - - STRATEGIC ACQUISITIONS. Enhance core businesses by acquiring proprietary technologies and product lines that yield immediate synergy or help enter fast growing market niches. RE-ENGINEERING PROGRAM In recent years government budgetary pressures and the rise of managed care organizations have dramatically changed the U.S. healthcare marketplace, causing homecare products to be viewed more generically and putting downward pressure on prices. Further, home medical equipment providers have been consolidating into a number of national chains and buying groups, who have used their new purchasing power to intensify this pressure. In the early 1990's, Sunrise operated with a decentralized structure, built around product-specific salesforces and management teams. As the new industry reality emerged, the company implemented a progression of consolidation steps,announced publicly as follows: JANUARY 1995: Formation of SunMed Service ("SMS") to unify order entry, customer service, and physical distribution of standard products in the U.S. homecare market through a network of eight distribution centers. SMS was launched in February 1996. JANUARY 1996: Integration of six U.S. homecare salesforces into three; merger of SMS into Guardian division; merger of Jay and Quickie divisions; and headcount reductions of 6% across all Sunrise divisions. JUNE 1996: Consolidation of four U.S. institutional product divisions into the Continuing Care Group; consolidation of four French subsidiaries; merger of two German subsidiaries; and establishment of a Mexican maquiladora factory in Tijuana to manufacture personal care products. JANUARY 1997: Merger of five U.S. homecare divisions into the Home Healthcare Group, with a single salesforce, launched July 1, 1997; consolidation of four U.K. manufacturing divisions into one plant, with the last move to be completed by October 1997; and conversion to a common enterprise resource planning hardware/software platform in North America and in Europe. 3 This re-engineering program has spanned three fiscal years and is expected to be completed by the end of calendar 1998. Most of the remaining financial impact will be in fiscal 1998, when pre-tax expenses estimated at $13 million will be incurred, primarily costs of conversion to common computer software packages in North America and in Europe. Other re-engineering costs include the relocation of production activities and personnel and the disposition of facilities and equipment. HOME HEALTHCARE GROUP The Home Healthcare Group ("HHG") was consolidated into a single business in fiscal 1997. Headquartered in Longmont, Colorado, HHG focuses on the outpatient equipment needs of the elderly and the disabled. Headquarters functions include sales, marketing, finance, information systems, customer service, distribution, human resources and SunMed Finance, the company's dealer installment financing division. Product development and manufacturing activities are assigned to three product divisions, each with a global market perspective: Mobility Products (wheelchairs, including custom, power, pediatric and standard wheelchairs, and seating and positioning systems); Personal Care Products (standardized medical products designed to assist in walking, bathing, toileting, patient lifting and patient mobility); and Respiratory Products (aerosol, oxygen and sleep therapy products). The products of the three divisions are sold through a single nationwide salesforce that calls on a network of home medical equipment ("HME") providers, rehabilitation technology suppliers, and drug wholesalers. Included within HHG are the company's distribution organizations in Canada and Australia, and its export sales activities throughout the Americas and the Pacific Rim. Sales of the Home Healthcare Group were $282 million, up 7%, and accounted for 43% of the company's total sales in 1997. MOBILITY PRODUCTS DIVISION The Mobility Products Division's primary product lines are QUICKIE custom wheelchairs and JAY seating systems. The QUICKIE range includes manual ultralight rigid and folding chairs, standard lightweight chairs, pediatric positioning chairs, power chairs, and wheelchairs designed for racing, basketball, tennis, and other disabled sports. U.S. wheelchair plants are located in Fresno, California and Avon Lake, Ohio. QUICKIE brand products are also manufactured by the company's U.K. subsidiary for European customers. JAY wheelchair cushions and modular positioning provide flexible, cost-effective solutions to the seating and postural problems of wheelchair users with special needs. The cushions and pads are filled with JAY FLOW, a patented fluid material designed and manufactured at the company's facility in Longmont, Colorado. JAY products are designed to fit all major brands of wheelchairs. Sunrise expanded its product offering in the pediatric wheelchair market with its acquisition of Kid-Kart, Inc. in December 1996. Kid-Kart designs, manufactures and markets strollers, push wheelchairs, positioning systems, and other adaptive medical 4 equipment for the pediatric rehabilitation market, including units designed to be transportable by bus. PERSONAL CARE PRODUCTS DIVISION The Personal Care Products Division features the professional line of GUARDIAN brand patient aids, marketed through HME providers, and a line of consumer-packaged personal care products under the CAREMATE brand name, which is distributed through drug stores, home centers, department stores and specialty retailers. During 1997 production of certain products was shifted from the division's main plant in Simi Valley, California, to a leased facility in Tijuana, Mexico. Additional production will be shifted upon completion of a larger factory now under construction. RESPIRATORY PRODUCTS DIVISION The Respiratory Products Division manufactures at plants in Somerset, Pennsylvania and Ft. Pierce, Florida. Product categories include a broad range of aerosol, oxygen and sleep therapy home respiratory products under the DEVILBISS brand name. Aerosol devices convert liquid medicine into airborne particles to treat breathing disorders such as asthma and cystic fibrosis. Oxygen concentrators are electrical devices that enrich normal room air up to 93% purity for patients suffering from chronic obstructive lung diseases such as emphysema and bronchitis. Portable liquid and gas oxygen systems allow oxygen users to leave their homes and resume normal activities for up to eight hours at a time. The PULSEDOSE proprietary demand oxygen delivery devices, using a given supply of liquid or gaseous oxygen, can triple the range of a patient. Sunrise also manufactures the DEVILBISS HORIZON line of sleep products, which alleviate adult obstructive sleep apnea by supplying continuous positive airway pressure ("CPAP") while patients are sleeping. DEVILBISS products are distributed globally, with European manufacturing support provided in the U.K. by Sunrise Europe. CONTINUING CARE GROUP The Continuing Care Group ("CCG"), with headquarters in Stevens Point, Wisconsin, manufactures products that foster ease of care for recovering patients and long term residents in nursing homes, subacute facilities, hospitals and assisted living centers. Product lines include healthcare beds, nursing home furniture, patient support surfaces, patient lifters and specialized institutional bathing systems. CCG's products are sold through two salesforces, one focused on extended care and the other on hospitals. In addition, homecare beds and therapeutic mattresses are sold through the HHG salesforce to homecare dealers. Foreign sales of institutional products are made through Sunrise's international export sales and distribution network. CCG sales were $93 million in 1997, down 11%, and represented 14% of total company sales. 5 The JOERNS product line consists of healthcare beds, patient room furniture, overbed tables, dining room and commons area furnishings. BIO CLINIC support surfaces cover a range of cost-effective products for the prevention and treatment of pressure sores--dermal wounds which can afflict immobilized patients. This broad product line includes: portable low air loss mattress systems; specialty mattresses; foam overlays; and foam operating room positioners. BIO CLINIC disposable products are sold through medical/surgical distributors, who supply them to their hospital and nursing home customers. HOYER patient lifters and slings are used in institutional and home settings to lift and transfer disabled patients between bed, bathtub, wheelchair and automobile. PARKER bathing systems are specialized bathtubs that recline or elevate with lifters designed specifically for a nursing home. In fiscal year 1997, Sunrise formed CCG by consolidating into a single business what were formerly the Joerns, Bio Clinic, Hoyer and Parker U.S. divisions. This group integrates the domestic manufacturing, marketing and distribution of all Sunrise products aimed at nursing homes and hospitals. The Bio Clinic manufacturing facility in Ontario, California was closed and the move to Stevens Point completed in June 1997. In addition, CCG manufactures patient lifters in Oshkosh, Wisconsin and foam products in Baldwyn, Mississippi. SUNRISE MEDICAL EUROPE Sunrise manufactures products in four European countries (United Kingdom, Germany, Spain and France) and also owns distribution companies in the Netherlands, Norway, Sweden, Italy and Switzerland that distribute the company's products into these and surrounding countries. Sales in Europe have grown significantly in each of the last four years, reflecting expansion of the company's core businesses as well as a number of acquisitions. European sales were $268 million, up 5%, and accounted for 41% of total company sales in 1997. In the United Kingdom, Sunrise manufactures and markets five major product lines: wheelchairs, personal care products, patient lifters, respiratory products and bathing systems. The wheelchair product line includes QUICKIE custom manual wheelchairs, POWERTEC power wheelchairs, STERLING electric scooters and MINIVATOR home stairlifts. COOPERS canes, walkers, bath safety products and aids for daily living are sold through homecare dealers and retail drugstores. DEVILBISS oxygen concentrators are rented through the U.K. national health service and exported throughout Europe. The OXFORD line of Sunrise lifting systems for patient transfers covers a broad range of applications in both institutional and home care use. PARKER specialized bathing systems are sold in the U.K., France and the U.S. In recent years exports have increased steadily to more than 40 countries, including, most importantly, the company's European distribution network. In Germany, Sunrise manufactures and markets the SOPUR line of custom lightweight manual, power, pediatric and performance wheelchairs. Other Sunrise homecare products such as JAY seating systems, DEVILBISS oxygen concentrators and 6 Spanish manufactured standard wheelchairs are also distributed by this organization to homecare dealers throughout Germany and Austria. The company's Spanish subsidiary, located in Bilbao, manufactures URIBARRI standard wheelchairs and patient aids, providing Sunrise with a low-cost European manufacturing base. URIBARRI wheelchairs and patient aids are sold throughout Spain and exported to many countries, including Sunrise divisions in Europe and Australia. In France, Sunrise manufactures nursing home beds and furniture in Tours under the CORONA and TEKTONA SANTE brands. CORONA products are marketed to French nursing homes and hospitals through a direct salesforce, while homecare products are sold through a nationwide network of home medical equipment dealers. Sunrise France also distributes QUICKIE and SOPUR brand wheelchairs, the DEVILBISS line of respiratory products, and PARKER bathing systems. In fiscal 1997 Sunrise announced a series of consolidations of its European operations within each major country in order to eliminate administrative redundancies, capitalize on economies of scale, and enhance cost efficiencies. In France, four separate operating locations were consolidated in Tours under a single management structure. In Germany, the distribution and manufacturing activities were integrated into the SOPUR business in Malsch. In the U.K., Sunrise purchased an existing 370,000 square-foot manufacturing facility in Wollaston (Birmingham area) England, refurbished it, and began relocating four factories to the new site (wheelchairs, patient lifters, personal care products and respiratory products). These factory moves, involving approximately 1,150 jobs, are expected to be completed in October 1997. The conversion of European computer systems onto a common hardware/software platform is expected to be completed by the end of fiscal 1998. SALES AND DISTRIBUTION Home Healthcare Group products are sold through a nationwide salesforce that calls on a network of 12,000 HME providers, rehabilitation technology suppliers and drug wholesalers. Special attention is being directed to larger regional and national accounts, including the deployment of incentive programs that benefit customers who purchase from multiple Sunrise divisions. HHG offers consolidated customer service, order entry, distribution and credit functions for standard products sold to the domestic HME market. Order processing centers are maintained in California and Pennsylvania, and eight regional distribution centers are located throughout the United States. Large national accounts and independent homecare providers are able to purchase standard products across all Sunrise divisions by placing a single order; products are shipped the next day from one of the regional distribution centers. However, customized products, such as most QUICKIE wheelchairs and many JAY cushion products, continue to be ordered directly and shipped from those factories. 7 Continuing Care Group sells its products directly to healthcare institutions through its own nationwide salesforce. In the case of capital equipment such as beds and bathing systems, company account representatives demonstrate and sell products directly to nursing homes and other continuing care institutions where clinicians such as directors of nursing play a key role in product evaluations and ultimate decision making. In the case of hospital disposable products, such as EGGCRATE mattress overlays, a second CCG sales force calls on hospital influencers such as enterostomal therapy (E.T.) specialists to stimulate demand, but products are sold and distributed through medical/surgical distributors. Contracts with hospital groups and group purchasing organizations also play an important role in purchasing decisions. Sunrise products are marketed in Europe through distribution channels that resemble U.S. patterns. Home medical equipment products are distributed through independent medical equipment dealers in most countries, although, under Scandinavia's state-controlled healthcare systems, the local technical aid centers perform a similar function. The company has its own salesforces calling on these distribution channels in all major countries of Western Europe. Institutional products are sold direct to nursing homes and hospitals through the company's own salesforces in the U.K., France and several other countries. 8 Two separate export sales teams represent all Sunrise product lines in their respective global regions. They are responsible for developing import distributor relationships in all countries where Sunrise products are sold. One team, part of HHG, covers the Americas and Pacific Rim, while the second team, part of Sunrise Medical Europe, covers Europe, the Middle East, Africa, and Central Asia. COMPETITION Sunrise encounters significant domestic and foreign competition from a number of well-established manufacturers in each of its product lines. Sunrise's primary competitors in the U.S. are Invacare Corporation, Nellcor Puritan Bennett, Graham-Field and Hillenbrand Industries. Invacare competes with Sunrise in almost every product line and market. On September 8, 1997, Graham-Field, annouced an agreement to acquire Fugua Enterprises, another major competitor. In the European homecare market, Meyra Ortopedia (Germany) and Scandinavian Mobility are the most important competitors. Sunrise competes primarily on the basis of its product features and performance, the range of products offered, the quality of its customer service and delivery, the competitiveness of its prices, the technical expertise of its salesforces, and the strength of its distribution operations and independent dealer network. In certain countries and product markets, including the United States, the company faces competition from other manufacturers that have larger market shares, more extensive financial resources or other competitive advantages. MANUFACTURING The company operates 17 manufacturing plants in the U.S., Mexico, and Western Europe. Manufacturing processes include metal fabrication, welding/brazing, injection molding, circuit board assembly, powder coating, final assembly, life testing and quality assurance. Certain components used in the company's products, such as small motors and electronic controls, are manufactured by third parties. Although the company purchases most of its raw materials, components and supplies from a number of different vendors, it does procure a few components and materials on a single-source basis. If one of these single-source vendors failed to deliver components as planned, the company would be temporarily unable to ship certain of its products. During the past few years, prices paid by the company for certain raw materials, such as aluminum, foam and wood, have fluctuated widely. When prices have increased, the company has not always been able to pass along the full effect of such increases to its customers. In addition, its manufacturing margins have recently been hurt by the strengthening of the British pound, since a major portion of Sunrise Europe sales come from products manufactured in the U.K. and sold on the Continent. The company has utilized a variety of operational tools such as "just-in-time" manufacturing, demand flow technology, value engineering, total quality management, target costing, and its Associate suggestion system to reduce product costs, increase quality, shorten delivery cycles and improve asset turnover. These complementary techniques are all part of the company's Pursuit of Excellence program. All Sunrise factories have earned ISO 9001 certification, the international standard for quality assurance in design and manufacturing. 9 RESEARCH AND DEVELOPMENT Sunrise conducts research and development at each of its manufacturing divisions. For the year ended June 27, 1997, the company spent $16.5 million on research and development, or 2.5% of sales, compared to $15.5 million, or 2.3% of sales, in the prior year. Each operating unit establishes annual objectives for introducing new products, and the company tracks progress against those objectives on a regular basis. The company introduced more than 100 new products in each of the last two fiscal years. PATENTS AND TRADEMARKS Sunrise currently holds patents associated with certain existing products and has filed applications for additional patents covering certain of its newer products. Although some of these patents can provide a meaningful competitive advantage in a particular product market, overall, management does not consider the ownership of patents essential to its current or future market position. The company relies primarily on product quality and features, strong marketing and distribution networks, competitive prices, and responsive customer service to protect and improve its competitive positions. This annual report discusses many of the brands and trademarks owned and used by Sunrise and its subsidiaries. For ease of reading, these brands have been indicated in capital letters, and trademark and registration designations have been omitted. WARRANTY The company's products are generally sold with limited warranties for periods of up to five years. Customers may also purchase extended warranties on certain products. Some components of the company's wheelchair products have a lifetime warranty. The expected warranty expense associated with each product sold is booked at the time of sale, and the adequacy of those warranty reserves is reviewed regularly. GOVERNMENT FUNDING AND REGULATION The healthcare industry is affected by extensive government funding and regulation at the federal and state levels. MEDICARE AND MEDICAID. Medicare is a federally funded health insurance program administered by private insurance companies providing health insurance coverage for persons 65 or older and certain persons with disabilities. Medicaid is a federally and state-funded health insurance program administered by state governments that provides reimbursement for healthcare related expenses for certain financially and medically needy persons regardless of age. These programs provide reimbursement to homecare providers for rentals and sales of medical 10 equipment and related supplies. Medicare generally pays 80% of the allowable rate of reimbursement for home medical equipment items, while Medicaid generally pays 100%. The company estimates that approximately 21% of its 1997 sales were ultimately funded by these U.S. government programs. While the company itself is not a provider under Medicare or Medicaid, its products are sold to homecare dealers, nursing homes and hospitals that are providers under these programs and do depend upon Medicare and Medicaid reimbursement for a portion of their revenue. Changes in Medicare/Medicaid regulations can adversely impact the company's revenues and collections indirectly by reducing the reimbursement rate received by HME providers, thus making it less profitable for them to sell or rent products to the end-user. This, in turn, can put downward pressure on prices charged for the company's products sold through this channel. Management believes that intensified healthcare cost containment efforts through managed care continue to favor lower cost alternatives such as home healthcare and nursing home care, as has been the case historically. Increasingly, government funded programs are relying on managed care programs to provide healthcare insurance to their beneficiaries. The company has made special efforts in recent years to allocate more of its new product engineering dollars to lower cost, more generic products favored by managed care and Medicare/Medicaid programs. The recently passed Balanced Budget Act of 1997 will reduce reimbursement for oxygen concentrator rentals by 30% over two years, beginning January 1, 1998. Domestic sales of oxygen concentrators accounted for approximately 4% of the company's sales in 1997, and a lesser percentage of gross profit. Other features of the new law, such as the creation of a separate reimbursement category for portable oxygen products and the addition of a patient upgrade capability using personal funds, are expected to have a favorable impact on the sale of certain homecare products. FDA REGULATION. Medical products manufactured by the company in the U.S. are subject to regulation by the U.S. Food and Drug Administration ("FDA"). Most such medical devices must be the subject of device listings filed with the FDA, and medical device manufacturers must be registered. Certain products require clearance by the FDA prior to marketing and distribution in the United States. Delays in receiving such approval can adversely affect the company's ability to introduce new products on a timely basis and impact the company's results of operations and financial condition. During the last two years, such delays have slowed new product introductions and, in a number of cases, have led to their initial marketing overseas in advance of the United States. EMPLOYEES (ASSOCIATES) The company employed 4,254 full-time Associates worldwide as of June 27, 1997. Approximately 400 Associates at two factories in the United States are covered by collective bargaining agreements that expire in June 1998 and 2002. In Europe, 236 Associates in the 11 United Kingdom and 142 in Germany are covered by national union arrangements. The company has not experienced a strike, work stoppage or labor disturbance during its 14-year history. The company believes that its labor relations are good. Sunrise refers to its employees as Associates. BACKLOG Sunrise's backlog of firm orders at June 27, 1997 was approximately $39 million, compared to $44 million at June 28, 1996. Approximately $16 million in 1997 and $20 million in 1996 represented orders for patient room beds and furnishings, the one portion of Sunrise's business for which backlog is believed to be a meaningful predictive factor because of the long order lead times in this market. Generally, Sunrise manufactures the balance of its products to its forecast of near-term demand, shipping immediately from stock, or else produces customized products based on actual orders received and ships within a short period thereafter. As a result, Sunrise does not have a substantial backlog for these products. Management does not believe that its overall backlog at any particular time is a very meaningful indicator of future sales levels. WORKING CAPITAL REQUIREMENTS The company does not maintain inventory of its products for a significant period of time (see "Backlog"). Most of the company's products are manufactured in connection with specific orders which are shipped in less than 30 days, and in many cases less than 72 hours, from receipt of the order. Patient room bed and furnishing products also are manufactured in connection with specific orders, but may take from one to three months until products are ready to ship. The company maintains a larger stock of those component parts which require longer lead times to obtain from suppliers to minimize the risk of extending time periods to fulfill product orders. Most of the company's sales are made on standard terms requiring payment by the customer within 30 days of delivery. Some sales are made on extended terms on a selective basis. Certain customers elect to finance their purchases with installment note contracts offered by the company's captive finance subsidiary. The company occasionally accepts products for replacement upon customer request. However, returns for credit or refund have not been a material aspect of the company's business. FOREIGN OPERATIONS Sunrise has foreign subsidiaries with manufacturing and distribution operations in the United Kingdom, France, Germany, Spain and Mexico. In addition, company-owned sales/distribution companies are located in Canada, Australia, the Netherlands, Norway, Sweden, Switzerland and Italy. All of Sunrise's manufacturing and distribution facilities are located in industrially developed areas where qualified labor and material supply have been readily available at economic rates. ITEM 2. PROPERTIES Sunrise's corporate headquarters office is located in Carlsbad, California, and comprises approximately 21,000 square feet of leased space that Sunrise occupies under a lease expiring in 12 2004. Sunrise conducts its U.S. operations from 12 leased facilities (totaling approximately 962,000 square feet) under leases with expiration dates ranging from 1997 through 2008, and also operates factories using four company-owned facilities totaling approximately 411,000 square feet. For its international operations, Sunrise leases 35 facilities in Europe, Canada and Australia (totaling approximately 321,000 square feet) under leases with expiration dates extending through 2017, together with 10 company-owned facilities in Europe with approximately 835,000 square feet. The number of facilities will decline as consolidations of operations in the U.K., France and Germany are completed. Sunrise's facilities are used primarily for manufacturing, distribution and administration. Sunrise has options to renew a number of its leases, as well as purchase options on certain leased facilities. Management believes that its facilities are adequate for Sunrise's current needs. ITEM 3. LEGAL PROCEEDINGS The company is a party to various legal proceedings arising in the ordinary course of business. Management does not believe that the outcome of any of these actions will have a material adverse effect upon the financial position or results of operations of the company. The Securities and Exchange Commission ("SEC") has entered a formal order of private investigation into the circumstances underlying the restatement of the company's 1995 and 1994 financial statements. The company is cooperating fully with the SEC in its investigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the company's stockholders during the fourth quarter of fiscal 1997. 13 EXECUTIVE OFFICERS OF THE COMPANY Pursuant to General Instruction G(3) of Form 10-K, the following information is included as an unnumbered Item in Part I of this Report. The following is a list of names and ages of the executive officers (within the meaning of Item 401 of Regulation S-K) of the company, indicating all positions and offices with the company held by each such person and each such person's principal occupation or employment during the past five years. Executive officers serve at the discretion of the Board of Directors. No person other than those listed below has been chosen to become an executive officer of the company. NAME AGE POSITION - ---- --- -------- Richard H. Chandler 54 Chairman of the board, chief executive officer and president Steven A. Jaye 41 Senior vice president, general counsel and secretary Dennis J. McCarthy 56 President - Continuing Care Group Thomas H. O'Donnell 54 President - Home Healthcare Group Barrie Payne 60 President - Sunrise Medical Europe John M. Radak 36 Vice president and controller Ted N. Tarbet 44 Senior vice president and chief financial officer Richard H. Chandler has served as chairman of the Board of Directors and chief executive officer of the company since its inception in January 1983 through the present. In January 1996 he also became president, a position he previously held from January 1983 until July 1993. From 1982 to 1983, he was president of Richard H. Chandler Company, a management consulting firm, during which period he planned the formation of the company. From 1979 to 1982, he was president and chief executive officer of Abbey Medical, Inc. Mr. Chandler participated in the leveraged buy-out of Abbey Medical from Sara Lee Corporation in June 1979 and arranged for its 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 its Abbey Rents/Abbey Medical division. Steven A. Jaye was elected senior vice president, general counsel and secretary of the company in August 1996 after joining the company 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. Dennis J. McCarthy was elected president of the Continuing Care Group in June 1997 after serving as president of Joerns Healthcare Inc. (a Sunrise subsidiary) since September 1990. From 1986 to 1989, Mr. McCarthy was president of the Document Management Products Company 14 (DMPC), a subsidiary of Bell & Howell Company that manufactures and markets office products and systems, where he also served as a corporate vice president. From 1981 to 1986, he was president of the Computer Output Microfilm Division of Bell & Howell. Thomas H. O'Donnell was elected president of the Home Healthcare Group in June 1997. He served as executive vice president--operations of the company from January 1987 until August 1988, when he was elected president of Quickie Designs Inc. (a Sunrise subsidiary). In January 1996 he was named senior vice president--North America. 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. Barrie Payne was elected president of Sunrise Medical Europe in June 1997. He was named senior vice president--Europe in January 1996, after serving as managing director of Sunrise Medical Ltd. (a Sunrise subsidiary) since June 1983. Previously, Mr. Payne was president of A-BEC Mobility Inc., a distributor of electric wheelchairs and other power mobility products that was founded by him in 1972 and was purchased by Sunrise Medical in 1983. John M. Radak was elected vice president and controller in 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 was elected senior vice president and chief financial officer in August 1993. Mr. Tarbet joined Sunrise in 1986 as corporate controller. In 1988 he was made a vice president of the company 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. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The company's common stock, $1 par value, trades on the New York Stock Exchange under the symbol "SMD." The highest and lowest daily closing price for each quarterly period during the last two fiscal years was as follows: Fiscal Year 1997 Fiscal Year 1996 ----------------------------------------------------------------- High Low High Low - -------------------------------------------------------------------------------- First Quarter 18 1/8 15 1/8 29 25 1/8 Second Quarter 15 7/8 13 5/8 26 7/8 15 1/8 Third Quarter 16 1/2 12 5/8 19 1/4 13 3/4 Fourth Quarter 15 10 1/8 20 3/4 13 7/8 Year 18 1/8 10 1/8 29 13 3/4 - -------------------------------------------------------------------------------- The number of holders of record of Sunrise common stock as of August 29, 1997 was 576. The company estimates it has approximately 10,600 beneficial holders of its common stock. The closing price of the common stock on August 29, 1997 was 14 13/16. The company has not paid cash dividends to holders of its common stock and has no plans to do so in the foreseeable future. The company presently intends to retain all earnings to fund its operations and future growth. 16 ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share amounts)
Years Ended ------------------------------------------------------------- June 27, June 28, June 30, July 1, July 2, CONSOLIDATED RESULTS OF OPERATIONS DATA: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net sales $656,742 $667,130 $601,927 $466,942 $319,196 Gross profit 213,681 220,625 205,651 166,947 115,317 Marketing, selling and administrative expenses 144,695 159,109 134,511 102,776 67,269 Research and development expenses 16,506 15,544 13,937 11,029 7,388 Corporate expenses 12,109 9,998 7,360 5,444 4,439 Amortization of intangibles 8,273 8,686 6,823 5,435 2,374 Unusual items -- 65,152 -- -- -- Corporate operating income (loss) 32,098 (37,864) 43,020 42,263 33,847 Interest expense 14,774 16,687 10,358 6,078 4,252 Income (loss) before taxes 21,027 (52,460) 33,863 36,168 29,696 Net income (loss) $10,569 $(40,867) $19,471 $21,809 $18,090 ------ ------- ------ ------ ------ ------ ------- ------ ------ ------ Net income (loss) per share(1) $ 0.55 $( 2.17) $ 1.03 $ 1.19 $ 1.21 ------ ------- ------ ------ ------ ------ ------- ------ ------ ------ Weighted Average Shares Outstanding(1) 19,196 18,810 18,819 18,317 14,950 ------ ------- ------ ------ ------ ------ ------- ------ ------ ------ CONSOLIDATED BALANCE SHEET DATA: Working capital $ 102,231 $104,991 $119,594 $101,479 $ 92,049 Total assets 610,549 620,416 604,743 471,667 284,031 Long-term debt(2) 188,061 207,446 182,029 118,697 32,475 Stockholders' Equity(3) $279,420 $260,554 $299,493 $259,539 $194,723 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- ---------------------------- (1) Net income (loss) per share and weighted average number of shares outstanding for fully diluted computations are not materially different from primary computations. (2) Excludes current installments of long-term debt. (3) The company did not declare cash dividends for the fiscal years 1993 through 1997. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Sunrise closed its fiscal year ended June 27, 1997 with worldwide revenues of $656.7 million, a decrease of 2% from 1996 . Net sales grew 4% in 1997 after adjusting for the effects of foreign currency translation, divestitures and acquisitions. Net income increased to $10.6 million from a loss of $40.9 million in fiscal 1996, and gained 86% over $5.7 million last year when unusual items are excluded. Earnings per share rose 83% to $0.55 from $0.30 in 1996 excluding the unusual items, and from a loss of $2.17 per share as reported last year. During fiscal 1997, the company consolidated a number of its operating units, factory sites and salesforces and strategically re-aligned its divisions into three market-oriented operating groups: the Home Healthcare Group (HHG), the Continuing Care Group (CCG) and Sunrise Medical Europe. The consolidations are expected to be completed in calendar 1998, with further streamlining of operating units, data centers, factory sites and salesforces. Management estimates that approximately $13 million in non-recurring costs will be incurred during fiscal 1998 to complete these activities, principally to implement related computer system conversions. Other re-engineering costs include the relocation costs of production activities and personnel and the disposition of facilities and equipment. NET SALES ANALYSIS Sales decreased 1.6% in 1997 to $657 million from sales of $667 in 1996, following an increase of 11% over sales of $602 million recorded in 1995. The sale of the company's Comfort Clinic division, in October 1996, marking the company's exit from the consumer products market, reduced sales by 5% in fiscal 1997. The acquisition of Kid-Kart, Inc. in December 1996 added to sales by 1% in 1997, while the acquisition of three European-based businesses between April and October 1995 added 11% to the company's sales in 1996. Acquisitions accounted for 8 percent of the increase in sales in 1995. Sunrise used acquisitions during these periods to enhance existing businesses and expand internationally. International sales accounted for 44% of worldwide net sales, compared with 42% in 1996 and 33% in 1995. Fluctuations of foreign currency rates decreased overall net sales by 1% in 1997, while increasing net sales by less than 1% in 1996 and by 3% in 1995. The impact of foreign currency fluctuations on net sales is not necessarily indicative of the impact on net earnings due to the offsetting foreign currency impact on costs and expenses and the company's hedging activities. (See Note 1 to the consolidated financial statements for the company's accounting policies for foreign currency instruments.) The 4% internal sales growth from 1996 to 1997 was primarily the result of continued volume increases. Average selling prices in a number of major product lines declined in 1997, primarily due to healthcare cost containment pressures. Healthcare cost reduction continues to be pursued in the United States and Europe, putting downward pressure on the Company's price. Management believes that it is correctly responding through its strategic re-alignment around 18 markets, reducing its cost structure by consolidating business units, factories and sales forces. As was evidenced in fiscal 1997, management believes that future sales growth will be driven predominantly by unit volume growth, price competitiveness, new product introductions, contract sales to increasingly larger customers and buying groups, and by international expansion. Following is a summary of sales by business group as a percentage of total net sales: ANALYSIS OF PRODUCT LINE SALES CONTRIBUTION ($ in millions) 1997 1996 1995 ------------ ------------- -------------- Home Healthcare Group $282 43% $265 40% $258 43% Continuing Care Group 93 14% 103 15% 112 19% Sunrise Medical Europe 268 41% 255 38% 165 27% Comfort Clinic(1) 14 2% 44 7% 67 11% Total $657 100% $667 100% $602 100% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1)Divested in October 1996 Net sales of the Home Healthcare Group (HHG) reached record levels in each of the last three years, growing 7% to $282 million in 1997, after an increase of 2% to $265 million in 1996 from sales of $258 million in 1995. Sales of respiratory products led the increase in 1997, followed by custom wheelchairs and personal care products. Sales from the introduction of the SOLAIRIS line of oxygen concentrators and the PULSE DOSE EX2000, an oxygen conservation device that can triple the effective range of portable gas cylinders, were largely responsible for the boost in respiratory sales. Growth in custom wheelchair sales was attributed primarily to strong sales of standard lightweight manual wheelchairs. Personal care products grew by 4%, reflecting a rebound from a slight decline experienced in 1996. Unit volume growth was evidenced in substantially all product lines, while average selling prices decreased primarily as a result of the increase in discounts to large national accounts. Continuing Care Group (CCG) sales declined 11% in 1997 to $93 million. This followed a decline of 7% in 1996 to $103 million, compared to growth of 12% in 1995. The sale of the company's air therapy rental business in January 1996, following an extended period of declining rental rates, negatively impacted sales by 6% in fiscal 1997 and 4% in fiscal 1996. Although 1997 unit volume increased in sales of beds, patient lifters and slings, these were more than offset by depressed unit sales of patient room furniture, bathing systems and foam overlays. Generally, in 1997, average selling prices declined as a result of growth in large national contracts, while the decrease in unit sales of patient furniture was attributed to the shift in new construction funding from nursing homes to assisted living centers. Unit volume sales of bathing systems declined in 1997 due to the discontinuation of several products. The 1997 decline of 19 foam overlays is primarily attributed to the loss of a major national private label contract at low margins. Sales in Europe grew by 5% in 1997 to $268 million following increases of 55% in 1996 and 51% in 1995. The large increases in the two preceding years reflected both internal growth and the impact of a series of acquisitions. Foreign currency exchange rate movements had an unfavorable impact on European sales of 4% in 1997 and a favorable impact of 1% and 13% in 1996 and 1995, respectively. Excluding the impact of acquisitions and foreign currency exchange movements, sales grew by 6% in fiscal 1997 after growth of 19% in 1996. In 1997 sales growth within Europe was strongest in Germany, Spain, and the company's country distribution organizations. Sales growth in the United Kingdom was modest and was partially offset by a slight decline in sales in France. Overall, during 1997, European unit sales volumes increased, while average selling prices were lower than prior years in several markets due to increasing discounts to dealers. Product sales growth was led by custom wheelchairs, which remained the largest European product line and demonstrated modest volume increases. Personal care products and beds also contributed to the total growth in sales in 1997, while respiratory sales declined, primarily due to the termination of a distribution agreement Sunrise had with another manufacturer. EXPENSE AND PROFIT ANALYSIS In 1997 gross margin (gross profit as a percentage of net sales) decreased by 0.6% to 32.5%. Gross margin in a number of domestic product lines was adversely affected by market pricing pressures indirectly driven by the growth of managed healthcare and consolidation of the company's customer base. In Europe, gross margins were adversely affected by the disruptive impact of consolidations as well as the growth of buying groups. Gross margin declined by 1.1% in 1996 due primarily to a significant decline in the profitability of the company's support surfaces business. For the company's other product lines, the gross margin was 36.2% in 1996, as competitive pricing conditions and cost increases in certain raw materials were largely offset by selective price increases, changes in product mix and improvements in factory productivity. Marketing, selling and administrative expenses decreased 1.8% as a percentage of net sales in 1997, after an increase of 1.5% in 1996. This decrease reflects the results of a company-wide profit improvement program instituted early in the 1996 calendar year. As a result, these expenses declined despite the costs associated with the February 1996 launch of SunMed Services ("SMS"), the company's integrated order entry, customer service and delivery function for standard products sold to the U.S. homecare market. SMS operated in all of fiscal 1997. Marketing, selling and administrative expenses for 1997 include one-time costs of $1.4 million for the company's sponsorship of the 1996 Atlanta Paralympic Games. Without these costs, fiscal 1997 marketing, selling and administrative expenses decreased 9.9% to 21.8% of net sales as compared to 23.8% in fiscal 1996. Research and development (R&D) expense increased 6% to $16.5 million in 1997 following an increase of 12% in 1996. The growth of R&D spending has generally been consistent with sales growth and continues to reflect the company's focus on applying new technologies to address unmet user needs and technological enhancements to existing products. Management believes 20 that investing significant resources in R&D will result in future revenue growth and market share gains. The following is a summary of expenses and profits as a percentage of net sales:
% Increase (Decrease) -------------------- ($ in millions) 1997 1996 1995 1997/96 1996/95 - -------------------------------------------------------------------------------------------------- Net sales $656.7 $667.1 $601.9 ( 2)% 11% - -------------------------------------------------------------------------------------------------- Gross profit 213.7 220.6 205.7 ( 3)% 7% % of net sales 32.5% 33.1% 34.2% Marketing, selling and administrative expenses 144.7 159.1 134.5 ( 9)% 18% % of net sales 22.0% 23.8% 22.3% Research and development 16.5 15.5 13.9 6% 12% % of net sales 2.5% 2.3% 2.3% Corporate expenses 12.1 10.0 7.4 21% 36% % of net sales 1.8% 1.5% 1.2% Amortization of goodwill and other intangibles 8.3 8.7 6.8 ( 5)% 27% % of net sales 1.3% 1.3% 1.1% Unusual items -- 65.2 -- * * % of net sales 9.8% - -------------------------------------------------------------------------------------------------- Corporate operating income (loss) 32.1 (37.9) 43.0 * * % of net sales 4.9% ( 5.7)% 7.1% Interest expense 14.8 16.7 10.4 ( 11)% 61% % of net sales 2.2% 2.5% 1.7% Interest income and other, net 3.7 2.1 1.2 77% 74% % of net sales 0.6% 0.3% 0.2% - -------------------------------------------------------------------------------------------------- Income (loss) before income taxes 21.0 (52.5) 33.9 * * % of net sales 3.2% ( 7.9)% 5.6% Income taxes (benefit) 10.5 (11.6) 14.4 * * % of income (loss) before taxes 49.7% (22.1)% 42.5% - -------------------------------------------------------------------------------------------------- Net income (loss) $10.6 $(40.9) $19.5 * * % of net sales 1.6% ( 6.1)% 3.2% - -------------------------------------------------------------------------------------------------- * Percentage not meaningful
In January 1997 the company announced the consolidation of its four U.S. homecare divisions into the Home Healthcare Group based in Longmont, Colorado, and also initiated a series of consolidations in its European operations. These actions are designed to improve manufacturing 21 and marketing efficiencies while reducing operating costs. Pre-tax charges of $4.7 million were incurred in 1997 in connection with these consolidations. Management estimates that approximately $13 million in non-recurring costs will be incurred during 1998 to complete these activities, principally to implement related information system conversions. The company's support surfaces business returned to profitability in 1997, following losses of $15 million at the division profit contribution level in 1996 and $4 million in 1995. (Profit contribution is an internal measurement used by the company to measure operating unit performance; it does not include any allocations of unusual items, corporate office expense, goodwill amortization, interest, or income taxes.) During 1996, significant expense increases were incurred in this business, including higher marketing costs and increased bad debt expenses, while revenues were under increased competitive pressures. In December 1995 management initiated a number of actions designed to return this business to profitability, including staffing and overhead reductions to align operations with a significantly lower level of sales. As part of this plan, Bio Clinic's air therapy rental business was sold in January 1996. In June 1996, Bio Clinic was merged with the Joerns division to form a single institutional products organization, the Continuing Care Group (CCG), integrating the domestic manufacturing and marketing of all Sunrise products aimed at nursing homes and hospitals. In August 1996, following a strategic review of its businesses, the company decided to sell its Comfort Clinic division in order to concentrate on its core healthcare products business. The sale of this division for $14 million was completed in October 1996. In addition to these actions related to the support surfaces business, management conducted in December 1995 an intensive review of the company's other businesses and initiated Operation Rebound, a company-wide profit improvement plan. This plan involved four major elements: the consolidation of the company's domestic salesforces from twelve to six; the integration of a number of the company's smaller divisions operating within the same country or market; the establishment of profit improvement programs at all divisions; and the sale of the air therapy rental business referred to above. In June 1996 the company reached an agreement to settle stockholder litigation filed in November and December 1995 following the announcement of the investigation of accounting practices in its support surfaces business and subsequent restatement of the company's 1995 and 1994 financial statements. The company also announced plans to consolidate certain European operations. As a result of these actions, the Sunrise recorded pre-tax charges from unusual items of $65.2 million in 1996. These charges included: $18.6 million for costs of the internal investigation, restatement, and reissuance of historical financial statements and the settlement of related litigation, including attorneys' fees; $27.6 million for the write-down of assets at Bio Clinic and Comfort Clinic to reflect revised estimates of net asset realizations, including goodwill; and $19.0 million related to the company's reorganization and cost reduction program (including severance costs of $3.2 million). Of the total charges of $65.2 million, approximately $36.2 million required cash payments and $29.0 million represented non-cash charges. During 1997, these reserves were adjusted downward by $4.6 million because of lower than expected costs to relocate operations and to write down assets to be sold. 22 Corporate operating income improved to 4.9% of sales in 1997, compared to 4.1% (excluding unusual item charges) in 1996, due to the decrease in marketing, selling and administrative expenses and the improvement in the support surfaces business. The 1996 decline from 7.1% in the prior year reflected lower gross margins in support surfaces, respiratory and patient aids product lines, as well as higher selling and administrative costs. Interest expense decreased by 11% in 1997 to $14.8 million following an increase of 61% to $16.7 million in 1996. The 1997 reduction resulted from lower average borrowings during 1997, as well as lower average interest rates. The increase in 1996 was primarily due to higher average borrowings required to finance acquisitions completed during 1995 and 1996 and to fund capital expenditures. In addition, higher interest rates caused by market conditions and by less favorable terms in the company's credit agreement contributed to the increase in interest expense in 1996. Interest income increased 15% in 1997 to $3.3 million after an increase of 78% in 1996, reflecting the growth in installment receivables. Management believes that the wide range of installment financing plans offered by its SunMed Finance subsidiary is an important contributor to its market position in the U.S. home healthcare market. In 1997 the company's effective tax rate was 49.7% compared to a tax benefit at an effective rate of 22.1% in 1996 and an effective tax rate of 42.5% in 1995. The effective tax rates differ from the U.S. corporate tax rate of 35% primarily because of non-deductible goodwill amortization. Net income in 1997 was $10.6 million or 1.6% of net sales. As a result of the unusual item charges, the company incurred a net loss of $40.9 million in 1996. Excluding the unusual items, net income was $5.7 million or 0.9% of net sales. In 1995 net income was $19.5 million or 3.2% of net sales. The company attempts to minimize or offset the impact of inflationary pressures on labor and raw material costs through increased sales volume, improved productivity, active cost control measures, and, to a lesser extent, increases in product pricing. The company believes that inflationary material cost increases may continue and that the markets in which it sells its products will remain price-sensitive, thereby limiting its ability to offset higher costs with pricing actions. FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY CASH FLOW Cash flows provided by operations increased 78% to $38 million in 1997 from $22 million in 1996. Cash flows provided by operations were $19 million in 1995. Cash generation (defined as net income plus non-cash charges) has historically been an important source of funding for capital spending, working capital and acquisitions. Cash generation was $45 million (430% of net income) in 1997. This compares to $3 million in 1996 (reflecting the impact of unusual items) and $46 million (236% of net income) in 1995. 23 As noted above, the unusual item charges in 1996 included $36.2 million requiring the payment of cash, of which $18.8 million was paid in 1996 and $9.9 million in 1997. Management estimates that the remaining liability of $7.5 million will require payments of $6.5 million in 1998 and $1 million thereafter. CAPITAL EXPENDITURES Capital spending in 1997 was $29.3 million, or 164% of depreciation expense, compared to $19.0 million, approximately equal to depreciation expense, in 1996. In 1995 capital expenditures were $23.1 million, or 137% of depreciation expense. Significant investments made in 1997 include the $10 million purchase and remodeling of a 370,000 square foot factory site to house the company's consolidated U.K. operations, improvements in telecommunications and data processing systems, upgrades and enhancements in machinery and equipment and new product tooling. The company expects capital expenditures in 1998 to be less than in 1997. ACQUISITIONS On December 27, 1996 the company acquired Kid-Kart, Inc. a manufacturer of pediatric positioning strollers and other dependent mobility products, for 416,000 shares of common stock valued at $6.5 million and cash of $.5 million. The transaction was accounted for as a purchase. Pro forma results of operations giving effect to the acquisition as though it had occurred on July 1, 1995 would not differ materially from amounts reported. In July 1995 the company purchased Coopers Healthcare Plc, a United Kingdom manufacturer of patient aids. This was followed in October by the acquisition of Parker Bath Group, a U.K. manufacturer and distributor of bathing systems and patient lifters. During 1995, Sunrise acquired certain assets and liabilities of Jay Medical Ltd., a Boulder, Colorado-based manufacturer of wheelchair cushions and seating systems. The company also acquired Cozy Craft, a domestic line of seating inserts for which it was already the primary distributor. In Europe in 1995, Sunrise acquired Corona, a French manufacturer of healthcare beds and also purchased two distribution companies in Italy and Switzerland, former importers/distributors for the company. CAPITAL STRUCTURE AND LEVERAGE The company's capital structure consists of two primary components: stockholders' equity and long-term debt. Stockholders' equity was $279.4 million at the end of 1997, an increase of $18.9 million from the prior year-end. In addition to net income of $10.6 million, common stock of $6.5 million was issued in 1997 for the acquisition of Kid-Kart and $0.4 million was issued upon exercise of stock options, and foreign currency translation increased stockholders' equity by $1.4 million. 24 ANALYSIS OF LONG-TERM DEBT 1997 1996 1995 ----------------------------------------------------------------------- Fixed-rate debt as a percentage of total debt at year-end 69 % 66 % 72 % Foreign denominated debt as a percentage of total debt at year-end 58% 56% 41% Weighted average annual interest rate 7.4% 7.8% 6.6% Interest coverage (before unusual items) 2.2 x 1.6 x 4.2 x ----------------------------------------------------------------------- Long-term debt (excluding current installments) decreased by $19 million to $188 million at June 27, 1997, aided by divestiture proceeds, tax refunds, and diligent asset management. The ratio of debt to total capitalization was reduced to 40% at year end, which equates the company's target ceiling, compared to 44% at the end of fiscal 1996. Sunrise attempts to minimize interest expense while also managing its exposure to variable interest rates by employing interest rate exchange agreements, or swaps, to convert its bank borrowings from floating rate into the equivalent of fixed rate debt. However, as a policy Sunrise does not use interest rate swaps or any other derivatives that have a level of complexity or risk which, in the judgment of Sunrise's management, is higher than the exposure to be hedged. The company does not hold or issue such instruments for trading purposes. Sunrise has used foreign-denominated borrowings from its multi-currency credit facility to hedge against foreign currency balance sheet exposures that would otherwise result from changes in currency values. Total foreign-denominated debt at year end was $112 million in 1997 compared to $119 million and $76 million in 1996 and 1995, respectively. The company's multi-currency credit facility provides for maximum borrowings of $250 million, declining to $235 million in January 1999 and $215 million in January 2000. The company must comply with certain covenants, such as the maintenance of leverage ratio and interest coverage, minimum levels of tangible net worth, and certain restrictions on acquisitions. As of June 27, 1997 the company had approximately $79 million of funds available from the credit facility. FOREIGN CURRENCY RISK MANAGEMENT Operating on a global basis requires a posture of active currency risk management. To finance imports and exports, the company utilizes a variety of foreign currencies that are constantly shifting in relative value. The company engages in hedging activities to reduce potential transaction losses on net cash flows and balances denominated in these currencies. These amounts can arise from cross-border trade flows or intercompany financing transactions. The company's financial statements are also affected by foreign currency translation fluctuations. These distort the 25 comparative results of foreign operations when they are translated into U.S. dollars using dissimilar rates. In contrast to transaction gains or losses, translation adjustments are not the result of a cash exchange of currencies and, therefore, do not give rise to a direct economic gain or loss. In these cases the costs to execute hedges would exceed any consistently realizable tangible benefits. Consequently, Sunrise does not commit economic resources to hedge against the potential effect of foreign currency translation fluctuations. It believes that the best long-term protection of stockholder value is to do business in a broad number of currencies. DIVIDEND POLICY The company's present policy is to use available cash flow for reinvestment in its core businesses, for future acquisitions and for debt reduction rather than to pay a cash dividend. This policy reflects an appraisal by management and the Board of Directors, which includes the company's largest stockholder, of the attractiveness of the company's investment opportunities and their confidence in its ability to continue increasing economic value for its stockholders through cash retention and reinvestment. This policy is reviewed periodically as industry conditions change. LITIGATION The company is a party to various legal proceedings arising in the ordinary course of business. Management does not believe that the outcome of any of these actions will have a material adverse effect upon the financial position or results of operations of the company. The Securities and Exchange Commission ("SEC") has entered a formal order of private investigation into the circumstances underlying the restatement of the company's 1995 and 1994 financial statements. The company is cooperating fully with the SEC in its investigation. NEW ACCOUNTING STANDARDS In 1997 the Financial Accounting Standards Board issued the following statements: - - Statement No. 128, "Earnings per Share" ("SFAS 128"). The effects of SFAS 128 is discussed in Note 1 to the consolidated financial statements. The company will adopt SFAS 128 in the second quarter of fiscal 1998. - - Statement No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which requires disclosures about capital structure that had been included in a number of previously issued statements and opinions. The company will comply with the disclosure requirements in 1998. No significant revisions of prior disclosure are expected. - - Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income and its components. The company will adopt SFAS 130 in fiscal 1999. - - Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and 26 services, geographic areas and major customers. The company will adopt SFAS 131 in fiscal 1999. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS The company has made forward-looking statements in this Form 10-K, including the estimated benefits to be realized from the consolidation of various Sunrise divisions worldwide, the timing of completion of these activities and the level of future capital expenditures. These statements are only predictions. Actual events or results may differ materially as a result of risks and uncertainties facing the company including: COMPETITION - The company encounters significant competition domestically from a number of well-established manufacturers in each of its product lines, and from foreign sources for some products. In certain countries and product markets, including the United States, the company may face competition from other manufacturers that have larger market shares or other competitive advantages. PRICING PRESSURES - The growth in national chains and buying groups among home medical equipment providers has caused manufacturers to reduce their effective prices by offering volume discounts. The increasing penetration of managed care into home medical equipment industry is exacerbating this trend. If the company is unable to achieve sufficient manufacturing and technological efficiencies to offset any future price reductions, its profit margins will be adversely affected. RE-ENGINEERING PROGRAM - The company is in the later stages of a three-year corporate re-engineering program that has consolidated its domestic healthcare business into two operating groups and its European operations in France, Germany and the U.K. into country organizations. In fiscal 1998, Sunrise will invest approximately $13 million in two re-engineering programs, including the costs of new and upgraded management information systems necessary to support the newly consolidated operations. These investments are expected to result in future cost reductions and operating efficiencies. There is no assurance, however, that the information system conversion will be completed on schedule and on budget, or that the anticipated re-engineering savings and efficiencies will in fact be achieved. Short term results could also be affected negatively by the disruptions associated with this re-engineering program. RAW MATERIAL COSTS - In the past few years, prices paid by the company for certain raw materials, such as aluminum, foam and wood, have fluctuated. When prices have increased, the company has not always passed along the full effect of such increases to its customers in order to maintain or enhance the company's market position. NEW PRODUCTS - The company's future results will depend in part on its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis that meet evolving customer requirements. Delays in introduction or a disappointing market acceptance could have an adverse effect on the company's business. 27 MEDICARE/MEDICAID FUNDING - The U.S. healthcare industry is heavily reliant upon extensive government regulation and funding at the federal and state levels. Although the company is not a provider under Medicare or Medicaid, its products are sold to home medical equipment ("HME") providers, nursing homes and hospitals which are providers under these programs and do depend upon Medicare and/or Medicaid reimbursement for a portion of their revenue. Changes in Medicare/Medicaid regulations could adversely impact the company's revenues and collections indirectly by reducing the reimbursement rate received by HME providers and thus make it less profitable for them to sell or rent products to the end-user. This, in turn, can put downward pressure on prices charged for the company's products sold through this channel. (See "Business-Government Funding and Regulation".) GOVERNMENT REGULATION - Medical equipment manufactured or sold by the company in the U.S. is subject to regulation by the U.S. Food and Drug Administration ("FDA"). All such medical devices must be the subject of device listings filed with the FDA, and medical device manufacturers must be registered. Certain products require clearance by the FDA prior to marketing and distribution in the United States. Delays in receiving such approval could adversely affect the company's ability to introduce new products on a timely basis and impact the company's results of operations and financial condition. During the last two years, such delays have slowed new product introductions and, in a number of cases, have led to their initial marketing overseas in advance of the United States. In addition, the company and its products are subject to similar regulation in other countries. INTERNATIONAL OPERATIONS - An increasing portion of the company's sales in recent years has been derived from its international operations. The company's international financial results could be significantly affected by such factors as: government budgetary pressures and payment policies for healthcare products, difficulties in staffing and managing foreign operations, and other risks associated with international activities. The company disclaims any obligation to update any of the factors that may affect future operating results or to announce publicly the result of any revisions to any of the forward-looking statements contained in this Form 10-K, or to make corrections to reflect future events or developments. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following are included herein: PAGE ---- Report of Management 29 Independent Auditors' Report 30 Consolidated balance sheets as of June 27, 1997 and June 28, 1996 31 Consolidated statements of operations for the years ended 32 June 27, 1997, June 28, 1996 and June 30, 1995 Consolidated statements of cash flows for the years ended 33 June 27, 1997, June 28, 1996 and June 30, 1995 Consolidated statements of stockholders' equity for the years 34 ended June 27, 1997, June 28, 1996 and June 30, 1995 Notes to consolidated financial statements 35 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 REPORT OF MANAGEMENT The management of Sunrise Medical Inc. is responsible for the preparation, integrity and accuracy of the accompanying financial statements and related information. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and include amounts based on our best estimates and informed judgments, as required. Management maintains a comprehensive system of internal controls supported by formal policies and procedures, a written code of business conduct, periodic internal audits and management reviews. Although no cost-effective system will preclude all errors and irregularities, we believe Sunrise Medical has in place a system of internal controls which provides reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition, transactions are recorded in accordance with our policies, and the financial information presented to our stockholders is reliable. The Audit Committee of the Board of Directors is comprised solely of outside directors. The Audit Committee meets periodically with the independent auditors, our internal auditors and financial management to ensure that each is carrying out its responsibilities. Both the independent auditors and the internal auditors 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. The consolidated financial statements have been audited by KPMG Peat Marwick LLP, who have expressed their opinion elsewhere herein with respect to the fairness of the statements. Their audits included a review of the system of internal control and tests of transactions to the extent they considered necessary to render their opinion. Richard H. Chandler CHAIRMAN AND CHIEF EXECUTIVE OFFICER Ted N. Tarbet SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER John M. Radak VICE PRESIDENT AND CONTROLLER 30 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Sunrise Medical Inc.: We have audited the accompanying consolidated balance sheets of Sunrise Medical Inc. and Subsidiaries as of June 27, 1997 and June 28, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 27, 1997. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 14.a(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunrise Medical Inc. and Subsidiaries as of June 27, 1997 and June 28, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 27, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Los Angeles, California August 13, 1997 31 SUNRISE MEDICAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
June 27, June 28, 1997 1996 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 2,823 $ 1,785 Trade receivables, net of allowance for doubtful accounts of $5,075 and $11,523, respectively 114,223 123,924 Installment receivables, net 13,351 10,312 Income tax refunds receivable 3,794 12,535 Inventories 88,757 80,937 Deferred income taxes 11,343 17,802 Other current assets 3,703 5,016 --------- --------- Total current assets 237,994 252,311 Property and equipment, net 90,852 82,246 Goodwill and other intangible assets, less accumulated amortization of $39,440 and $31,167, respectively 274,410 278,857 Other assets, net 7,293 7,002 --------- --------- Total assets $ 610,549 $ 620,416 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 4,942 $ 5,748 Trade accounts payable 47,486 42,861 Accrued compensation and other expenses 81,216 88,331 Income taxes payable 2,119 10,380 --------- --------- Total current liabilities 135,763 147,320 Long-term debt, less current installments 188,061 207,446 Deferred income taxes 7,305 5,096 Stockholders' equity: Preferred stock, $1 par. Authorized 5,000 shares; none issued -- -- Common stock, $1 par. Authorized 40,000 shares; 19,304 and 18,847 shares, respectively, issued and outstanding 19,304 18,847 Additional paid-in capital 202,379 195,906 Retained earnings 55,978 45,409 Cumulative foreign currency translation adjustment 1,759 392 --------- --------- Total stockholders' equity 279,420 260,554 --------- --------- Total liabilities and stockholders' equity $ 610,549 $ 620,416 --------- --------- --------- ---------
(See accompanying notes to consolidated financial statements) 32 SUNRISE MEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years Ended ----------------------------------- June 27, June 28, June 30, 1997 1996 1995 -------- -------- -------- Net sales $656,742 $667,130 $601,927 Cost of sales 443,061 446,505 396,276 ------- ------- ------- Gross profit 213,681 220,625 205,651 Marketing, selling and administrative expenses 144,695 159,109 134,511 Research and development expenses 16,506 15,544 13,937 Corporate expenses 12,109 9,998 7,360 Amortization of goodwill and other intangibles 8,273 8,686 6,823 Unusual items -- 65,152 -- ------- ------- ------- Corporate operating income (loss) 32,098 ( 37,864) 43,020 ------- ------- ------- Other (expense) income: Interest expense ( 14,774) ( 16,687) ( 10,358) Interest income 3,303 2,878 1,617 Other income and expense, net 400 ( 787) ( 416) ------- ------- ------- ( 11,071) ( 14,596) ( 9,157) ------- ------- ------- Income (loss) before income taxes 21,027 ( 52,460) 33,863 Income tax expense (benefit) 10,458 ( 11,593) 14,392 ------- ------- ------- Net income (loss) $ 10,569 $( 40,867) $ 19,471 ------- ------- ------- ------- ------- ------- Net income (loss) per share $ 0.55 $( 2.17) $ 1.03 ------- ------- ------- ------- ------- ------- Weighted average number of shares outstanding 19,196 18,810 18,819 ------- ------- ------- ------- ------- -------
(See accompanying notes to consolidated financial statements) 33 SUNRISE MEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended ----------------------------------- June 27, June 28, June 30, 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 10,569 $( 40,867) $ 19,471 Depreciation and amortization 17,882 19,090 16,854 Amortization of goodwill and other intangibles 8,273 8,686 6,823 Deferred income taxes 8,731 ( 13,140) 2,866 Unusual items--non-cash charges -- 28,978 -- Changes in assets and liabilities, net of effect of acquisitions: Receivables, net 1,180 4,808 ( 4,334) Installment receivables (3,468) 2,476 ( 7,687) Inventories (8,490) 2,983 ( 10,616) Prepaid expenses and other assets 5,476 2,967 ( 4,951) Income taxes 480 ( 3,257) ( 1,585) Accounts payable and other liabilities (2,435) 8,793 1,950 --------- --------- -------- Net cash provided by operating activities 38,198 21,517 18,791 ------- ------- ------- Cash flows from investing activities: Purchase of property and equipment ( 29,250) ( 19,041) ( 23,144) Proceeds from sale of businesses 14,000 6,004 -- Net cash invested in acquisition of businesses ( 856) ( 23,072) ( 52,254) --------- --------- -------- Net cash used for investing activities ( 16,106) ( 36,109) ( 75,398) --------- --------- -------- Cash flows from financing activities: Borrowings of long-term debt 124,885 191,759 208,335 Repayments of long-term debt (146,374) (177,335) ( 156,220) Proceeds from issuance of common stock 446 273 3,604 ------- ------- -------- Net cash (used for) provided by financing activities ( 21,043) 14,697 55,719 -------- ------- ------- Effect of exchange rate changes on cash ( 11) ( 60) 47 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,038 45 ( 841) Cash and cash equivalents at beginning of year 1,785 1,740 2,581 --------- --------- -------- Cash and cash equivalents at end of year $ 2,823 $ 1,785 $ 1,740 --------- --------- -------- --------- --------- --------
(See accompanying notes to consolidated financial statements) 34 SUNRISE MEDICAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Common Stock Foreign Total -------------------- Additional Currency Stock- Number Paid-in Retained Translation holders' of Shares Amount Capital Earnings Adjustment Equity --------- ---------- ---------- --------- ----------- ---------- Balance at July 1, 1994 17,996 $ 17,996 $ 175,965 $ 66,805 $ (1,227) $ 259,539 --------- --------- ---------- --------- ----------- ---------- Exercise of stock options, including associated tax benefits, net 261 261 3,343 - - 3,604 Issuance of stock for acquisitions 340 340 10,647 - - 10,987 Net income - - - 19,471 - 19,471 Foreign currency translation adjustment - - - - 5,892 5,892 --------- --------- ---------- --------- ----------- ---------- Balance at June 30, 1995 18,597 18,597 189,955 86,276 4,665 299,493 --------- --------- ---------- --------- ----------- ---------- Exercise of stock options, including associated tax benefits 27 27 246 - - 273 Issuance of stock for acquisition 223 223 5,705 - - 5,928 Net loss - - - (40,867) - (40,867) Foreign currency translation adjustment - - - - (4,273) (4,273) --------- --------- ---------- --------- ----------- ---------- Balance at June 28, 1996 18,847 18,847 195,906 45,409 392 260,554 --------- --------- ---------- --------- ----------- ---------- Exercise of stock options, including associated tax benefits 41 41 405 - - 446 Issuance of stock for acquisition 416 416 6,068 - - 6,484 Net income - - - 10,569 - 10,569 Foreign currency translation adjustment - - - - 1,367 1,367 --------- --------- ---------- --------- ----------- ---------- Balance at June 27, 1997 19,304 $ 19,304 $ 202,379 $ 55,978 $ 1,759 $ 279,420 --------- --------- ---------- --------- ----------- ---------- --------- --------- ---------- --------- ----------- ----------
(See accompanying notes to consolidated financial statements) 35 SUNRISE MEDICAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Sunrise Medical Inc. (the "company") designs, manufactures and markets medical products used in institutional and homecare settings that address the recovery, rehabilitation, and respiratory needs of the patient. Products include custom, manual and electric wheelchairs, wheelchair seating systems, ambulatory and bath safety aids, home respiratory devices, patient-room beds and furnishings, and therapeutic mattresses and support surfaces. The company's products are designed to meet the special needs of four groups of people: the elderly, the disabled, the recovering patient, and the respiratory sufferer. BASIS OF PRESENTATION The consolidated financial statements include domestic and foreign subsidiaries. All material intercompany profits, balances and transactions have been eliminated. Accounts denominated in foreign currencies have been translated using year-end exchange rates for assets and liabilities, while revenues and expense are translated at exchange rates prevailing during the year. Adjustments for foreign currency translation fluctuations are deferred as a separate element of consolidated stockholders' equity. The preparation of financial statements in conformity with generally accepted accounting principles requires management estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from management's estimates. FISCAL YEAR END The company's fiscal year ends on the Friday closest to June 30, resulting in years of either 52 or 53 weeks. The years ended June 27, 1997, June 28, 1996 and June 30, 1995 each contained 52 weeks. INVENTORIES Certain inventories are stated at the lower of last-in, first-out (LIFO) cost or market value. All other inventories are stated at the lower of first-in, first-out (FIFO) cost or market value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over estimated useful lives by the straight-line or declining balance methods. Assets recorded under capital leases and leasehold improvements are amortized over the shorter of their useful lives or the related lease terms by the straight-line method. The estimated useful lives are five to 42 years for buildings and improvements and two to 15 years for machinery and equipment. GOODWILL The excess of purchase price over the fair value of net assets of acquired subsidiaries (goodwill) is amortized on a straight-line basis over periods of 20 to 40 years, depending on the nature and type of business acquired. 36 LONG-LIVED ASSETS Effective with the first quarter of fiscal 1997, the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement requires that impairment loss be recorded on long-lived assets used in operations, such as property and equipment and intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. This loss is measured by the difference between carrying amounts and estimated fair values. The effect of adoption was not material. DERIVATIVE FINANCIAL INSTRUMENTS The company uses derivative financial instruments to reduce its financial market risks by hedging foreign currency and interest rate market exposures. The company does not use derivative financial instruments for speculative or trading purposes. Criteria used in designating an instrument as a hedge include the instrument's effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. Gains and losses on currency forward contracts that are designated and effective as hedges of anticipated transactions are deferred and recognized in income in the same period that the underlying transactions are settled and generally offset the losses and gains on the underlying transactions. Gains and losses on any instruments not meeting the above criteria would be recognized in income in the current period. Income or expense on interest rate swaps is accrued as an adjustment to the yield of the debt that is hedged. REVENUE RECOGNITION The company recognizes revenue from product sales at the time of shipment and provides an appropriate allowance for estimated returns and adjustments. WARRANTY COSTS Certain products are covered by warranties against defects in material and workmanship for periods of up to five years. Components of certain products carry a lifetime warranty. The estimated warranty cost is recorded at the time of sale and is adjusted periodically to reflect actual experience. RESEARCH AND DEVELOPMENT COSTS Research and development costs relate to both present and future products and are expensed in the year incurred. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The company has chosen to present required disclosures and to continue to account for stock-based employee compensation using the method prescribed in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the company's stock at the date of grant over the amount an employee must pay to acquire the stock. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of shares of outstanding common stock and dilutive common stock equivalents from the assumed exercise of stock options. Fully diluted earnings per share are not materially different from primary amounts. Pursuant to Statement of Financial Accounting Standards No. 37 128, "Earnings per Share," which is effective for periods ending after December 15, 1997, the company's basic net income (loss) per share would have been $0.55 in 1997, $(2.17) in 1996 and $1.06 in 1995; diluted per share data would have been $0.55, $(2.17) and $1.03, respectively. CASH FLOW INFORMATION Cash payments for interest in 1997, 1996 and 1995 were $14,183, $16,060 and $9,547, respectively. Cash payments of $10,615, $8,842 and $13,912 were made for income taxes in 1997, 1996 and 1995, respectively. The company received income tax refunds of $9,680 in 1997 and $6,834 in 1996. 2. FINANCIAL INSTRUMENTS CASH AND CASH EQUIVALENTS Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates their fair value. INSTALLMENT RECEIVABLES Installment receivables consist of the following: June 27, June 28, 1997 1996 ------ ------ Current portion $ 17,994 $ 14,293 Less: Unearned interest ( 2,409) ( 2,225) Allowance for doubtful accounts ( 2,234) ( 1,756) ------ ------- Net current portion 13,351 10,312 Due after one year (included in other assets) 6,190 5,761 ------- ------- Total installment receivables, net $ 19,541 $ 16,073 ------- ------- ------- ------- The carrying amount of installment receivables approximates their fair value. The majority of these receivables are due in less than one year, and the related interest rates have not varied significantly over the past two years. LONG-TERM DEBT Based on borrowing rates currently available to the company for bank loans with similar terms and average maturities, the carrying amount of long-term debt at June 27, 1997 and June 28, 1996 approximated its fair value. FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS The company transacts business in various foreign currencies, primarily European currencies. The company uses currency forward contracts and currency options to protect against reductions in value and volatility of future cash flows caused by changes in foreign exchange rates. The maturities of these instruments are generally less than one year. Deferred gains or losses attributable to foreign currency instruments are not material. SWAP AGREEMENTS The fair market value of interest rate swap agreements (Note 7) is the amount the company would be required to pay to terminate them, which is estimated to be $1,622 38 at June 27, 1997 ($1,211 at June 28, 1996). Net receipts or payments under all swap agreements are included in interest expense. The company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreements. However, the company considers the risk of nonperformance by the other party to be minimal because the party to each swap agreement is a member of the company's bank group. 3. BALANCE SHEET ITEMS Inventories consist of the following: June 27, June 28, 1997 1996 -------- -------- Raw material $34,501 $33,980 Work-in-progress 11,570 9,629 Finished goods 42,686 37,328 ------ ------ Total inventories $88,757 $80,937 ------ ------ ------ ------ If all inventories had been valued at FIFO cost, inventories would have been approximately $90,178 and $82,829 for 1997 and 1996, respectively. The components of property and equipment are as follows: June 27, June 28, 1997 1996 ---- ---- Land $ 5,194 $ 5,434 Buildings, machinery and equipment 159,488 140,191 Leasehold improvements 9,590 11,772 -------- -------- 174,272 157,397 Less accumulated depreciation and amortization ( 83,420) ( 75,151) -------- ------- Property and equipment, net $ 90,852 $ 82,246 ------- ------- ------- ------- 4. ACQUISITIONS On December 27, 1996 the company acquired Kid-Kart, Inc., a manufacturer of pediatric positioning strollers and other dependent mobility products, for 416,000 shares of common stock valued at $6.5 million and cash of $.5 million. The transaction was accounted for as a purchase. Pro forma results of operations giving effect to the acquisition as though it had occurred on July 1, 1995 would not differ materially from amounts reported. In July 1995 the company acquired Coopers Healthcare Plc, a United Kingdom-based manufacturer of patient aids, for 222,266 shares of common stock (valued at $5.9 million) and cash of $2.5 million. In October 1995 the company acquired Parker Bath Group, a U.K. 39 manufacturer and distributor of bathing systems and patient lifters, for cash and notes amounting to $30.0 million. In April 1995 the company acquired the outstanding stock of S.E.P.A.C., Corona S.A., Tecktona Bois S.A. and Tecktona Sante S.A., a group of related French corporations (collectively, "Corona") for approximately $42.9 million. The total purchase price of 206 million French francs included 174,918 shares of Sunrise common stock valued at 31 million French francs with the remainder in cash, which was funded from the company's bank credit facility. Corona manufactures and markets hydraulic and electric beds and other furniture for the homecare, nursing home and hospital markets in France. In September 1994 the company purchased selected assets and liabilities of Jay Medical, Ltd. ("Jay") for approximately $31 million. The total purchase price included cash of $19 million also financed through the multi-currency credit facility, a subordinated note of $7.5 million and 165,789 shares of Sunrise Medical Inc. common stock valued at $4.5 million when issued in December 1994. Jay manufactures specialized wheelchair seating and positioning products which it markets throughout the world. Also during fiscal 1995 the company acquired a U.S. manufacturer of adaptive seating accessories for wheelchairs and two wheelchair distributors, one in Italy and one in Switzerland. These companies were acquired for approximately $3.7 million, consisting of $2.4 million in cash and $1.3 million in subordinated notes. All of these acquisitions were accounted for by the purchase method of accounting. The excess of the aggregate purchase price over the fair market value of net assets acquired of approximately $6 million in 1997, $36 million in 1996, and $69 million in 1995 was recognized as goodwill and is being amortized over periods ranging from 20 to 40 years. The operating results of all acquisitions are included in the consolidated results of operations from the respective dates of acquisition. 5. UNUSUAL ITEMS In December 1995 the company completed an intensive review of its operations and businesses and initiated Operation Rebound, a corporate-wide profit improvement plan. This plan involved four major elements: the consolidation of the company's U.S. salesforces from twelve to six; the integration of a number of the company's smaller divisions operating within the same country or market; establishment of profit improvement programs at all divisions; and the sale of the Bio Clinic division's air therapy rental business because of declining margins and high administrative costs. Approximately 250 positions were eliminated (including 83 positions in the air therapy rental business transferred as of January 31, 1996 to the buyer of that business), or 6% of the company total. The air therapy rental business had net sales of $7.6 million in 1996 through the date of sale; its net sales in 1995 and 1994 were $13.1 million and $12.8 million, respectively. In June 1996 the company reached a settlement of stockholder litigation initiated in October and November 1995 following the announcement of an internal investigation of financial reporting at the Bio Clinic division. The company also initiated the merger of the remaining Bio Clinic business into the Joerns division (thereby eliminating an estimated 60 positions), and commenced 40 a company-wide reorganization of its operations with the goal of reducing the company's general and administrative cost structure. Also in June 1996, following a strategic review of its businesses, the company decided to sell its Comfort Clinic division in order to concentrate on its core healthcare products business, necessitating a write-down of its investment to estimated net realizable value which was recorded in the fourth quarter of 1996. The Comfort Clinic division was sold in October 1996 for cash of $14 million. Sales through the date of sale were $13.9 million, while the division's sales in 1996 and 1995 were $44 million and $66 million, respectively. As a result of these actions, the company in 1996 recorded pretax charges from unusual items of $65.2 million, of which $34.8 million was recorded in the second quarter and $30.4 million in the fourth quarter. These charges included: $18.6 million for costs of the internal investigation and settlement of related litigation, including attorneys' fees; $27.6 million related to Bio Clinic and Comfort Clinic, consisting of loss on the sale of businesses of $5.8 million, goodwill write-downs of $13.8 million and other asset adjustments of $8.0 million to reflect revised estimates of net asset realizations; and $19.0 million related to the company's reorganization and cost reduction program. During 1997, these reserves were adjusted downward by $4.6 million because of lower than expected costs to relocate operations and to write down assets to be sold. In 1997 the company announced the consolidation of its four U.S. homecare divisions into the Home Healthcare Group based in Longmont, Colorado, and a series of consolidations in its European operations. These actions were designed to reduce operating costs and improve manufacturing and marketing efficiencies. Pre-tax charges of $4.7 million were incurred in 1997 in connection with these consolidations. The following table summarizes the restructuring activity through June 27, 1997 (in millions):
Total Adjust- Additional Amounts Balance Unusual ments: Charges Utilized at Item Increase/ in Fiscal Through June 27, Charge (Decrease) 1997 June 1997 1997 ------ ---------- --------- ---------- --------- Bio Clinic/Comfort Clinic: Litigation and investigation $ 18.6 $( 0.4) $ -- $( 16.0) $ 2.2 Investment write-down and related items 27.6 ( 3.6) -- ( 22.6) 1.4 ------ -------- -------- ------- ------ 46.2 ( 4.0) -- (38.6) 3.6 Corporate reorganization: Severance 3.2 ( 0.5) 1.4 ( 3.1) 1.0 Facility closings 5.4 ( 0.2) 1.4 ( 2.6) 4.0 Other 10.4 0.1 1.9 ( 9.5) 2.9 ------ -------- -------- ------- ------ 19.0 ( 0.6) 4.7 ( 15.2) 7.9 ------ -------- -------- ------- ------ Total $ 65.2 $( 4.6) $ 4.7 $( 53.8) $ 11.5 ------ -------- -------- ------- ------ ------ -------- -------- ------- ------
41 Of the original charges of $65.2 million, approximately $36.2 million require cash payments and $29.0 million represent non-cash charges. Cash payments of $18.8 million were made in 1996 and $9.9 million in 1997. Management estimates that the remaining liability of $7.5 million will require payments of $6.5 million in 1998 and $1 million thereafter. 6. LEASES The company leases office and operating facilities, machinery and equipment and automobiles under operating leases which expire over the next 20 years. Rent expense for operating leases amounted to $10,443, $9,698 and $8,332 for 1997, 1996 and 1995, respectively. Minimum lease payments under operating leases expiring subsequent to June 27, 1997 are: Year Ended Amount ---------- ------ 1998 $10,216 1999 6,443 2000 4,624 2001 3,568 2002 3,018 Thereafter 12,438 ------ Total minimum lease payments $40,307 ------ ------ 42 7. LONG-TERM DEBT
Long-term debt consists of the following: June 27, June 28, 1997 1996 ---- ---- Borrowings under multi-currency credit agreement $170,581 $188,205 Unsecured subordinated notes maturing from 1998 to 2003, payable in installments with interest rates from 7% to 10% (7% to 9.26% in 1996) 13,051 18,422 Unsecured European Coal and Steel Community job creation loan due 2002; interest at Libor +1% payable semiannually 4,161 -- Mortgages payable in monthly installments with interest at various rates from 6.65% to 9.1%, maturing from 1998 through 2004, secured by property 3,473 3,922 Obligations under capital leases with lease periods expiring at various dates through 2005; interest at various rates from 6.25% to 14.8% 1,737 2,645 --------- --------- Total long-term debt 193,003 213,194 Less current installments ( 4,942) ( 5,748) ---------- ---------- Long-term debt, net of current installments $188,061 $207,446 ---------- ---------- ---------- ----------
As of June 27, 1997, aggregate debt maturities were as follows: 1998--$4,942; 1999--$3,410; 2000--$4,730; 2001--$172,533; 2002--$4,448; and thereafter--$2,940. The company's unsecured multi-currency bank credit facility provides for maximum borrowings of $250 million, decreasing to $235 million in January 1999 and to $215 million in January 2000. The maturity date is January 2001 and interest is at the prime rate. The company has the option of using interbank offered rates as a basis for interest and can fix the interest rate on the outstanding portion for up to six months. A commitment fee of .15% to .30% per year, depending upon the company's leverage ratio, is payable on the unused portion of the line. The credit facility requires the company to comply with certain covenants such as maintenance of leverage ratio, tangible net worth, and interest coverage, and places certain restrictions on acquisitions. At June 27, 1997, the amount of funds available from the credit facility was approximately $79 million. SWAP AGREEMENTS The company has entered into 11 interest rate swap agreements with U.S. money center banks in order to minimize the impact of interest rate fluctuations on the company's 43 interest expense. Each swap agreement is denominated in the currency of the related borrowings. Under the terms of each agreement the company receives compensation when the three-month interbank offered rate of the respective currency exceeds the swap rate and pays compensation when it falls below the swap rate. At June 27, 1997 the three-month interbank offered rates were: French francs--3.33%; U.S. dollars--5.81%; and German marks--3.08%. The following table summarizes the company's interest rate swap agreements. The U.S. dollar equivalent is based on exchange rates in effect at June 27, 1997. - -------------------------------------------------------------------------------- U.S. Notional Dollar Swap Amount Currency Amount Rate Effective Period - ------ -------- ------ ---- ---------------- 100,000 French francs $17,050 7.59% April 1997 - April 2000 85,000 French francs $14,493 3.50% April 1997 - April 1998 85,000 French francs $14,493 4.15% April 1998 - April 1999 85,000 French francs $14,493 5.09% April 1999 - April 2000 85,000 French francs $14,493 5.95% April 2000 - April 2001 40,000 German marks $23,004 3.28% February 1997 - February 1998 33,000 German marks $18,978 4.09% February 1998 - February 1999 30,000 U.S. dollars $30,000 5.29% September 1995 - September 1997 30,000 U.S. dollars $30,000 5.63% September 1995 - September 2000 25,000 German marks $14,378 5.01% February 1999 - February 2000 25,000 German marks $14,378 5.97% February 2000 - February 2001 - -------------------------------------------------------------------------------- 8. BUSINESS AND CREDIT CONCENTRATIONS The company manufactures and distributes durable medical equipment and supplies primarily to the home health care and extended care markets. A significant portion of the company's receivables are due from home health care and medical equipment dealers located throughout the United States, Canada and Europe. Many of these product sales to dealers are ultimately funded through government reimbursement programs such as Medicare and Medicaid. Any changes in these programs could affect dealer liquidity and profitability. This, in turn, could put pressure on prices charged and credit terms offered for the company's products sold through this channel of distribution. The company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. 44 9. INCOME TAXES The provision (benefit) for income taxes consists of the following: Years Ended ---------------------------------------- June 27, June 28, June 30, 1997 1996 1995 ---- ---- ---- Current: Federal $( 205) $( 5,962) $ 4,635 State 217 23 587 Foreign 4,463 7,486 4,681 ------ ------ ------ 4,475 1,547 9,903 Deferred: Federal 5,935 (12,060) 3,327 State 533 ( 238) 936 Foreign ( 485) ( 842) 226 ------ ------ ------ 5,983 (13,140) 4,489 ------ ------ ------ Total $10,458 $(11,593) $14,392 ------ ------ ------ ------ ------ ------ Foreign income taxes are based upon $8,768, $16,126 and $13,489 of foreign earnings before income taxes during 1997, 1996 and 1995, respectively. No deferred federal income taxes have been provided for cumulative foreign earnings of $65,366 as the company has no plans or intentions to repatriate foreign earnings or liquidate the related foreign assets. At June 27, 1997, the company had foreign tax loss carryforwards of approximately $6,680, consisting of $676 which expires in 1998, $5,119 which expires between 2000 and 2004, and $885 which does not expire. A reconciliation between the federal statutory tax rate and the effective income tax rate follows:
Years Ended ----------------------------------------- June 27, June 28, June 30, 1997 1996 1995 ---- ---- ---- Statutory federal income tax rate 35.0% ( 35.0)% 35.0% Amortization of goodwill 6.5 10.8 4.2 State income taxes, net of federal taxes 2.6 -- 2.9 Taxation of foreign operations 4.3 1.9 0.5 Other, net 1.3 0.2 ( 0.1) ------ ------ ------ Effective income tax rate 49.7% ( 22.1)% 42.5% ------ ------ ------ ------ ------ ------
45 Significant components of deferred income tax assets and liabilities are shown below:
June 27, June 28, 1997 1996 ---- ---- Deferred income tax assets: Allowance for doubtful accounts $ 3,563 $ 4,663 Inventory reserves 4,295 4,407 Accrued expenses 5,030 8,732 State and local taxes ( 1,545) -- ------- ------- 11,343 17,802 ------ ------- Deferred income tax liabilities: Depreciation and amortization 7,305 5,096 ------- ------- Net deferred income taxes $ 4,038 $12,706 ------- ------- ------- -------
Management believes that realization of the tax benefit of net deferred tax assets is more likely than not. 10. PROFIT SHARING/SAVINGS PLAN The company has a 401(k) profit sharing/savings plan covering most U.S. employees ("Associates"). Under the profit sharing portion of the plan, the company will contribute to Associates' accounts a percentage of their salary for the fiscal year. The percentage amount is based upon attainment of certain earnings targets by the company as a whole in the case of corporate office Associates, or by the subsidiary where the Associate works. The plan is discretionary as the amounts are determined based on earnings targets set by the Board of Directors. During 1997, 1996 and 1995, $2,533, $2,518 and $2,373, respectively, were accrued for this plan. Under the savings feature of the plan, individual Associates may make contributions to the plan, which are matched by the company in an amount determined by the Board of Directors. During 1997, 1996 and 1995, $745, $790 and $709, respectively, of Associate contributions were matched by the company. 11. STOCKHOLDERS' EQUITY COMMON STOCK PURCHASE RIGHTS In April 1990 the company's Board of Directors declared a dividend of one common share purchase right ("Right") for each outstanding share of common stock. Pursuant to the stockholder Rights Agreement as amended in May 1997, an exercisable Right will, under certain conditions, entitle its holder to purchase from the company one-half of one share of common stock at the exercise price of $60.00 per whole share, subject to adjustment, until May 16, 2007. The Rights will become exercisable ten days after a person (an "Acquiring Person") acquires 15% or more of the common stock, or ten days after a person announces a tender offer which would result in such person acquiring 15% or more of the 46 common stock. The Rights may be redeemed by the Board of Directors for $.01 per Right at any time until ten days following the public announcement that a person has become an Acquiring Person. Under certain circumstances after a person becomes an Acquiring Person, or after a merger or other business combination involving the company, an exercisable Right will entitle its holder (other than the Acquiring Person) to purchase shares of common stock (or shares of an acquiring company) having a market value of two times the exercise price of one Right. STOCK OPTION PLANS The 1983 Stock Option Plan as amended ("the 83 Plan") provided for the grant of up to 1,800,000 shares of common stock to officers, key Associates and outside directors in the form of incentive stock options or non-qualified stock options. The 83 Plan expired in August 1995. In August 1993 the company adopted the 1993 Stock Option Plan ("the 93 Plan") providing for the grant of up to 4,000,000 shares of common stock to officers, outside directors and key Associates in the form of incentive stock options or non-qualified stock options. At the time of adoption, 300,000 unissued shares of common stock were reserved for future grants under the 93 Plan. The number of unissued shares of common stock reserved for future grants under the 93 Plan increases annually by a number equal to 1.5% of the number of shares of common stock issued and outstanding as of the last day of each fiscal year. The 93 Plan expires in August 2003. Under both plans, the option price (exercise price) is equal to the closing market price on the day prior to the grant date. Options become exercisable in four equal annual amounts, beginning one year after the grant date. Option exercisability is cumulative. Unexercised options expire up to ten years and one day after the date of grant. As of June 27, 1997 there were 431,904 unissued shares of common stock reserved for future grants under the 93 Plan. Shares subject to option under both plans are summarized as follows:
Years Ended -------------------------------------------------------------------------------------- June 27, 1997 June 28, 1996 June 30, 1995 ------------- ------------- ------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 1,365,350 $17.47 1,259,175 $18.56 1,312,175 $15.48 Granted 409,500 14.88 327,400 14.59 295,425 25.09 Exercised ( 41,850) 10.05 ( 27,200) 8.36 ( 268,750) 10.14 Canceled ( 175,350) 18.74 ( 194,025) 20.99 ( 79,675) 20.08 -------- ------ -------- ----- -------- ------ Outstanding at end of year 1,557,650 $16.85 1,365,350 $17.47 1,259,175 $18.56 Exercisable at end of year 817,643 $16.75 688,337 $15.73 536,776 $13.53 Weighted average fair value of options granted during the year $ 5.82 $ 6.13 n/a
47 The following table summarizes information about stock options outstanding at June 27, 1997: Options Outstanding Options Exercisable - ----------------------------------------------------- ---------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ------- ----- ----------- ----- $ 4.56 to $12.00 243,150 5.0 $ 8.22 178,850 $ 7.54 $12.38 to $15.88 696,550 8.0 $14.66 216,153 $13.56 $17.25 to $21.88 336,150 6.1 $19.72 261,526 $19.61 $23.50 to $35.88 281,800 7.1 $26.25 161,114 $26.58 --------- ---- ------ ------- ------ 1,557,650 6.9 $16.85 817,643 $16.75 The company applies APB 25 and related interpretations in accounting for grants to employees under its stock option plans. Because the exercise price of the options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized in the company's financial statements. Pro forma disclosures assuming compensation cost had been determined based on the fair value of stock options at the grant dates consistent with the method of SFAS 123 are as follows: 1997 1996 -------- --------- Net income (loss) As reported $10,569 $(40,867) Pro forma $ 9,904 $(41,075) Earnings (loss) per share As reported $ 0.55 $( 2.17) Pro forma $ 0.52 $( 2.18) The fair value of options granted has been estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997 and 1996 respectively: expected volatility of 43% and 46% (based on daily closing stock prices for the preceding four years); risk-free interest rates of 6.4% and 6.7%; expected lives of 4.9 years; and no dividend yield. For purposes of the pro forma disclosures, the estimated fair value of the options has been amortized to expense over the vesting period of the options. Because SFAS 123 is applicable only to options granted subsequent to June 28, 1995, the pro forma effect will not be fully reflected until 1999. 48 12. GEOGRAPHIC SEGMENT INFORMATION Selected geographic information is summarized as follows:
Years Ended ---------------------------------------- June 27, June 28, June 30, 1997 1996 1995 ---- ---- ---- Net sales: United States $388,351 $412,361 $437,331 Europe 268,391 254,769 164,596 ------- ------- ------- Total $656,742 $667,130 $601,927 ------- ------- ------- ------- ------- ------- Corporate operating income (loss): United States $ 10,820 $( 60,214) $ 24,277 Europe 21,278 22,350 18,743 ------- ------- ------- Total 32,098 ( 37,864) 43,020 Interest expense ( 14,774) ( 16,687) ( 10,358) Interest income 3,303 2,878 1,617 Other income and expense, net 400 ( 787) ( 416) ------- ------- ------- Income (loss) before income taxes $ 21,027 $( 52,460) $ 33,863 ------- ------- ------- ------- ------- ------- IDENTIFIABLE ASSETS AT END OF YEAR United States $271,450 $307,511 $336,040 Europe 339,099 312,905 268,703 ------- ------- ------- Total $610,549 $620,416 $604,743 ------- ------- ------- ------- ------- -------
Amounts reported for United States include immaterial amounts from subsidiaries in Canada and Australia. Eliminated from net sales shown above for 1997, 1996 and 1995 were $4,261, $1,270 and $960, respectively, of sales by European subsidiaries to North American subsidiaries, and $17,496, $18,146 and $13,053 of sales, respectively, by North American subsidiaries to European subsidiaries. Sales between geographic locations are based upon manufacturing costs plus a reasonable profit element. 49 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share data)
First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----- 1997 Net sales $165,353 $169,710 $158,419 $163,260 $656,742 Gross profit 54,454 54,612 50,774 53,841 213,681 Net income 3,060 2,452 1,104 3,953 10,569 Earnings per share $ 0.16 $ 0.13 $ 0.06 $ 0.20 $ 0.55 1996 Net sales $157,172 $173,710 $169,574 $166,674 $667,130 Gross profit 54,700 54,157 56,204 55,564 220,625 Net income (loss) 3,794 (24,092) 2,694 (23,263) ( 40,867) Earnings (loss) per share $ 0.20 $( 1.28) $ 0.14 $( 1.23) $( 2.17)
50 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of the company is included under the caption "Election of Directors" in the company's Definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 13, 1997 and is incorporated herein by reference. Information regarding the executive officers of the company is included under a separate caption in Part I hereof, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Certain information regarding executive compensation is set forth under the caption "Compensation of Executive Officers" in the company's Definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 13, 1997 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the company's Definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 13, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding related transactions is set forth under the caption "Certain Transactions" in the company's Definitive Proxy Statement for its Annual Meeting of Stockholders to be held on November 13, 1997 and is incorporated herein by reference. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) INDEX TO FINANCIAL STATEMENTS (1) FINANCIAL STATEMENTS: PAGE ---- Report of Management 29 Independent Auditors' Report 30 Consolidated Balance Sheets as of June 27, 1997 and June 28, 1996 31 Consolidated Statements of Operations for the years 32 ended June 27, 1997, June 28, 1996 and June 30, 1995 Consolidated Statements of Cash Flows for the years 33 ended June 27, 1997, June 28, 1996 and June 30, 1995 Consolidated Statements of Stockholders' Equity for the years 34 ended June 27, 1997, June 28, 1996 and June 30, 1995 Notes to Consolidated Financial Statements 35 (2) FINANCIAL STATEMENT SCHEDULES: Schedule II -- Valuation and Qualifying Accounts for the 52 years ended June 27, 1997, June 28, 1996 and June 30, 1995 All other financial statement schedules have been omitted because they are not required or are not applicable, or the information is otherwise included. (b) REPORTS ON FORM 8-K A report on Form 8-K dated May 16, 1997, was filed in connection with an amendment to the company's Stockholders' Rights Agreement. (c) EXHIBITS Reference is made to the Index of Exhibits immediately preceding the exhibits hereto, which index is incorporated herein by reference. 52 SCHEDULE II SUNRISE MEDICAL INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Fiscal Years Ended June 27, 1997, June 28, 1996 and June 30, 1995 (in thousands)
Additions --------------------------- Balance at Charged to Charged to Balance at beginning costs and other end Description of period expenses accounts Deductions of period - ----------- --------- -------- -------- ---------- --------- 1995 - ---- Allowance for doubtful receivables $ 4,373 $ 1,871 $ 748 (1) $(1,088)(2) $ 5,904 Reserve for installment receivables $ -- $ 954 $ -- $ -- $ 954 Reserve for inventory obsolescence $ 5,451 $ 2,745 $ 361 (1) $(1,083)(3) $ 7,474 1996 - ---- Allowance for doubtful receivables $ 5,904 $ 9,421 $ 167 (1) $(3,969)(2) $ 11,523 Reserve for installment receivables $ 954 $ 980 $ 1 (1) $( 179)(2) $ 1,756 Reserve for inventory obsolescence $ 7,474 $ 8,683 $ 1,249 (1) $(3,742)(3) $ 13,664 1997 - ---- Allowance for doubtful receivables $11,523 $ 1,954 $(3,302)(1) $(5,100)(2) $ 5,075 Reserve for installment receivables $ 1,756 $ 1,586 $ 125 (1) $(1,233)(2) $ 2,234 Reserve for inventory obsolescence $13,664 $ 4,598 $(1,033)(1) $(3,468)(3) $ 13,743
(1) Represents foreign currency translation adjustment, amounts recorded on books of acquired subsidiaries at dates of acquisition, and reserves related to businesses sold. (2) Includes write-off of uncollectible accounts. (3) Disposition of items previously reserved. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNRISE MEDICAL INC. By: /s/ Ted N. Tarbet ---------------------------- Senior Vice President and Chief Financial Officer Date: September 16, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on September 16, 1997. SIGNATURE TITLE /s/ Richard H. Chandler Chairman, President and Chief Executive Officer - --------------------------- (principal executive officer) Richard H. Chandler /s/ Ted N. Tarbet Senior Vice President and Chief Financial Officer - --------------------------- (principal financial officer) Ted N. Tarbet /s/ John M. Radak Vice President and Controller - --------------------------- (principal accounting officer) John M. Radak /s/ J. R. Woodhull Director - --------------------------- J. R. Woodhull /s/ Joseph Stemler Director - --------------------------- Joseph Stemler /s/ Lee A. Ault III Director - --------------------------- Lee A. Ault III /s/ Lloyd E. Cotsen Director - --------------------------- Lloyd E. Cotsen Director - --------------------------- Murray H. Hutchison /s/ William L. Pierpoint Director - --------------------------- William L. Pierpoint /s/ Babette Heimbuch Director - --------------------------- Babette Heimbuch 54 INDEX OF EXHIBITS Exhibit Number Description - ------ ----------- 3.1 Certificate of Incorporation of the company and amendments thereto. (a) 3.2 Amendment to Certificate of Incorporation of the company as set forth under the caption "Article III - Liability of Director to the Corporation." (b) 3.3 Bylaws of the company. (a) 3.4 Amendment to Article II, Section 2, of the company's Bylaws. (c) 3.5 Amendment to Certificate of Incorporation of the company as to the number of authorized shares. (d) 3.6 Amendment of Bylaws to increase the number of directors to eight. (c) 3.7 Amendment of Bylaws to increase the number of directors to nine. (f) 3.8 Amendment of Bylaws to reduce the number of directors to eight. (g) 3.9 Amended and Restated Bylaws as of April 29, 1997. 4.1 Shareholders' Rights Agreement dated April 24, 1990. (h) 4.2 Amended and Restated Shareholders' Rights Agreement dated May 16, 1997. (q) 10.6 Amended and Restated Stock Option Plan for Key Associates. (i)(r) 10.7 1993 Stock Option Plan. (j)(r) 10.8 Management Incentive Bonus Plan. (a)(r) 10.9 Special Bonus Plan. (k)(r) 10.10 Agreement for the Purchase of Certain Stock of Homecare Holdings, Inc. dated as of June 29, 1993 among Sunrise Medical Inc., Homecare Holdings, Inc., and the selling shareholders listed therein. (l) 10.11 Asset Purchase Agreement for the Purchase of Certain Assets of Jay Medical, Ltd. (m) 10.12 Agreement for the Purchase of Shares of S.E.P.A.C., Corona S.A., Tecktona Bois S.A., Tecktona Sante S.A., and Sci La Planche by Homecare Holdings France S.A. (n) 55 INDEX OF EXHIBITS--CONTINUED Number Description - ------ ----------- 10.13 Second Amended and Restated Credit Agreement dated as of September 29, 1995 among Sunrise Medical Inc. and certain subsidiary borrowers and guarantors, Bank of America as agent and other lenders. (o) 10.14 First Amendment to Second Amended and Restated Credit Agreement and Waiver dated as of May 2, 1996 among Sunrise Medical Inc. and certain subsidiary borrowers and guarantors, Bank of America as agent and other lenders. (g) 10.15 Second Amendment to Second Amended and Restated Credit Agreement and Waiver dated as of August 22, 1996 among Sunrise Medical Inc. and certain subsidiary borrowers and guarantors, Bank of America as agent and other lenders.(p) 10.16 Form of Change in Control Agreements dated June 27, 1997 between Sunrise Medical Inc. and certain employees.(r) 11 Computation of Net Income (Loss) Per Share. 21 List of Subsidiaries. 23 Consent of Independent Auditors. 27 Financial Data Schedule. - --------------------------- (a) Incorporated herein by reference to the company's Registration Statement No. 2-86314. (b) Incorporated herein by reference to the company's 1987 Definitive Proxy Statement. (c) Incorporated herein by reference to the company's Form 10-Q for the quarter ended December 28, 1990. (d) Incorporated herein by reference to the company's Form 10-Q for the quarter ended January 1, 1993. (e) Incorporated herein by reference to the company's Form 10-Q for the quarter ended December 31, 1993. (f) Incorporated herein by reference to the company's Form 10-K for the fiscal year ended July 1, 1994. (g) Incorporated herein by reference to the company's Form 10-Q for the quarter ended March 29, 1996. (h) Incorporated herein by reference to the company's Form 10-Q for the quarter ended March 30, 1990. (i) Incorporated herein by reference to the company's 1990 Definitive Proxy Statement. (j) Incorporated herein by reference to the company's 1993 Definitive Proxy Statement. (k) Incorporated herein by reference to the company's Form 10-K for the fiscal year ended July 3, 1992. (l) Incorporated herein by reference to the company's Form 8-K dated June 29, 1993. (m) Incorporated herein by reference to the company's Form 8-K dated September 16, 1994. (n) Incorporated herein by reference to the company's Form 8-K dated April 7, 1995. (o) Incorporated herein by reference to the company's Form 10-K/A for the fiscal year ended June 30, 1995. (p) Incorporated herein by reference to the company's Form 10-K for the year ended June 28, 1996. (q) Incorporated herein by reference to the company's Form 8-K dated May 16, 1997. (r) Management contract or compensatory plan required to be filed as an exhibit pursuant to Item 14(c). 56 EX-3.9 2 EX 3.9 AMENDED AND RESTATED BYLAWS OF SUNRISE MEDICAL, INC., A DELAWARE CORPORATION AS OF APRIL 29, 1997 AMENDED AND RESTATED BYLAWS OF SUNRISE MEDICAL, INC., A DELAWARE CORPORATION TABLE OF CONTENTS Page No. -------- ARTICLE I OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Registered Office.. . . . . . . . . . . . . . . . . . . . . 1 Section 1.2 Other Offices.. . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . 1 Section 2.1 Place of Meetings.. . . . . . . . . . . . . . . . . . . . . 1 Section 2.2 Annual Meeting of Stockholders. . . . . . . . . . . . . . . 1 Section 2.3 Quorum; Adjourned Meetings and Notice Thereof.. . . . . . . 2 Section 2.4 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.5 Proxies.. . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.6 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 3 Section 2.7 Notice of Stockholder's Meetings. . . . . . . . . . . . . . 3 Section 2.8 Maintenance and Inspection of Stockholder List. . . . . . . 3 Section 2.9 Stockholder Action By Written Consent Without a Meeting.. . 3 ARTICLE III DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.1 Number, Election and Tenure.. . . . . . . . . . . . . . . . 5 Section 3.2 Vacancies.. . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 3.3 Notification of Nomination. . . . . . . . . . . . . . . . . 5 Section 3.4 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 3.5 Place of Meetings.. . . . . . . . . . . . . . . . . . . . . 6 Section 3.6 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 7 Section 3.7 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 7 Section 3.8 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.9 Action Without Meeting. . . . . . . . . . . . . . . . . . . 7 Section 3.10 Telephonic Meetings. . . . . . . . . . . . . . . . . . . . 7 Section 3.11 Committees of Directors. . . . . . . . . . . . . . . . . . 7 Section 3.12 Minutes of Committee Meetings. . . . . . . . . . . . . . . 8 Section 3.13 Compensation of Directors. . . . . . . . . . . . . . . . . 8 Section 3.14 Indemnification. . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Section 4.1 Officers. . . . . . . . . . . . . . . . . . . . . . . . . .10 Section 4.2 Election of Officers. . . . . . . . . . . . . . . . . . . .11 Section 4.3 Subordinate Officers. . . . . . . . . . . . . . . . . . . .11 i Page No. -------- Section 4.4 Compensation of Officers. . . . . . . . . . . . . . . . . .11 Section 4.5 Term of Office; Removal and Vacancies.. . . . . . . . . . .11 Section 4.6 Chairman of the Board.. . . . . . . . . . . . . . . . . . .11 Section 4.7 President.. . . . . . . . . . . . . . . . . . . . . . . . .11 Section 4.8 Vice Presidents.. . . . . . . . . . . . . . . . . . . . . .11 Section 4.9 Secretary.. . . . . . . . . . . . . . . . . . . . . . . . .12 Section 4.10 Assistant Secretary. . . . . . . . . . . . . . . . . . . .12 Section 4.11 Chief Financial Officer. . . . . . . . . . . . . . . . . .12 ARTICLE V CERTIFICATES OF STOCK. . . . . . . . . . . . . . . . . . . . . . .12 Section 5.1 Certificates. . . . . . . . . . . . . . . . . . . . . . . .12 Section 5.2 Signatures on Certificates. . . . . . . . . . . . . . . . .13 Section 5.3 Statement of Stock Rights, Preferences, Privileges. . . . .13 Section 5.4 Lost, Stolen or Destroyed Certificates. . . . . . . . . . .13 Section 5.5 Transfers of Stock. . . . . . . . . . . . . . . . . . . . .13 Section 5.6 Fixing Record Date. . . . . . . . . . . . . . . . . . . . .14 Section 5.7 Registered Stockholders.. . . . . . . . . . . . . . . . . .14 ARTICLE VI GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . .14 Section 6.1 Dividends.. . . . . . . . . . . . . . . . . . . . . . . . .14 Section 6.2 Payment of Dividends. . . . . . . . . . . . . . . . . . . .14 Section 6.3 Checks. . . . . . . . . . . . . . . . . . . . . . . . . . .14 Section 6.4 Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . .14 Section 6.5 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . .14 Section 6.6 Manner of Giving Notice.. . . . . . . . . . . . . . . . . .15 Section 6.7 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . .15 Section 6.8 Annual Statement. . . . . . . . . . . . . . . . . . . . . .15 ARTICLE VII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Section 7.1 Amendment by Directors or Stockholders. . . . . . . . . . .15 ii AMENDED AND RESTATED BYLAWS OF SUNRISE MEDICAL, INC., A DELAWARE CORPORATION ARTICLE I OFFICES Section 1.1 REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 1.2 OTHER OFFICES. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. Section 2.2 ANNUAL MEETING OF STOCKHOLDERS. (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting, (i) directors shall be elected from the persons who are nominated in accordance with the procedures set forth in paragraph (b) below and (ii) any proper business shall be conducted which has been submitted in accordance with the procedures set forth in paragraph (c) below. (b) Only proper business which has been submitted in accordance with the following procedures shall be conducted at the annual meeting. Submissions of proper business to be conducted at the annual meeting may be made at such meeting by or at the direction of the Board of Directors, by any committee or persons appointed by the Board of Directors or by any stockholder of the corporation who complies with the notice procedures set forth in this paragraph. Such submissions of proper business by any stockholder shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the corporation not less than 60 days prior to the annual meeting; provided, however, that in the event that less than 75 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the fifteenth day following the day on which such notice of the date of the meeting 1 was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (i) a description of the proper business submitted for consideration at the annual meeting and the reasons for conducting such business at the meeting, and if such business includes a proposal to amend the bylaws of the bylaws of the Corporation, the language of the proposed amendment, (ii) the name and record address of the stockholder giving the notice, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in the business. No proper business shall be conducted at the annual meeting unless submitted in accordance with the procedures set forth herein. The Chairman of the Board shall, if the facts warrant, determine and declare to the meeting that a submission of proper business was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective submission shall be disregarded. Section 2.3 QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. The Chairman of the Board (or the President in the absence of the Chairman of the Board) may adjourn the meeting from time to time, whether or not there is such a quorum. At any adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat. Section 2.4 VOTING. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes, or the Certificate of Incorporation, or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 2.5 PROXIES. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the corporation on the record date set by the Board of Directors as provided in Article II, Section 2.9 hereof. All elections shall be had and all questions decided by a plurality vote. 2 Section 2.6 SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President and shall be called by the President or the Secretary at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 2.7 NOTICE OF STOCKHOLDER'S MEETINGS. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 2.8 MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.9 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. (a) Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice to the stockholders and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the date the earliest dated written consent was received in accordance with Section 2.9(b) of this Article II, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the Corporation in the manner prescribed in Section 2.9(b) of this Article II. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 3 (b) In order that the corporation may determine the stockholders entitled to express consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. Every signed written consent shall be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business or to any officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. (c) In the event of the delivery, in the manner provided by Section 2.9(b) of this Article II hereof, to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall engage nationally recognized independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the corporation that the consents delivered to the corporation in accordance with Section 2.9(b) of this Article II hereof represent at least the minimum number of votes that would be necessary to take the corporation action. Nothing contained in this paragraph shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). ARTICLE III DIRECTORS Section 3.1 NUMBER, ELECTION AND TENURE. The authorized number of directors which shall constitute the Board shall not be less than four (4) nor more than ten (10). The exact number shall be determined from time to time by resolution of the Board. Until otherwise 4 determined by such resolution, the Board shall consist of eight (8) persons. Directors shall be elected at the annual meeting of stockholders and each director shall serve until such person's successor is elected and qualified or until such person's death, retirement, resignation or removal. The directors need not be stockholders. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, if any, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors except that (i) unless the certificate of incorporation provides otherwise, if the corporation shall have a classified board of directors, shareholders may effect such removal only for cause, and (ii) so long as the corporation shall have cumulative voting in respect of the election of directors, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against the removal of the director would be sufficient to elect that person if then cumulatively voted at an election of the entire Board of Directors or, if the corporation shall have classes of directors, at an election of the class of directors of which that person is a part. Section 3.2 VACANCIES. Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. The directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and qualified, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 3.3 NOTIFICATION OF NOMINATION. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, if any, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating or other committee or person appointed by the Board, or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3.3. Such nominations, other than those made by or at the direction of the Board or by any nominating or other committee or person appointed by the Board, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the corporation not less than 60 days prior to the meeting; provided, however, that in the event that less than 75 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the fifteenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder 5 proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person and his or her employment history for the most recent five years, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the person, (iv) the consent of the person to serve as a Director if so elected and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the rules and regulations under the Securities Exchange Act of 1934, as amended; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons pursuant to which the nomination or nominations are to be made by the stockholder, (iv) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notices. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director of the corporation or for use in the preparation of materials used for the solicitation of proxies for the election of directors. The Chairman of the Board shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 3.4 POWERS. The property and business of the corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 3.5 PLACE OF MEETINGS. The directors may hold their meetings and have one or more offices, and keep the books of the corporation outside of the State of Delaware. Section 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Section 3.7 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President on forty-eight hours' notice to each director, either personally or by mail, facsimile or by telegram; special meetings shall be called by the President or the Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director; in which case special meetings shall be called by the President or Secretary in like manner or on like notice on the written request of the sole director. Section 3.8 QUORUM. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise 6 specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum. Section 3.9 ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3.10 TELEPHONIC MEETINGS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. Section 3.11 COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each such committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Section 3.12 MINUTES OF COMMITTEE MEETINGS. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 3.13 COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each 7 meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 3.14 INDEMNIFICATION. (a) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, ERISA excise taxes and amounts paid or to be paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the corporation shall be successful on the merits or otherwise in defense, of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. 8 (d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of the directors who are not parties to such action, suit or proceeding, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in paragraph (d) upon receipt of an undertaking by or on behalf of the director or officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section 3.14. (f) The indemnification provided by this Section 3.14 shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any statute, provision in the Certificate of Incorporation or these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section 3.14. (h) The corporation shall, to the fullest extent permitted by the General Corporation Law of the State of Delaware, indemnify its directors, officers, employees and agents against liabilities incurred in their capacities as such. (i) For the purposes of this Section 3.14, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise, shall stand in the same position under the provisions of 9 this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (j) For purposes of this section, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. ARTICLE IV OFFICERS Section 4.1 OFFICERS. The officers of this corporation shall be chosen by the Board of Directors and shall include a Chairman of the Board, a President, a Secretary, and a Chief Financial Officer. The corporation may also have at the discretion of the Board of Directors such other officers as are desired, including one or more Vice Presidents, one or more Assistant Secretaries, and such other officers as may be appointed in accordance with the provisions of Section 4.3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 4.2 ELECTION OF OFFICERS. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the corporation. Section 4.3 SUBORDINATE OFFICERS. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4.4 COMPENSATION OF OFFICERS. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 4.5 TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. Section 4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer be elected, shall, if present, preside at all meetings of the stockholders and of the Board of Directors and exercise and perform such other powers and duties as may be from time to time 10 assigned to him by the Board of Directors or prescribed by these Bylaws. If there is no President, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 4.7 of this Article IV. Section 4.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. In the absence of the Chairman of the Board, he shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. He shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of President and Chief Executive Officer of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. Section 4.8 VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors. Section 4.9 SECRETARY. The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these Bylaws. He shall keep in safe custody the seal of the corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed it shall be attested by his signature or by the signature of an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 4.10 ASSISTANT SECRETARY. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 4.11 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation, in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so 11 requires, an account of all his transactions as Chief Financial Officer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. ARTICLE V CERTIFICATES OF STOCK Section 5.1 CERTIFICATES. Every holder of stock of the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Chief Financial Officer of the corporation, certifying the number of shares represented by the certificate owned by such stockholder in the corporation. Section 5.2 SIGNATURES ON CERTIFICATES. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 5.3 STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to 12 advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 5.5 TRANSFERS OF STOCK. Upon surrender to the corporation, or the transfer agent of the corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5.6 FIXING RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action (except action to be taken pursuant to a written consent of stockholders without a meeting as specifically contemplated in Section 2.9(b) of Article II), the Board of Directors may fix a record date which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5.7 REGISTERED STOCKHOLDERS. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware. ARTICLE VI GENERAL PROVISIONS Section 6.1 DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 6.2 PAYMENT OF DIVIDENDS. Before payment of any dividend there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve. 13 Section 6.3 CHECKS. All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate. Section 6.4 FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. Section 6.5 CORPORATE SEAL. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 6.6 MANNER OF GIVING NOTICE. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile or telegram. Section 6.7 WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Section 6.8 ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VII AMENDMENTS Section 7.1 AMENDMENT BY DIRECTORS OR STOCKHOLDERS. The Board of Directors is expressly empowered to adopt, amend or repeal the bylaws of the corporation, without the approval of the stockholders. Any adoption, amendment or repeal of the bylaws of the corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The holders of a majority of the stock issued and outstanding and entitled to vote shall also have power to adopt, amend or repeal the bylaws of the corporation. 14 CERTIFICATE OF SECRETARY OF SUNRISE MEDICAL, INC., A DELAWARE CORPORATION I, the undersigned, do hereby certify: (1) That I am the duly elected and acting Secretary of Sunrise Medical, Inc., a Delaware corporation; and (2) That the foregoing Amended and Restated Bylaws, comprising fourteen (14) pages, constitute the Bylaws of said corporation as duly adopted at a meeting of the Board of Directors of said corporation on April 29, 1997. IN WITNESS WHEREOF, I have hereunto subscribed my name this 30th day of April, 1997. --------------------------------------- Steven A. Jaye Secretary EX-10.16 3 EX 10.16 [Type A: 2 year w/window CIC] CHANGE IN CONTROL AGREEMENT The undersigned employee ("Employee") and Sunrise Medical Inc., a Delaware corporation (the "Company"), desire to enter into this Agreement (the "Agreement") as of the date set forth below for the purpose of providing for certain rights and obligations following a Change in Control. In consideration of the foregoing and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Employee hereby agree as follows: SECTION 1. TERMS AND CONDITIONS. The Terms and Conditions attached hereto are incorporated herein by this reference and shall be part of the Agreement and binding on the Company and Employee. Neither the Agreement nor any of the Terms and Conditions incorporated in the Agreement may be waived or modified except in a written waiver or amendment signed by the Company and the Employee. Capitalized terms used in the Agreement shall have the meanings set forth herein or in the Terms and Conditions. SECTION 2. SEVERANCE PAYMENT. The term "Severance Payment" when used in the Agreement shall mean an amount equal to the following: Two times the sum of (i) Employee's annual salary in effect as of the Date of Termination or immediately prior to the Change in Control, whichever salary is greater, and (ii) the amount of the Employee's target bonus under the Company's Management Incentive Bonus Plan (and any successor and supplemental bonus plan or plans) in effect for the fiscal year during which the Date of Termination occurs or during the fiscal year during which the Change of Control occurs, whichever bonus is greater. SECTION 3. TERMINATION OF EMPLOYMENT FOR ANY OR NO REASON. Notwithstanding any other provision set forth in the Agreement to the contrary, Employee shall be entitled to terminate his employment for any or no reason during the 30-day period commencing on the first anniversary of the date of a Change in Control and such termination of employment shall be deemed automatically to be a termination of employment for Good Reason for purposes of the Agreement, entitling Employee to payment of the severance payment referenced above and the benefits, bonuses and other payments referenced in the attached Terms and Conditions. IN WITNESS WHEREOF, Employee and the Company have entered into this Agreement, effective as of the date set forth below. Date: June 27, 1997 SUNRISE MEDICAL INC. Signed: Signed: ---------------------------- -------------------------------- Address: 2383 Faraday Avenue, Suite 200 Carlsbad, CA 92008 Phone: (760) 930-1500 Fax: (760) 930-1575 [Type B: 2 year CIC] CHANGE IN CONTROL AGREEMENT The undersigned employee ("Employee") and Sunrise Medical Inc., a Delaware corporation (the "Company"), desire to enter into this Agreement (the "Agreement") as of the date set forth below for the purpose of providing for certain rights and obligations following a Change in Control. In consideration of the foregoing and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Employee hereby agree as follows: SECTION 4. TERMS AND CONDITIONS. The Terms and Conditions attached hereto are incorporated herein by this reference and shall be part of the Agreement and binding on the Company and Employee. Neither the Agreement nor any of the Terms and Conditions incorporated in the Agreement may be waived or modified except in a written waiver or amendment signed by the Company and the Employee. Capitalized terms used in the Agreement shall have the meanings set forth herein or in the Terms and Conditions. SECTION 5. SEVERANCE PAYMENT. The term "Severance Payment" when used in the Agreement shall mean an amount equal to the following: Two times the sum of (i) Employee's annual salary in effect as of the Date of Termination or immediately prior to the Change in Control, whichever salary is greater, and (ii) the amount of the Employee's target bonus under the Company's Management Incentive Bonus Plan (and any successor and supplemental bonus plan or plans) in effect for the fiscal year during which the Date of Termination occurs or during the fiscal year during which the Change of Control occurs, whichever bonus is greater. IN WITNESS WHEREOF, Employee and the Company have entered into this Agreement, effective as of the date set forth below. Date: June 27, 1997 SUNRISE MEDICAL INC. Signed: Signed: ---------------------------- -------------------------------- Address: 2383 Faraday Avenue,Suite 200 Carlsbad, CA 92008 Phone: (760) 930-1500 Fax: (760) 930-1575 1 [Type C: 2 year declining: 1 year minimum CIC] CHANGE IN CONTROL AGREEMENT The undersigned employee ("Employee") and Sunrise Medical Inc., a Delaware corporation (the "Company"), desire to enter into this Agreement (the "Agreement") as of the date set forth below for the purpose of providing for certain rights and obligations following a Change in Control. In consideration of the foregoing and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Employee hereby agree as follows: SECTION 6. TERMS AND CONDITIONS. The Terms and Conditions attached hereto are incorporated herein by this reference and shall be part of the Agreement and binding on the Company and Employee. Neither the Agreement nor any of the Terms and Conditions incorporated in the Agreement may be waived or modified except in a written waiver or amendment signed by the Company and the Employee. Capitalized terms used in the Agreement shall have the meanings set forth herein or in the Terms and Conditions. SECTION 7. SEVERANCE PAYMENT. The term "Severance Payment" when used in the Agreement shall mean an amount equal to the following: IF THE DATE OF TERMINATION OCCURS AT ANY TIME DURING THE FIRST YEAR following the Change in Control, the Severance Payment shall be an amount equal to the sum of (i) the Employee's annual salary in effect as of the Date of Termination or immediately prior to the Change in Control, whichever salary is greater, and (ii) the amount of the Employee's target bonus under the Company's Management Incentive Bonus Plan (and any successor and supplemental bonus plan or plans) 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, whichever bonus is greater (the sum of (i) and (ii) being referred to herein as the "Annual Compensation Amount"), and (iii) an amount determined by multiplying the Annual Compensation Amount by a fraction, the numerator of which shall be the number of days in the period which commences on the Date of Termination and ends on the last day of the first year following the Change in Control, and the denominator of which shall be 365. IF THE DATE OF TERMINATION OCCURS AT ANY TIME DURING THE SECOND YEAR following the Change in Control, the Severance Payment shall be an amount equal to the Annual Compensation Amount. IN WITNESS WHEREOF, Employee and the Company have entered into this Agreement, effective as of the date set forth below. Date: June 27, 1997 SUNRISE MEDICAL INC. Signed: Signed: ---------------------------- -------------------------------- Address: 2383 Faraday Avenue,Suite 200 Carlsbad, CA 92008 Phone: (760) 930-1500 Fax: (760) 930-1575 2 EX-11 4 EX 11 EXHIBIT 11 SUNRISE MEDICAL INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME (LOSS) PER SHARE Fiscal Years Ended June 27, 1997, June 28, 1996 and June 30, 1995 (In thousands, except per share amounts) 1997 1996 1995 ---- ---- ---- PRIMARY EARNINGS PER SHARE: Net income (loss) $10,569 $(40,867) $19,471 Weighted average number of shares: Shares issued 19,075 18,810 18,290 Stock options 121 -- 529 ------- -------- ------- Total 19,196 18,810 18,819 ------- -------- ------- Net income (loss) per share $ 0.55 $ (2.17) $ 1.03 ------- -------- ------- ------- -------- ------- FULLY DILUTED EARNINGS PER SHARE: Net income (loss) $10,569 $(40,867) $19,471 Weighted average number of shares: Shares issued 19,075 8,810 18,290 Stock options 136 -- 595 ------- -------- ------- Total 19,211 18,810 18,885 ------- -------- ------- Net income (loss) per share $ 0.55 $ (2.17) $ 1.03 ------- -------- ------- ------- -------- ------- EX-21 5 EX 21 EXHIBIT 21 SUNRISE MEDICAL INC. AND SUBSIDIARIES LIST OF SUBSIDIARIES
Name of Subsidiary Incorporation Ownership % - ------------------ ------------- ----------- Sunrise Medical CCG Inc. Wisconsin 100 Sunrise Medical HHG Inc. California 100 Homecare (Deutschland) GmbH Germany 100 DeVilbiss Medizinische Produkte GmbH Germany 100 DeVilbiss Health Care (Europa) GmbH Germany 100 SunMed Finance Inc. Delaware 100 Sunrise Medical Canada Inc. Canada 100 Sunrise Medical Holdings B.V. Netherlands 100 Norsk Rehab AS Norway 100 Sopur Medizintechnik GmbH Germany 100 Sunrise Medical B.V. Netherlands 100 Sunrise Medical S.A. France 100 DeVilbiss Medical France S.A. France 100 SCI La Planche S.A. France 100 Talleres Uribarri S.L. Spain 100 Sunrise Medical S.r.l. Italy 100 Sunrise Medical Ltd. United Kingdom 100 Coopers Healthcare PLC United Kingdom 100 Sunrise Medical A.G. Switzerland 100 Vitactiv AB Sweden 100 Sunrise Medical Pty Ltd. Australia 100 Sunrise Medical Technologias S.A. de C.V. Mexico 100
- ---------------------- Each corporation is the parent of those indented beneath it. The company has omitted from the list sixteen foreign and four domestic subsidiaries. None of the omitted companies individually or in the aggregate is a significant subsidiary. EX-23 6 EX 23 EXHIBIT 23 ACCOUNTANTS' CONSENT The Board of Directors Sunrise Medical Inc.: We consent to incorporation by reference in the Registration Statement No. 33-44082 on Form S-4, Statement No. 333-14493 on Form S-4, Statement No. 33-81316 on Form S-4, Statement No. 33-49500 on Form S-3, Statement No. 33-88216 on Form S-8, Statement No. 33-35797 on Form S-8, Statement No. 33-82842 on Form S-8, and Statement No. 33-39887 on Form S-8 of Sunrise Medical Inc. of our report dated August 13, 1997 relating to the consolidated balance sheets of Sunrise Medical Inc. and subsidiaries as of June 27, 1997 and June 28, 1996 and the related consolidated statements of operations, stockholders' equity and cash flows and related financial statement schedule for each of the years in the three-year period ended June 27, 1997, which report appears in the June 27, 1997 annual report on Form 10-K of Sunrise Medical Inc. KPMG Peat Marwick LLP Los Angeles, California September 16, 1997 EX-27 7 EX 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 27, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-28-1996 JUN-27-1997 2,823 0 119,298 5,075 88,757 237,994 174,272 83,420 610,549 135,763 188,061 0 0 19,304 260,116 610,549 656,742 656,742 443,061 443,061 181,583 0 14,774 21,027 10,458 10,569 0 0 0 10,569 0.55 0.55
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