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**UNITED STATES SECURITIES AND EXCHANGECOMMISSION Washington, D.C. 20549**

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**FORM 10-****K**

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     *(Mark One)*
[X] ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**FOR THE FISCAL YEARENDED JUNE 30, 2000 or**

[   ] TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to_________

Commission file number: 0-12744

**SUNRISE MEDICAL INC. **(Exact name of Registrant as specified in its charter)

 **Delaware****95-3836867**  (State or Other Jurisdiction of    Incorporation or Organization) (I.R.S. Employer Identification Number)
**2382 Faraday Avenue, Suite 200Carlsbad, CA   92008**(Address of Principal Executive Offices)
**(760) 930-1500 (Registrant'sTelephone Number, Including Area Code)**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      Common Stock Purchase Rights                         New York Stock Exchange                               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 405of Regulation S-K is not contained herein and will not be contained, to the bestof registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. x

         Indicate by check mark whether registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months and (2) has been subject to such filing requirements forthe past 91 days. YES x NO o

          Theaggregate market value of the voting stock held by non-affiliates of theregistrant was $91,000,000 as of September 1, 2000.

          As ofSeptember 1, 2000 the registrant had 22,247,553 outstanding shares of $1 parvalue common stock.
**DOCUMENTS INCORPORATED BY REFERENCE

**                             Documents**  

**Form 10-K References**
Portions of our Definitive Proxy      Statement for our upcoming Annual Meeting of Stockholders

 Part III, Items 10-13
SUNRISE MEDICAL INC.FORM 10-KFor the Fiscal Year Ended June 30, 2000

INDEX
**PART I**
 

Item 1.      Item 2.      Item 3.      Item 4.Business      Properties      Legal Proceedings      Submission of Matters to a Vote of Security Holders
Executive  Officers of the Company

 

**PART II**

 
Item 5.Market for the Registrant's Common Equity and      Related Stockholder matters
Item 6.Selected Financial Data
Item 7.Management's Discussion and Analysis of      Financial Condition and Results of Operations
Item 7A.Quantitative and Qualitative Disclosures about      Market Risk
Item 8.Financial Statements and Supplementary Data
Item 9.Changes in and Disagreements with Accountants      and Accounting and Financial Disclosure

 

**PART III**

 
Item 10.Directors and Executive Officers of the      Registrant
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners      and Management
Item 13.Certain Relationships and Related Transactions

 

**PART IV**

 
Item 14.Exhibits, Financial Statement Schedules and      Reports on Form 8-K
Signatures** 

PART I

ITEM 1. BUSINESS

General**
Sunrise Medical Inc. is a worldwide leader in thedesign, manufacture and marketing of medical products and assistive technologydevices that address the recovery, rehabilitation and respiratory needs ofpatients in institutional and homecare settings. Our principal product linesinclude:
- custom manual and power wheelchairs and related seating and positioning    systems;  
- home respiratory devices such as compressor nebulizers and oxygen    concentrators;  
- personal care products such as walkers, crutches and bath safety products;  
- beds and specialized bathing systems; and  
- speech devices.

We manufacture our products in theUnited States, Mexico, the United Kingdom, Germany, France and Spain anddistribute them through company-owned sales organizations in 19 countries andthrough independent importer-distributors in about 80 other countries. Ourcustomers include more than 20,000 home medical equipment providers anddistributors around the world who provide our products to millions of end-userseach year. In addition, we sell directly to extended care and assisted livingfacilities and to users of speech devices.

We believe that a number offactors will contribute to the continued worldwide growth in the markets for ourproducts, including:
- advances in technology that increase the ability for patient recovery in    the institutional or home environment rather than the hospital and    facilitate independent living by people with disabilities;  
- increasing integration of the disabled into the mainstream of community,    workplace and schools;  
- the increasing popularity of wheelchair sports and recreational activities    among the disabled;  
- the aging of the population;  
- the economic pressures in the U.S. and all other developed countries to    shift patients from hospitals to lower-cost institutional and homecare    settings; and  
- patient preference for home healthcare.

Headquartered in Carlsbad, California,Sunrise was incorporated in 1983 and is publicly traded on the New York Stock Exchangeunder the ticker symbol "SMD."
**Products**
Our corporate mission is to improve people's lives by creating innovative,high quality products. The following is a summary of our revenues by principalproduct line for the last three fiscal years.

 
% of Total Revenue 
2000 
1999 
1998
Wheelchairs
43%
43%
42%
Home respiratory products
19%
18%
19%
Personal care products
23%
21%
21%
Beds and bathing systems
12%
15%
16%
Speech devices
3%
3%
2%
***W******heelchairs.***Our broad range of wheelchair products include:
- Custom ultralight wheelchairs . Our ultralight custom manual models      are the wheelchairs of choice for active users. These include, among      others, the  Quickie 2 , manufactured in the U.S. and U.K. and the  Sopur      Easy  made in Germany.  
Sports wheelchairs. 
Our 
Quickie, Shadow
 and 
Sopur
      brands of custom wheelchairs are designed for specific sports such as      tennis, basketball, road racing and quad rugby.
Lightweight standard wheelchairs. 
Our lightweight manual      wheelchairs such as the 
Breezy 500
 and 
Sopur Classic
 are      primarily for geriatric users.
Standard wheelchairs. 
Our standard wheelchairs are used primarily      for the value conscious customer and the short-term rental market. These      include the 
Breezy 100
 for the U.S. market and the 
Breezy 300
      manufactured in Spain.
Pediatric wheelchairs. 
Our pediatric wheelchairs such as the 
Zippie,      Youngster
 and 
Kid-Kart
 are specially designed for children with      disabilities, adjusting to accommodate a child's growth and changing      needs.
Power wheelchairs. 
Our custom power wheelchairs, including the 
Quickie      S-626
, 
Quickie S-525
, 
Breezy P300
 and the 
Sopur P140
,      provide mobility for more severely disabled end-users.
Scooters. 
Our three and four wheeled battery-powered scooters under      the 
Sterling
 brand provide easy and convenient mobility primarily      for geriatric end-users with only moderate disabilities.

Our custom wheelchairs are manufactured to individual end-user specificationsas to dimensions, features and color. For instance, the Quickie 2 offersone-inch increments of seat depth, seat width and back height, in a choice of 15colors and an array of options and accessories which give the end-user an almostunlimited number of variations from which to choose. Power wheelchair optionsinclude microprocessor technology to enable quadriplegic users to maneuver theirwheelchairs through the movement of fingers, head or chin or by sipping andpuffing through a plastic straw. Some wheelchairs have controllers thatinterface with household appliances and personal computers, permitting thedisabled user to be self-reliant. We manufacture a custom wheelchair uponreceipt of an order for a specific end-user and then deliver the finishedproduct within three days to three weeks.

Our Jay brand of specialty wheelchair cushions and positioning systemsprevent pressure sores and provide postural support and improved comfort. *Jay*products utilize our patented *Jay Flow* viscous fluid to provide pressurerelief. The *Jay* modular seating systems fit on all major brands ofwheelchairs and include a variety of customized positioning devices for posturalsupport.
***Home Respiratory Products.*** We manufacture and sell a broad range ofhome respiratory products under the DeVilbiss brand. Our productcategories include:
- Aerosol products.  These products include our  Pulmo-Aide       compressor nebulizer that converts liquid medicine into airborne particles      to treat asthma and other breathing disorders.  
Oxygen concentrators. 
Our oxygen concentrator products enrich      normal room air to a 90% oxygen level for patients suffering from chronic      obstructive lung diseases such as emphysema and bronchitis.
Ambulatory oxygen products. 
Our 
PulseDose
 oxygen conserving      devices triple the use time over standard ambulatory oxygen products,      allowing oxygen users to leave their homes for longer periods of time.
Sleep therapy products. 
We also manufacture a line of sleep therapy      products that alleviate adult obstructive sleep apnea by supplying      continuous positive airway pressure ("CPAP").
***Personal Care Products. Personal care products include our *Guardian*and *Coopers* brands of ambulatory products, such as walkers, crutches andcanes. This product line also includes aids for daily living, such as bedsidecommodes and bath safety products. In addition, we manufacture and marketpatient lifters and hoists for the nursing home and homecare setting under our *Hoyer*and *Oxford* brands, and home stairlifts under the *Minivator* brand.Our *Eggcrate* brand foam mattress overlays are used for the prevention ofpressure sores.
***Speech Devices. With our *DynaVox*products, we are the globalleader in augmentative communication devices and related computer software forpeople affected by speech disabilities. Our devices combine dynamic touch-screentechnology, predictive natural language software and a life-like voicesynthesizer to speak for those with speech disorders due to conditions includingcerebral palsy, autism, multiple sclerosis and stroke. At the core of *DynaVox's*technology is advanced proprietary natural language software that incorporateslinguistic and grammatical intelligence to speed sentence formation.
***Beds and Bathing Systems. We manufacture a full line of nursing homebeds and furniture under the *Joerns* brand in the U.S. and the *Corona*brand in Europe. The *Joerns* product line consists of healthcare beds,patient room furniture, overbed tables, dining room and common area furnishings.Our *Parker* brand of bathing systems are specialized bathtubs withfeatures such as adjustable height bathtubs for easier patient bathing bycaregivers and side-door entry for safe transfer from wheelchairs.
**Operating Segments**
Our operating segments are organized by distribution channels**.**We havethree reportable segments: North American Rehabilitation Products, EuropeanRehabilitation Products and Institutional Products.

Information as to revenues, operating income (loss), total assets, capitalexpenditures and depreciation and amortization by segment is included in Note 14of the "Notes to Consolidated Financial Statements."
**North American Rehabilitation Products**
The North American rehabilitation products segment includes wheelchairs andseating systems, personal care products, respiratory devices and speech devicesfocused on the needs of the disabled and elderly in the United States.

Product development and manufacturing activities in the U.S. are organized byprincipal product line:
- Mobility Products : 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 transport and      wound prevention;
Respiratory Products
: aerosol, oxygen and sleep therapy products;      and
Speech Devices
: advanced augmentative communication devices and      software.

Included within the North American rehabilitation products segment are ourdistribution organizations in Canada and Australia and our global export salesdepartment. The global export sales team is responsible for developingrelationships with independent importers to sell the full line of Sunriseproducts in countries where we do not have our own distribution organization.Also included are SunMed Finance, our dealer installment financing division andSunrise Consulting, our Medicare reimbursement consulting business.

Through our DynaVox Systems division located in Pittsburgh, Pennsylvania, wedesign, manufacture and market hardware and software products for people withspeech and cognitive disabilities. The DynaVox product line is the globalleader in augmentative communication devices. Our speech devices combinepowerful microprocessors with proprietary software that uses predictive naturallanguage logic, touch-screen technology and a life-like voice synthesizer to aidthose with speech disorders. Typical users are unable to speak as a result ofconditions such as cerebral palsy, autism, multiple sclerosis or stroke. Mostusers today are children, but there is a larger potential market with theelderly, particularly if Medicare begins to fund this product, which we areworking to achieve. Proprietary DynaVox DSS software is sold separatelyfor use with Windows or Macintosh based personal computers. This allows parentsand teachers to customize programs and download them to the user's speechdevice.

Purchasers and payers include school districts, non-profit organizations,state medical insurance programs and government agencies. Many users of ourwheelchairs and other products have disabilities which also require the needfor assistive technology devices. For example, persons afflicted with cerebralpalsy or multiple sclerosis often require both mobility products and speechdevices.
**European Rehabilitation Products**
The European rehabilitation products segment consists of three manufacturingdivisions which produce wheelchairs and seating systems, scooters, homestairlifts and daily living aids and six distribution divisions that distributethese products as well as respiratory products in Europe, the Middle East,Africa and Central Asia.

Our European divisions' manufacturing, selling and distribution processes aresimilar to those of our North American operations. In Europe, we manufacture ourrehabilitation products in the U.K., Germany and Spain and distribute themthrough company-owned sales and distribution organizations in France, theNetherlands, Norway, Sweden, Italy and Switzerland. Sunrise Medical Ltd.,operating in the U.K., manufactures and markets wheelchairs, scooters, personalcare products, patient lifters and respiratory products. Sunrise Germanymanufactures and markets the *Sopur*line of custom lightweight manual,power, pediatric and performance wheelchairs. This organization also distributesrespiratory products and standard wheelchairs to homecare dealers throughoutGermany and Austria. Our Spanish subsidiary manufactures standard wheelchairs,power wheelchairs and patient aids.
**Institutional Products**
The institutional products segment is comprised of three manufacturingdivisions and globally produces and sells healthcare beds and furniture,therapeutic mattresses and other patient support surfaces and bathing systemsfor patients and long-term residents in institutional settings such as nursinghomes, sub-acute facilities and assisted living centers.

Products are manufactured in the U.S., the U.K. and France and are soldthrough our own salesforce calling directly on institutional settings andassisted living facilities in those three countries. Clinicians such asdirectors of nursing play a key role in product evaluations and ultimatedecision making.

The institutional products segment also markets the Sunrise OneSourceprogram, which bundles design services and sells a full line ofself-manufactured and outsourced products primarily to assisted livingfacilities. In addition, this segment manufactures homecare beds and therapeuticmattresses that are sold through the North American rehabilitation products'salesforce to U.S. homecare equipment providers and, in Europe, through oursales organization in France.
**Sales and Marketing**
Sunrise products are primarily marketed through a number of programsincluding print advertising, product brochures and videos and electroniccommerce featuring a comprehensive product catalog and on-line customer serviceinquiries.

Mobility, personal care and respiratory products are sold through anationwide salesforce to independent homecare providers and dealers whotypically display these products in a retail setting and sell or rent them topatients. The salesforce calls on these dealers and also stimulates apull-through demand by explaining product benefits to clinical influencers suchas physical, occupational and respiratory therapists. Special attention has beendirected to larger regional and national accounts, including the use ofincentive programs that benefit customers who purchase from multiple Sunrisedivisions.

DynaVox products are sold to end-users through a direct salesforce andthrough Sunrise distribution organizations or independent importer-distributorsin other developed countries. DynaVox also has a flexible product rentalprogram.

In Europe, products are marketed and sold through independent medicalequipment dealers in most countries, although under Scandinavia'sstate-controlled healthcare systems, the government's local technical aidcenters perform a similar function.

Institutional products are sold through our own salesforces in the U.S. andEurope. Our account representatives demonstrate and sell products directly tocontinuing care institutions where clinicians such as directors of nursing playa key role in product evaluations and ultimate decision making. This groupoffers OneSource products to assisted living facilities through computer basedmarketing material. Certain products manufactured by the Institutional productssegment that are sold primarily through dealers or distributors are handled bythe North American rehabilitation products segment's salesforce.
**Re-Alignment of Operations**
In March 2000, we initiated a plan to re-align our operations into threefocused operating groups: the North American Operating Group, the EuropeanOperating Group, and the Global Business Group. The North American OperatingGroup will combine the sales and manufacturing operations of the Home HealthcareGroup and the U.S. portion of the Continuing Care Group. A similar sales andmanufacturing structure was formed for all European operations. The GlobalBusiness Group will combine product development, product management andstrategic supply chain activities that were previously performed at a divisionallevel.

These operating groups were created to better focus and prioritize internalresources on activities that will allow us to streamline decision making andcompete more effectively. In addition, the re-alignment will involve amanufacturing and distribution rationalization plan to determine the mostefficient manufacturing sites and the most cost effective distribution networkfor our products.

While part of the re-alignment has already taken place and we are operatingunder the new management structure, our reportable segments were unaffected infiscal 2000. The completion of the plan is estimated to be fiscal year 2002. Thecosts and benefits of these actions have not been finalized, but are expected tohave a material impact on our operations.
**Customers**
Rehabilitation products are principally sold to independent medical equipmentdealers, rehabilitation technology suppliers, drug wholesalers, medical-surgicaldistributors and hospital purchasing organizations. Institutional products aresold mainly to nursing homes, sub-acute facilities and assisted living centers.No single customer accounted for more than 10% of Sunrise's revenues in fiscalyear 2000.
**Manufacturing**
Sunrise operates 15 manufacturing plants globally: there are nine in theU.S., two in the U.K., and one each in Germany, France, Spain and Mexico.Manufacturing processes include metal and wood fabrication, welding/brazing,injection molding, circuit board assembly, powder coating, final assembly, lifetesting and quality assurance. Purchased components used in our products includesmall motors, electronic controls, batteries, wheels and tires. Although wepurchase most of our raw materials, components and supplies from a number ofdifferent vendors, we do procure a few components and materials on asingle-source basis. If one of these single-source vendors failed to delivercomponents as planned, we would be temporarily unable to ship some of ourproducts. Historically, the prices we have paid for certain raw materials, suchas aluminum, foam and wood, have fluctuated widely. When prices have increased,we have not always been able to pass along the full effect of these increases toour customers. See "Management Discussion and Analysis of FinancialCondition and Results of Operations -- Factors that May Affect Future OperatingResults."

Sunrise's mass customization manufacturing capabilities enable it to producecustomized wheelchairs and related seating and positioning products that aretailored to each end-user's needs. Our 15 modern manufacturing facilities userobotic and computer-controlled machinery. We have an additional competitiveadvantage with factories located both in North America and Europe that can servelocal customers and export internationally.

We have utilized a variety of techniques, such as just-in-time manufacturing,demand flow technology, value engineering, total quality management, targetcosting and our Associate suggestion system to reduce product costs, increasequality, shorten delivery cycles and improve asset turnover. These complementarytechniques are all part of our Pursuit of Excellence program, in whichproduction Associates are regularly trained. All of our factories have earned orare in the process of earning ISO 9001 certification, the international standardfor quality assurance in design and manufacturing.
**Research and Development**
Our investment in research and development supports our strategy ofincreasing sales growth and profit margins through development of innovative,higher technology products. We introduced more than 30 new products in 2000 withour most significant introductions including:
- the  Quickie S-626  wheelchair, which offers a center drive wheel      position for easy and intuitive operation, quad link rear stabilizing      casters, powerful two-stage drives for speed and go-anywhere torque and      adjustable seating for optimal performance.  
- the  Joerns Ultracare  universal bed, featuring 23 inches of      high-to-low travel unequalled in the industry. This bed won the      Nightingale Design Award, recognizing its functionality, quality and      style.  
- the  Parker Series 400  bathing system, winner of the Millennium      Award in the U.K. and also the Nightingale Design Award in the U.S.,      offers independence by the easy ingress and egress side entry tub.  
- the  Dynamo , which is the first full-featured, digitized speech      device to offer a dynamic display screen, thereby greatly expediting      conversation.
**Patents and Trademarks**
We currently hold patents associated with some existing products and havefiled applications for additional patents covering some of our newer products.Although some of these patents can provide a meaningful competitive advantage ina particular product market, overall, management does not consider the ownershipof patents essential to our current or future market position.

Research and development, which had previously been conductedat each of our manufacturing divisions, has now been combined under the GlobalBusiness Group. This will allow us to better prioritize and utilize engineeringresources and create global cross-functional integration.

**Warranty**
Our products are generally sold with limited warranties for periods of up tofive years. Customers may also purchase extended warranties on some products.Some components of our wheelchair products have a lifetime warranty. Theexpected warranty expense associated with each product sold is recorded at thetime of sale and the adequacy of those warranty reserves is reviewed regularlyand adjusted accordingly.
**Foreign Operations**
We have foreign subsidiaries with manufacturing and distribution operationsin the U.K., France, Germany, Spain and Mexico. In addition, company-ownedsales/distribution companies are located in Canada, Australia, the Netherlands,Norway, Sweden, Switzerland and Italy. We also have salespeople who coverneighboring countries, such as Belgium, Luxembourg, Austria, Denmark andPortugal. All of our manufacturing and distribution facilities are located inindustrially developed areas where qualified labor and material supply have beenreadily available. See "Management Discussion and Analysis of FinancialCondition and Results of Operations -- Factors that May Affect Future OperatingResults." Financial information relating to our operations by geographicarea is included in Note 14 of the "Notes to Consolidated FinancialStatements".
**Competition**
The medical supply industry is characterized by intense competition. Weencounter significant domestic and foreign competition from a number ofestablished manufacturers in each of our product lines. In some countries andproduct markets, including the U.S., we face competition from othermanufacturers that have substantially greater financial and other resources,larger market shares or other competitive advantages. Price reductions by ourcompetitors could result in similar price reductions by us.

The worldwide markets for rehabilitation and institutional products aredominated by two global manufacturers, Sunrise and Invacare Corporation. Otherprimary competitors in the U.S. include Respironics, Pride and Mallinckrodt inrehabilitation products and Hillenbrand Industries in institutional products. Inthe European market, Meyra/Ortopedia, Otto-Bock and Invacare are the mostimportant competitors in rehabilitation products and Hillenbrand Industries ininstitutional products.

We compete primarily on the basis of:
- product features, performance and quality;  
- the breadth of our full line product offering;  
- competitive prices;  
- customer service and delivery;  
- salesforce support; and  
- the strength of our independent dealer network.
**Government Funding and Regulation**
Extensive government funding and regulation at the federal and state levelsaffect the healthcare industry. Regulations change frequently and can have animpact on the profitability of products sold in each of our markets.
***Medicare and Medicaid. Medicare is a federally funded healthinsurance program administered by private insurance companies providing healthinsurance coverage for persons 65 or older and other persons with disabilities.Medicaid is a federally and state-funded health insurance program administeredby state governments that provides reimbursement for healthcare related expensesfor persons with certain financial and medical needs regardless of age. Theseprograms provide reimbursement to homecare providers for rentals and sales ofmedical equipment and related supplies. Medicare generally pays 80% of theallowable rate of reimbursement for certain home medical equipment items, whileMedicaid generally pays 100%.

The U.S. health and homecare industry is continually adapting to changes inMedicare reimbursement. The Balanced Budget Act of 1997 made significantreductions in spending for the Medicare and Medicaid programs, including thoseaffecting our customers. The Balanced Budget Act required the government toconduct competitive bidding demonstration projects involving, among otherthings, oxygen equipment. The Health Care Financing Administration (HCFA)completed its first bidding demonstration and has made improvements in thedesign and policies to start a second bidding process in January 2001. Inaddition, the Balanced Budget Act granted the HCFA the authority to lowerMedicare reimbursement on any item that does not meet a pricing standard ofinherent reasonableness. Congress has since suspended this authority until theHCFA can provide statistically relevant and reliable data and sound costingmethodology to support its national inherent reasonableness authority. Congresshas also lifted the freeze on Medicare reimbursement for durable medicalequipment, which gave the healthcare providers modest increases in fiscal years200l and 2002. Further, the Balanced Budget Act imposed a prospective paymentsystem for Medicare skilled nursing facilities, which has eliminated cost-basedreimbursement in favor of a per diem payment based upon the projected level ofresources needed to care for residents. In many cases, the payment rates havebeen reduced sharply from prior levels, causing severe financial difficultiesfor many of our nursing home customers. These changes at the provider level havehad an adverse impact on Sunrise, particularly in the case of nursing homeconstruction and purchases in fiscal year 2000.

Although Sunrise itself is not a provider under Medicare for rehabilitationand institutional products, these products are sold to home medical equipmentdealers, nursing homes and hospitals that are providers and thus depend uponMedicare and Medicaid reimbursement for a portion of their revenue. Overall, weestimate that 21% of our 2000 sales were directly or indirectly funded bygovernment sources in the U.S. Our DynaVox subsidiary is a provider under manystate Medicaid programs and also sells our products directly to school districtsand other governmental units. Changes in regulations can adversely impact ourrevenues and collections directly by reducing payments to our DynaVox subsidiaryand indirectly by reducing the reimbursement rate received by home medicalequipment providers, thus making it less profitable for them to sell or rentproducts to the end-user. This, in turn, can put downward pressure on pricescharged for our products sold through this channel. We also depend on governmentfunding available in Europe.

Management believes that intensified healthcare cost containment effortsthrough managed care continue to favor lower cost alternatives such as homehealthcare and nursing home care, as has been the case historically. Governmentfunded programs now use managed care programs to provide healthcare insurance totheir beneficiaries. We have made special efforts in recent years to allocatemore of our new product engineering dollars to lower cost, more generic productsfavored by managed care and Medicare/Medicaid programs.

In the U.S., both the Home Healthcare Group, as a manufacturer of itemsreimbursable by Medicare, Medicaid and other government programs, and ourDynaVox subsidiary, as a direct provider of items reimbursable by these andother programs, are subject to a variety of complex and extensive state andfederal statutes and regulations governing healthcare fraud and abuse. Thefederal anti-kickback statute prohibits some business practices andrelationships involving the provision of health care items and servicesreimbursable under Medicare, Medicaid and other federal health programs. Theseprohibited practices include the payment or receipt of remuneration for thereferral, or arranging for the referral, of patients whose care will be paid forby Medicare, Medicaid, or other governmental programs. Sanctions for violatingthe anti-kickback statute include criminal penalties and civil sanctions,including civil monetary penalties and possible exclusion from governmentprograms such as Medicare and Medicaid. Any exclusion could be direct in thecase of our DynaVox subsidiary or indirect as a result of the rejection ofgovernment reimbursements to suppliers and distributors of our rehabilitationand institutional products. In addition, many states have adopted their ownanti-kickback provisions.

Both state and federal provisions govern the submission of false claims bydirect providers, including our DynaVox subsidiary, of items and servicesreimbursable by government programs. Violations of these provisions can resultin criminal penalties and civil sanctions, including civil money penalties andpossible exclusion. The government has also taken the position in some casesthat indirect providers, such as manufacturers of drugs and devices, can beliable under these false claims provisions, for instance, as part of afraudulent course of conduct. There is increasing investigative and enforcementactivity against direct and indirect providers of items and servicesreimbursable by Medicare, Medicaid and other government programs, potentiallysubject to state and federal anti-kickback and false claims provisions. Thisactivity is being undertaken by the Department of Health and Human Services, bythe Office of Inspector General, by state Medicaid Fraud Control Units, bygovernment subcontractors including Medicare carriers and fiscal intermediariesand by other entities. In addition, healthcare providers increasingly have beenthe targets of qui tam or "whistleblower" lawsuits, alleging thesubmission of false claims. We believe that we are not currently the subject ofany investigation or inquiry.
***FDA Regulation. The U.S. Food and Drug Administration andcorresponding foreign agencies regulate medical products manufactured by us.Most of these devices are subject to device listings filed with the FDA andmedical device factories must be registered with the FDA. The FDA regulates theintroduction, manufacture, advertising, labeling, packaging, marketing,distribution and recordkeeping for these products. In manufacturing andmarketing our products, we must comply with FDA regulations, including variousFDA recordkeeping requirements and inspections by the FDA. The testing for andpreparation of required applications can be expensive and subsequent FDA reviewcan be lengthy and uncertain. Moreover, clearance or approval, if granted, caninclude significant limitations on the indicated uses for which a product may bemarketed. Failure to comply with applicable FDA regulations can result in fines,civil penalties, suspensions or revocation of clearances or approvals, recallsor product seizures, operating restrictions or criminal penalties. Delays inreceipt of, or failure to receive, clearances or approvals for our products forwhich clearances or approvals have not yet been obtained would adversely affectthe marketing of those products in the U.S. and could adversely affect theresults of future operations.

We must obtain FDA or foreign regulatory approval or clearance for marketingour new devices prior to their release. There are two primary means by which theFDA permits a medical device to be marketed, either through pre-market approval(PMA) or by a 510(k) filing. A PMA is required for any device which is notsubstantially equal to a device already in the marketplace or for a device thatis critical in nature. For certain products, we may be required to seekclearance for a device by filing a 510(k) premarket notification with the FDA.To obtain that clearance, the 510(k) premarket notification must establish thatthe device is "substantially equivalent" to a device that has beenlegally marketed or was marketed before May 28, 1976. We may not place thedevice into commercial distribution in the U.S. until the FDA issues asubstantial equivalence determination notice. This notice may be issued within90 days of submission, but usually takes longer. The FDA, however, may determinethat the proposed device is not substantially equivalent, or require furtherinformation, such as additional test data or clinical data, or require us tomodify our product labeling, before it will make a finding of substantialequivalence. In addition, the FDA may inspect our manufacturing facility beforeissuing a notice of substantial equivalence and may delay or decline to issuethat notice until the facility is found to be in compliance with GoodManufacturing Practice requirements. The process of obtaining FDA clearance of a510(k) premarket notification, including testing, preparation and subsequent FDAreview, can take a number of years and require the expenditure of substantialresources.

The FDA also has the authority to issue performance standards for devicesmanufactured by us. In the event that any performance standards are issued, ourproducts would be required to conform, which could result in significantadditional expenditures for us. The impact of FDA regulation on us has increasedin recent years as we have increased our manufacturing operations. We cannotassure you that changes to current regulations or additional regulations imposedby the FDA will not have an adverse impact on our business and financialcondition in the future.
***Additional Government Regulation. In addition, we sell some of ourproducts directly to the U.S. government, particularly the Department ofVeteran's Affairs and General Services Administration. Sales to the U.S.government are subject to pricing and other regulatory requirements. Our failureto meet these requirements may disqualify us from selling to the U.S. governmentin the future and subject us to fines.

Further, our operations are subject to review and inspection by local, state,federal and foreign governmental entities. In addition, we are subject to avariety of other federal and state regulations, including, but not limited to,those administered by the United States Department of Labor and the UnitedStates Occupational Safety and Health Administration. Moreover, with respect toboth existing and proposed foreign and domestic operations, changes in currentor future laws or regulations or future judicial intervention may have amaterial adverse effect on us. We are unable to predict the effect that anyfuture foreign or domestic legislation or regulation may have on our existing orfuture business.
**Employees**
We refer to our employees as Associates. We employed approximately 4,470full-time Associates worldwide as of June 30, 2000. Approximately 390 Associatesat two factories in the U.S. are covered by collective bargaining agreementsthat expire in 2002. In Europe, approximately 250 Associates in the U.K. and 160in Germany are covered by national union arrangements. We have not experienced astrike or work stoppage during our 17-year history. We believe that our laborrelations are good.
**Cost of shipping**
Shipping is a significant expense in the operation of our business. We shipour products to customers generally by United Parcel Service in the U.S. andother delivery services worldwide and typically bear some or all of the costs ofshipment. Accordingly, any significant increase in shipping rates could have anadverse effect on our operating results. Similarly, strikes or other serviceinterruptions by these shippers could adversely affect our ability to deliverproducts on a timely basis, which could have an adverse effect on ourrelationships with our customers.
**Backlog**
Our backlog of firm orders was approximately $34 million at June 30, 2000 andJuly 2, 1999. Approximately $15 million in 2000 and 1999 represented orders forpatient room beds and furnishings, the one portion of our business for whichbacklog is believed to be a meaningful predictive factor because of the longorder lead times in this market. Generally, we manufacture the balance of ourproducts to our forecast of near-term demand, shipping immediately from stock,or else produce customized products based on actual orders received and shipwithin a short period thereafter. As a result, we do not have a substantialbacklog for these products. Management does not believe that our overall backlogat any particular time is a meaningful indicator of future sales levels.
**Customer Payment Terms**
We do not maintain inventory of our products for a significant period oftime. See "Backlog." Many of our products are manufactured inconnection with specific orders, which are shipped in less than 30 days and inmany cases less than 72 hours, from receipt of the order. Patient room bed andfurnishing products also are manufactured in connection with specific orders,but may take from one to three months until products are ready to ship. Wemaintain a larger stock of those component parts that require longer lead timesto obtain from suppliers to minimize the risk of extending time periods tofulfill product orders. Most of our sales are made on standard terms requiringpayment by the customer within 30-60 days of delivery. Some sales are made onextended terms on a selective basis. Some customers elect to finance theirpurchases with installment note contracts or leases offered primarily by thirdparties through our finance subsidiary, SunMed Finance. We occasionally acceptproducts for replacement upon customer request. However, returns for credit orrefund have not been a material aspect of our business.

**ITEM 2. PROPERTIES**
Our corporate headquarters is located in Carlsbad, California and comprisesapproximately 21,000 square feet of leased space that we occupy under a leaseexpiring in 2004. We lease 15 facilities in North America, including a facilityin Tijuana, Mexico that supports the U.S. operations. These facilities totalapproximately 1,151,000 square feet under leases with expiration dates rangingfrom 2000 through 2020. We also own and operate three factories in the U.S.totaling approximately 230,000 square feet.

For our international operations, we lease 40 facilities in Europe, Canadaand Australia totaling approximately 2,016,000 square feet under leases withexpiration dates through 2010. We own eight facilities in Europe withapproximately 657,000 square feet.

Our facilities are used primarily for manufacturing, distribution andadministration. We have options to renew a number of the leases. We believe thatour facilities are adequate for our current needs.
**ITEM 3. LEGAL PROCEEDINGS**
We are a party to various legal proceedings arising in the ordinary course ofbusiness. We do not believe that the outcome of any of these actions will have amaterial adverse effect upon our financial position or results of operations.
**ITEM 4.**SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
No matters were submitted to a vote of our stockholders during the fourthquarter of fiscal 2000.

**EXECUTIVE OFFICERS OF THE COMPANY**
Pursuant to General Instructions G(3) of Form 10-K, the following informationis included as an unnumbered Item in Part I of this Report.

The following table sets forth our executive officers, who serve at thediscretion of the Board of Directors. No person other than those listed belowhas been chosen to be an executive officer.

Name
Age
Position
Murray H. Hutchison
61
Chairman of the Board (elected January 17, 2000)
Michael N. Hammes
58
President and Chief Executive Officer (elected January 17, 2000)
Richard H. Chandler
57
Chairman of the Board, Chief Executive Officer and President (resigned      October 4, 1999)
Ben Anderson-Ray
45
Senior Vice President & President, Global Business Group
Raymond Huggenberger
41
President European Operations and Corporate Senior Vice President
Steven A. Jaye
44
Senior Vice President, Chief Administrative Officer, General Counsel      and Secretary
Thomas H. O'Donnell
57
Senior Vice President North America and Group President      - Home      Healthcare Group
Barrie Payne
63
Senior Vice President Operations, Group President and Managing Director      - Sunrise Medical Ltd. (retired March 2000)
John M. Radak
40
Vice President and Controller; Vice President of Finance, Global      Business Group
Ted N. Tarbet
47
Senior Vice President and Chief Financial Officer*Management Profiles*
**Murray H. Hutchison.** On January 17, 2000, Murray H. Hutchison was electedto serve as Chairman of the Board. He served as interim chairman of the board ofdirectors, chief executive officer and president from October 4, 1999 to January17, 2000, following the resignation of company founder Richard Chandler fromthose positions. Mr. Hutchison has served as a director of Sunrise since 1983.From 1976 through 1996, Mr. Hutchison was chairman of the board of InternationalTechnology Corporation, a NYSE-listed environmental management company and itschief executive officer from 1976 to 1994. Mr. Hutchison is currently a privateinvestor and serves on the board of directors of Epic Solutions, HuntingtonHotel Corporation, Olsen Company and Senior Resource Group, all privately heldcompanies and Cadiz Land Company and Jack in the Box, Inc., both publicly tradedcompanies.

**Michael N. Hammes.** On January 17, 2000, Michael H. Hammes was electedpresident and chief executive officer of Sunrise Medical Inc. Mr. Hammes joinedSunrise from Guide Corporation, a privately held company that is the largestproducer of automotive lighting in North America and was formerly the automotivelighting division of General Motors, where he served as chairman of the boardand chief executive officer from 1997 to 1999. Mr. Hammes' prior executivepositions include chairman and CEO of The Coleman Company, a global manufacturerof outdoor recreational equipment, from 1993 to 1997; corporate vice chairmanand president of Worldwide Consumer Product Operations of the Black & DeckerCorporation from 1990 to 1993 and president of International Operations forChrysler Corporation from 1986 to 1990. Mr. Hammes has been a member of theSunrise Medical board since 1998, where he served as the Audit Committeechairman.

**Richard H. Chandler.** Mr. Chandler, who founded the company in 1983 andserved as its chief executive officer since that time, resigned from hispositions as chairman of the board of directors, president and chief executiveofficer, as well as his seat on the board, effective October 4, 1999. Mr.Chandler is now an employee consultant under an agreement providing for threeyears of services and a covenant not to compete with or solicit employees fromthe company. From 1982 to 1983, he was president of Richard H. Chandler Company,a management-consulting firm, during which period he planned the formation ofSunrise. From 1979 to 1982, he was president and chief executive officer ofAbbey Medical, Inc., the nation's largest chain of home medical equipment storesat the time. Mr. Chandler participated in the leveraged buy-out of Abbey Medicalfrom Sara Lee Corporation in June 1979 and arranged for Abbey's sale to AmericanHospital Supply Corporation in April 1981. From 1974 to 1979, he held seniormanagement positions with Sara Lee Corporation, ending as a group vice presidentand including two years when he was president of the Abbey Medical/Abbey Rentsdivision.

**Ben Anderson-Ray.** Mr. Anderson-Ray was elected senior vice president ofSunrise and President of the Global Business Group in March 2000. From 1998 tothis election he served as group president of the Continuing Care Group, whichmanufactures Joerns and Corona beds and furniture and ParkerBath bathing equipment for nursing homes and other healthcare institutions.From November 1996 to 1998, Mr. Anderson-Ray was president of the MobilityProducts Division. From 1994 to 1996 he served as vice president of marketingand business development for the Rubbermaid Home Products Division. Prior tothis, he was general manager of cooking, cleaning and beverage products for Black& Decker Corporation. From 1984 to 1993 Mr. Anderson-Ray held positions atGeneral Electric including manager of Asia-Pacific marketing and sales, managerof international automotive products and product manager of lighting products.

**Raymond Huggenberger.** Mr. Huggenberger was elected group president ofEuropean Operations and senior vice president of Sunrise in March 2000. From1998 to this election, Mr. Huggenbenberger was President of SunriseGermany.  From 1996 to 1998, Mr. Huggenberger was managing director of Triumph Adler'shealthcare group, which includes two home medical equipment divisions well knownin Europe. From 1994 to 1996, Mr. Huggenberger was Sunrise Germany's vicepresident of marketing. From 1989 to 1994 he was International Sales directorfor Heidolph Electro GmbH.

**Steven A. Jaye.** Mr. Jaye was elected chief administrative officer inMarch 2000 and has served as senior vice president, general counsel andsecretary since August 1996, after joining Sunrise as vice president and generalcounsel in August 1995. From 1991 through 1995, Mr. Jaye served as the vicepresident - legal affairs for Magma Power Company, a publicly tradedinternational power producer. From 1984 through 1991, he served as a businessattorney with the law firm of Latham & Watkins. Prior to receiving his legaldegree, Mr. Jaye served as a design, production and quality assurance engineerfor a subsidiary of Hughes Aircraft Company. In addition to his legal duties,Mr. Jaye is responsible for the worldwide human resources, risk management andreal estate operations for Sunrise.

**Thomas H. O'Donnell.** Mr. O'Donnell was elected president, North Americaand senior vice president of Sunrise in August 2000. Mr. O'Donnell was formerlythe president of the Home Healthcare Group from July 1997 to this election. Heserved as executive vice president - operations of Sunrise from January 1987until August 1988, when he was elected president of Quickie Designs Inc. (then aSunrise subsidiary). In January 1996 he was named senior vice president, NorthAmerica. Prior to joining Sunrise in 1986, Mr. O'Donnell was president and chiefoperating officer of General Computer Company, a manufacturer and distributor ofpersonal computer peripherals. From 1984 to 1985, he was chief executive officerof Connecting Point of America, Inc., a chain of computer retail stores. From1967 to 1984, he was with IBM Corporation in a variety of management positions,most recently as vice president - product management for the Entry SystemsDivision.

**Barrie Payne**. Mr. Payne, who retired in March 2000, was a senior vicepresident of Sunrise since January 1996 and was managing director of SunriseMedical Ltd. (U.K.) since June 1983. In addition to his responsibilities atSunrise Medical Ltd. (U.K.), Mr. Payne oversaw Sunrise's distribution divisionsin Scandinavia and the Netherlands. From January 1996 through June 1997, Mr.Payne also served as senior vice president - Europe. Mr. Payne joined Sunrisefollowing our purchase of A-BEC Mobility Inc., a company founded by Mr. Payne in1972, where he served as president. A-BEC Mobility Inc. distributed electricwheelchairs and other power mobility products.

**John M. Radak.** Mr. Radak was elected vice president of finance for theGlobal Business Group in March 2000 and has served as vice president andcontroller since January 1995. From 1992 to 1995, Mr. Radak was vice president,finance for the respiratory care subsidiary of Bird Medical Technologies Inc., amedical device manufacturer. Prior to joining Bird, he held various financialmanagement positions with Calcomp Inc., a Lockheed/Martin subsidiary thatmanufactures printers and plotters for computer graphics applications. Mr. Radakis a certified public accountant.

**Ted N. Tarbet.** Mr. Tarbet was elected senior vice president and chieffinancial officer in August 1993. Mr. Tarbet joined Sunrise in 1986 as corporatecontroller. In 1988 he was made a vice president and in 1989 he was elected tothe position of vice president, chief financial officer and secretary. From 1981to 1986, Mr. Tarbet served as controller and then as vice president and chieffinancial officer of Anadex Inc., a manufacturer of personal computer products.Mr. Tarbet is a certified public accountant.
**PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED        STOCKHOLDER MATTERS**
Our common stock, $1 par value, trades on the New York Stock Exchange underthe symbol "SMD." The highest and lowest daily closing price for eachquarterly period during the last two fiscal years was as follows:
 
Fiscal Year 2000 
Fiscal Year 1999 
High 
Low 
High 
Low        
First Quarter
7 1/2
6
14 7/16
6 9/16
Second Quarter
7 1/16
4 3/4
13 1/2
8 5/16
Third Quarter
6 1/4
4 3/16
12 3/8
6 1/8
Fourth Quarter
6 3/16
3 13/16
9 1/4
5 15/16
Year
7 1/2
3 13/16
14 7/16
5 15/16
The number of holders of record of Sunrise common stock as of September 1,2000 was 548.

We have not paid cash dividends to holders of our common stock and have noplans to do so in the foreseeable future. Provisions of our credit facility andsenior notes restrict the payment of dividends.
**ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Years Ended
June 30,
July 2,
July 3,
June 27,
June 28,
Consolidated results of operations data (1)
2000
1999
1998 (3)
1997
1996
Net sales
$644,488
$660,248
$657,169
$670,545
$675,417
Gross profit
195,774
199,494
205,538
222,739
225,788
Marketing, selling and administrative
     expenses
144,895
147,027
155,998
162,504
172,847
Research and development expenses
18,914
21,075
17,919
17,483
16,265
Amortization of goodwill and other intangibles
9,424
8,589
8,440
8,273
8,686
Re-engineering expenses and merger costs
-
-
29,016
-
65,152
Operating income (loss)
22,541
22,803
(5,835)
34,479
(37,162)
Interest expense
16,094
16,486
15,222
14,774
16,687
Income (loss) before taxes
8,472
8,269
(11,802)
23,477
(51,749)
Net income (loss)
$ 4,127
$ 4,498
$(12,010)
$ 12,114
$(40,378)
Basic earnings (loss) per share
$ 0.19
$ 0.20
$( 0.55)
$ 0.56
$( 1.89)
Weighted average shares outstanding
22,239
22,195
22,001
21,656
21,391
Diluted earnings (loss) per share
$ 0.18
$ 0.20
$( 0.55)
$ 0.56
$( 1.89)
Weighted average number of shares assuming dilution
22,439
22,253
22,001
21,933
21,391
Consolidated balance sheet data (1)
Working capital
$108,464
$120,087
$107,579
$103,087
$107,193
Total assets
543,789
607,190
616,305
615,731
624,578
Long-term debt, including current installments
149,121
205,838
191,782
193,812
213,517
Stockholders' equity (2)
$265,018
$266,998
$272,660
$283,692
$263,281
(1) All financial data has been restated        to reflect the 1998 acquisition of Sentient Systems, Inc., accounted for        as pooling of interests.(2) We did not declare cash dividends for the years 1996        through 2000.(3) Fiscal year 1998 contained 53 weeks.
**ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION        AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS**
For the fiscal year ended June 30, 2000, consolidated net sales were $644million compared to net sales of $660 million in fiscal 1999. Sales were levelwith last year excluding a 2% negative impact from foreign currency translation.This compares to a sales increase of 0.5% in 1999 from 1998. Fiscal years 2000and 1999 were 52-week years, while 1998 was a 53-week year. Net income decreasedto $4.1 million in 2000 compared to a net income of $4.5 million in 1999.Diluted earnings per share in 2000 were $0.18 compared to $0.20 in 1999 and a$0.55 loss per share in 1998.

In the fourth quarter of 1998, we completed our multi-year, company-widere-engineering program and also concluded our merger with Sentient Systems,Inc., now named DynaVox Systems (DynaVox). Approximately $29 million inre-engineering expenses and merger costs were incurred during 1998 to completethese activities. All financial data has been restated to reflect the 1998acquisition of Sentient Systems, Inc., which was accounted for as a pooling ofinterests.
**Net Sales Analysis**
Net sales were $644 million in 2000 compared to $660 million in 1999 and $657million in 1998. Unit volumes increased slightly for many rehabilitationproducts in 2000, however, continued decreases in volumes for the nursing homesector, price competition and product mix resulted in overall flat salescompared to 1999, excluding the impact of exchange rates. International salesaccounted for 43% of consolidated net sales in 2000 and 1999, compared with 42%in 1998.

Fluctuations of foreign currency rates decreased overall sales by 2% in 2000,but did not have a significant impact on our 1999 sales. Sales in 1998 werereduced by 3% due to fluctuations of foreign currency rates. The impact offoreign currency fluctuations on net sales is not necessarily indicative of theimpact on operating results due to the offsetting foreign currency impact oncosts and expenses and our hedging activities. (See Note 1 to the consolidatedfinancial statements for our accounting policies for foreign currencyinstruments.)

Healthcare cost reduction continues to be pursued in the United States andEurope, causing downward pressure on our prices, although prices have stabilizedsomewhat in the second half of this fiscal year. We believe that we areappropriately reducing our cost structure in response through a strategicre-alignment of our operating units announced in March.
**Analysis of Product Line Sales Contribution**
The following table shows net sales by operating segment as a percentage oftotal net sales:

($ in millions)
2000 
1999 
1998            
North American  rehabilitation products
$365.3
57%
$363.6
55%
$359.8
55%
European rehabilitation products
212.7
33%
219.0
33%
217.8
33%
Subtotal rehabilitation products
578.0
90%
582.6
88%
577.6
88% 
Institutional products
66.4
10%
77.6
12%
79.6
12%
Total
$644.4
100%
$660.2
100%
$657.2
100%**Rehabilitation Products**
Rehabilitation products sales decreased $5 million in 2000 to $578 millionfrom $583 million in 1999, due to fluctuations of foreign currency rates.Excluding the impact of exchange rates, sales increased 2% from 1999.

North American rehabilitation products net sales of $365 million increased marginallyfrom $364 million in 1999. This compares to growth of 1% in 1999 and 5% in 1998.Mobility products sales increased in 2000, a continued trend from both 1999 and1998, although sales growth in each of the years was negatively impacted bydeclining prices. Power wheelchairs drove growth in 2000, while pediatric andpositioning products, seating products and custom wheelchairs led the growth in1999. In 1998, mobility products growth was primarily due to strong sales incustom and standard lightweight manual wheelchairs. In 2000, personal careproduct sales were about even with the prior year. Within this category,standard wheelchairs, bath safety and ambulatory products sales advanced overthe prior year. This is consistent with 1999. In 2000, respiratory productssales were flat compared to last year, impacted by pricing pressures and productmix to lower end products. Sleep therapy product sales experienced double-digitgrowth, but oxygen concentrator and ambulatory oxygen product sales were soft. In addition,we exited the unprofitable liquid oxygen product line in March 2000, whichcontributed $1.6 million in revenue. For 1999, oxygen and sleep therapy productsales exceeded the prior year but respiratory sales declined overall due to softsales of liquid and ambulatory oxygen products. Respiratory sales advancedmodestly in 1998, negatively impacted by the Balanced Budget Act of 1997, whichreduced reimbursement for oxygen concentrator rentals beginning January 1, 1998,causing respiratory dealers to delay purchases of equipment for their rentalfleets. The sales of speech devices declined slightly in 2000 due to supplier issues which improved markedly in the fourth quarter. Speech deviceshad increased 3.7% and 11% for 1999 and 1998, respectively, due to theintroduction of new products and expanded international sales.

Rehabilitation products sales in Europe were $213 million in 2000, down from$219 million in 1999. Excluding a negative 7% impact from foreign currencyfluctuations, European rehabilitation sales increased 4%. The increase wasprimarily due to strong sales of custom lightweight and standard wheelchairs.For 1999, product sales were up slightly from $218 million in 1998 primarily dueto the introduction of the *Breezy 300* manual and *Breezy P300* powerchairs. In 1998, overall European unit sales volumes were up on relatively flatprices, partially offset by a shift in product mix to lower-priced products.Sales were also negatively impacted by disruptions related to the consolidationof four factories in the U.K. and unfavorable foreign currency exchange rates.The impact on European sales of these unfavorable rates was 6% in 1998, but wasnegligible in 1999. Excluding the impact of acquisitions and foreign currencyexchange movements, sales grew by 1% in 1998.

**Institutional Products**

Institutional product sales decreased 14% in 2000 to $66 million compared todeclines of 2% in 1999 and 5% in 1998. Bathing products were down 8% in 2000compared to the prior year, excluding a negative impact from foreign exchange.Bed and patient room furnishings sales decreased by 13%. These declines areprimarily due to the U.S. government's Prospective Payment System for Medicareand loss of market share in France. The introduction at the end of the secondquarter of our new Universal nursing home bed has been well received in the U.S.and is expected to improve sales performance. In 1999 and 1998, unit volumeincreased in sales of beds, but increases were partially offset by a decline inunit sales of accessories. Although average selling prices for accessorized bedsdeclined overall in 2000, prices of beds and patient room furniture appear tohave stabilized. Customers, in their cost cutting moves, are purchasing lessaccessories for their bedding products and going with the basic model,resulting in lower sales volume for accessories.
**Expense and Profit Analysis**
The following is a summary of expenses and profits as a percentage of netsales:

%      Increase (decrease)

($ in millions)
2000
1999
1998
2000/99
1999/98
Net sales  
$644.4
 

$660.2
 

$657.2
(2%)
1%
Gross profit 
195.7
199.5
205.5
(2%)
( 3%)
% of net sales 
30.4%
30.2%
31.3%
Marketing, selling and 
administrative expenses 
144.9
147.0
156.0
(1%)
( 6%)
% of net sales 
22.5%
22.3%
23.7%
Research and development expenses 
18.9
21.1
17.9
(10%)
18%
% of net sales 
2.9%
3.2%
2.7%
Amortization of goodwill 
and other intangibles 
9.4
8.6
8.4
10%
2%
% of net sales 
1.5%
1.3%
1.3%
Re-engineering expenses and 
merger costs 
--
--
29.0
*
*
% of net sales  
--
 

--
 

4.4%
*
--
Operating income (loss) 
22.5
22.8
( 5.8)
(1%)
*
% of net sales 
3.5%
3.5%
(0.9%)
Interest expense 
16.1
16.5
15.2
(2%)
8%
% of net sales 
2.5%
2.5%
2.3%
Interest income and other, net 
2.0
2.0
9.3
--
(79%)
% of net sales  
0.3%
 

0.3%
 

1.4%
 

 

Income (loss) before income taxes 
8.4
8.3
(11.8)
2%
*
% of net sales 
1.3%
1.3%
( 1.8%)
Income tax expense 
4.3
3.8
0.2
15%
*
% of income (loss) before taxes  
51.3%
 

45.6%
 

1.8%
 

 

Net income (loss) 
$ 4.1
$ 4.5
$(12.0)
(8%)
*
% of net sales  
0.6%
 

0.7%
 

( 1.8%)
 

 

* Percentage not meaningful 
Gross profit as a percentage of net sales improved slightly in 2000 comparedto a decrease of 1.1 percentage points in 1999. Gross margin in the NorthAmerican rehabilitation products segment improved from the prior year due tolower material costs, while gross margin in the European rehabilitation productssegment was unchanged from the prior year. In 1999, gross margin in the North Americanrehabilitation products segment declined as a result of pricing pressure, product mixshifts and higher distribution costs to expedite backlog shipments in homecareproducts. In 1999, European rehabilitation products margins improved as a result ofproduction efficiencies following the U.K. factory consolidations, whichnegatively impacted margins in 1998. Gross profit in the Institutional productssegment has declined over the past two years as a result of lower productionvolumes. We are continuing to focus on margin improvement through variouspurchasing strategies and enhanced product design.

Marketing, selling and administrative expenses declined 1% in2000, followinga decrease of 6% in 1999. Included in 2000 expenses is approximately $4.5million consisting primarily of employee separation costs. Included in expensesfor 1999 was approximately $2.0 million of severance expense which resulted fromthe fourth quarter profit improvement plan. Marketing, selling andadministrative expenses for 1998 included costs estimated to be approximately$2.3 million for positions duplicated temporarily during the consolidation ofdivisions.

Research and development expenses decreased 10% to $18.9 million in 2000,compared to an 18% increase to $21.1 million in 1999. The formation of theGlobal Business Group in 2000 contributed to the decline by focusing resourceson the development of higher margin products.

We completed our three-year re-engineering program in 1998. Approximately $27million in non-recurring costs were incurred during that year primarilyassociated with implementation of common software and hardware systems and withfacilities consolidations and relocations. In addition, we merged with DynaVoxin the fourth quarter of 1998. Approximately $2 million of merger relatedexpenses were incurred.

Operating income of $23 million in 2000, or 3.5% of net sales, was consistentfor 1999 and 1998 both in dollars and as a percent of net sales, excluding 1998re-engineering expenses and merger costs. The decrease in operating expensesoffset the decrease in gross profit in the current year.

Operating income from U.S. rehabilitation products was $19 million in 2000compared to $15 million in 1999 and $18 million in 1998. The 2000 increase wasprimarily the result of gross margin improvement and a reduction in operatingexpenses. The increase in the gross margin was the result of lower raw materialcosts and a reduction in distribution costs.

European rehabilitation products operating income of $15 million in 2000 was$2 million higher than in 1999, due to lower operating expenses. For 1999,operating income was $13 million, compared to $5 million in 1998, with theincrease mainly due to improved gross margins and lower operating expenses.

Institutional products had an operating loss of $8 million in 2000 comparedto a $4 million loss in 1999 and operating income of $0.7 million in 1998. Thedecreases in 2000 and 1999 were primarily due to the drop in sales volume. Thisdecline in revenue was partially offset by lower operating expenses. Financialperformance in this segment is expected to improve with the stabilization ofprices and the launch of the new Universal bed product.

Interest expense decreased by 2% in 2000 to $16.1 million compared to anincrease of 8% in 1999. The reduction was due to a decline in debt of $56million, partially offset by higher interest rates on our amended creditagreement. The increase in 1999 was due to higher average borrowings andinterest rates compared to 1998.

Interest income decreased 30% in 2000 to $3.0 million compared to an increaseof 17% in 1999 to $4.3 million. The decline was due to the sale of approximately$23 million in installment receivables in the second quarter of 2000. Theincrease in 1999 was primarily due to the growth in installment notesreceivables.

Included in other income (expense), net in 2000 is a loss of approximately$0.5 million on the sale of installment notes receivable. Included in 1999, is a$2.2 million charge related to termination costs of interest rate swapagreements. In 1998 we reported other income of $5.6 million primarily as aresult of a favorable settlement of a patent infringement lawsuit of $4.4million and approximately $0.5 million from the sale of property in the U.K.

In 2000, our income tax expense was $4.3 million compared to $3.8 million in1999 and $0.2 million in 1998. The effective tax rates of 51.3%, 45.6% and 1.8%in 2000, 1999 and 1998, respectively, differ from the expected statutory rateprimarily due to the effect of non-deductible goodwill amortization. In 2000,the effective tax rate was also higher than the statutory rate due to foreignearnings being taxed at higher rates, partially offset by adjustments toestimated tax accruals. In addition to the goodwill impact, the effective taxrate of 1.8% in 1998 on a loss before income taxes of $11.8 million was alsodriven by tax expense recorded on pre-tax income in certain foreignjurisdictions with high tax rates.

Net income in 2000 was $4.1 million, or 0.6% of net sales as compared to $4.5 millionor 0.7% of net sales in 1999. Excluding the after-tax impact of re-engineeringexpenses and costs associated with the DynaVox merger in 1998, net income was$5.4 million in 1998 or 0.8% of net sales.

Diluted earnings per share in 2000 were $0.18 compared to $0.20 in 1999.Earnings per share dropped slightly from 1999, due to a decrease in net incomeof approximately $0.4 million caused from lower revenues and an increase in thenumber of shares outstanding. Earnings per share were $0.36 in 1999 before $6.0million of unusual charges primarily related to severance and swap terminationcosts. For 1998, there was a loss per share of $0.55, but excludingre-engineering expenses and merger costs, we earned $0.24 per share.
**Impact of Inflation**
We attempt to minimize or offset the impact of inflationary pressures onlabor and raw material costs through increased sales volume, improvedproductivity, active cost control measures, and, to a lesser extent, increasesin product pricing. We believe inflationary material cost increases may continueand the markets in which we sell our products will remain price-sensitive,thereby limiting our ability to offset higher costs with pricing actions.
**FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY

Cash Flow**
Cash and cash equivalents were approximately $19.9 million at June 30, 2000and $1.5 million at July 2, 1999. Net cash provided by operating activities was$53.5 million compared to $2.9 million in the prior year driven by a reductionin inventories and receivables. Working capital decreased $12 million to $108million in 2000 primarily due to the change in net receivables, inventories andcurrent installments of long term debt.

Capital spending in 2000 was $16.3 million, primarily invested forenhancements in machinery and equipment and new product tooling to improveoperating efficiencies and production. There were no material capitalexpenditure commitments outstanding as of June 30, 2000. We generally expectcapital expenditures to aggregate between 100-150% of depreciation expense.

In 2000, long-term borrowings were reduced by $56.3 million through cashgenerated by operations together with $35 million in proceeds generated fromasset sales. In December 1999, we sold approximately $23 million of ourinstallment receivable portfolio to an independent third party and received $21million in cash. In February 2000, we entered into a $21 million sale-leasebacktransaction whereby we sold and leased back two manufacturing facilities. Wereceived $14 million in cash from the sale of property. Historically ourprincipal source of liquidity has been cash flow from operations supplementedwith borrowings under the existing revolving credit facility. At June 30, 2000,we did not have any outstanding borrowings under our $37 million unsecuredrevolving bank credit facility. Besides the above transactions, we areconsidering a variety of other alternatives to generate the cash to maintain anadequate liquidity position, such as the divestiture of certain assets,including the sale and leaseback of additional company-owned manufacturingfacilities, and the issuance of securities. We believe that we will be able tomaintain an adequate liquidity position through the above measures together withcash generation, management of working capital and capital expenditure levels,and available borrowings under our credit facility. In September 2000, werefinanced our bank credit facility, replacing it with a $58 million securedcredit facility. See "Analysis of Long-Term Debt"below for moredetail.
**Acquisitions**
On April 13, 1998, we exchanged approximately 2.7 million shares of commonstock valued at approximately $40 million for all of the outstanding commonstock of Sentient Systems Technology, Inc., now named DynaVox Systems, amanufacturer of augmentative communication devices and software for personsaffected by speech disabilities. The transaction was accounted for as a poolingof interests.
**Capital Structure and Leverage**
Our capital structure consists of two primary components: stockholders'equity and long-term debt. Stockholders' equity was $265 million at the end of2000, a decrease of $2 million from the prior year-end. The decrease wasprimarily the result of a negative impact on accumulated other comprehensiveincome of foreign currency translation adjustments.

**Analysis of Long-Term Debt 
2000
1999
1998
Fixed rate debt as percentage of total debt at year-end
71%
52%
93%
Foreign denominated debt as a percentage of total debt at year-end
6%
5%
36%
Weighted average annual interest rate
8.9%
8.0%
7.8%
Interest coverage (1)
1.6x
1.7x
2.5x
(1) Earnings before income taxes, net        interest expense and re-engineering expenses and merger costs divided by        net interest expense.
Long-term debt, including current installments, of $149 million at June 30,2000 decreased approximately $57 million from $206 million at July 2, 1999. The ratio ofdebt to total capitalization decreased to 36% at year end, compared to 44% atthe end of 1999.

We attempt to minimize interest expense while also managing exposure tovariable interest rates by employing interest rate exchange agreements, orswaps, periodically to convert our bank borrowings from floating rate into theequivalent of fixed rate debt. However, as a policy we have not used interestrate swaps or any other derivatives that had a level of complexity or risk that,in our judgment, was higher than the hedged exposure. We do not hold or issuesuch instruments for trading purposes. As of June 30, 2000, we did not have anyinterest rate swap agreements.

We have used foreign-denominated borrowings from our multi-currency creditfacility periodically to hedge against foreign currency balance sheet exposuresthat would otherwise result from changes in currency values. Totalforeign-denominated debt at year-end was $9 million in 2000, $10 million in 1999and $68 million in 1998.

In 1998, we completed a private placement of $100 million ofsenior notes, $50 million maturing after seven years and bearing interest at7.09% with the remaining $50 million maturing after 10 years at an interest rateof 7.25%. The proceeds of this debt issuance were used to reduce the outstandingdebt on our unsecured multi-currency credit facility.

Our multi-currency bank credit facility provides for maximum borrowings of$77 million divided into a $37 million unsecured revolving credit facility and a$40 million secured term loan. The agreement was amended in April 1999 and inSeptember 1999 relating to pricing and certain collateral matters. The agreementwas again amended in June 2000 relating to financial covenants that wereadjusted to reflect certain asset disposals made in fiscal 2000. The term loanprovides us the option of using the London Interbank Offered Rate ("LIBOR")plus 4.50% or the prime rate plus 3.25% for interest. The term loan is securedby all domestic accounts receivable. The term loan is due and payable in asingle installment in January 2001. The revolving credit agreement permitsSunrise to elect one of two variable rate interest options at the time anadvance is made. The first option is a rate equal to the prime rate plus 4.00%.The second option is a rate based on LIBOR plus 5.25%. Interest during the yearwas at LIBOR plus the applicable margin (10.7% at June 30, 2000). We havethe option of using interbank offered rates as a basis for interest and can fixthe interest rate on the outstanding portion for up to six months. A commitmentfee of 1.00% per year is payable on the unused portion of the line. At June 30,2000, the amount of funds available from the credit facility was approximately$37 million. The credit facility required us to comply with certain covenantssuch as maintenance of leverage ratio, tangible net worth, interest coverageminimum EBITDA, and places certain restrictions on acquisitions and payment ofdividends. Maximum borrowings available under the $37 million revolving creditfacility were reduced to $25 million in July 2000 in accordance with theSeptember 1999 amendment.

In September 2000, the company refinanced its bank credit facility. The new$58 million credit facility is secured by domestic accounts receivable andinventory. A portion of the proceeds from this credit facility were used torefinance short-term debt. The agreement permits Sunrise to elect one of twovariable rate interest options, based on the leverage ratio. The first option isa rate based on LIBOR plus 2.5%. The second option is a rate equal to prime plus1.5%. A commitment fee of 0.5% is payable on the unused portion. The creditfacility expires April 2004.

The credit facility was refinanced in order to extend the maturity date onthe short-term portion of debt by three years and give the company moreflexibility in implementing its realignment plan. However, the credit facilitymay not be sufficient to fully fund the program as presently contemplated,therefore we are is seeking additional sources of funding prior to fullyimplementing the program.
**Foreign Currency Risk Management**
Operating on a global basis requires a posture of active currency riskmanagement. To finance imports and exports, we utilize a variety of foreigncurrencies that are constantly shifting in relative value. We engage in hedgingactivities to reduce potential transaction losses on net cash flows and balancesdenominated in these currencies. These amounts can arise from cross-border tradeflows or intercompany financing transactions. Our financial statements are alsoaffected by foreign currency translation fluctuations. These distort thecomparative 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 notthe result of a cash exchange of currencies and, therefore, do not give rise toa direct economic gain or loss. In these cases the costs to execute hedges wouldexceed any consistently realizable tangible benefits. Consequently, we do notcommit economic resources to hedge against the potential effect of foreigncurrency translation fluctuations. We believe that the best long-term protectionof stockholder value is to do business in a broad number of currencies.
**Dividend Policy**
While provisions of our credit facility and senior notes restrict the paymentof dividends, our present policy is to use available cash flow for reinvestmentin our core businesses, for future acquisitions and for debt reduction ratherthan to pay a cash dividend. This policy reflects an appraisal by management andthe Board of Directors of the attractiveness of our investment opportunities andtheir confidence in our ability to increase economic value for our stockholdersthrough cash retention and reinvestment. This policy is reviewed periodically asindustry conditions change.
**Recent Accounting Developments**
In June 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 133 (SFAS 133), "Accounting forDerivative Instruments and Hedging Activities, "which establishesaccounting and reporting standards for derivative instruments and hedgingactivities. SFAS 133 requires that an entity recognize all derivatives as eitherassets or liabilities in the statement of financial position and measure thoseinstruments at fair value. This Statement was amended by SFAS 137, which deferredthe effective date to all fiscal quarters of fiscal years beginning after June15, 2000. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for thefirst quarter in the fiscal year ending June 29, 2001. Adoption of this standardis not expected to have a material effect on our financial position or resultsof operations.

In December 1999, the Securities and Exchange Commission (SEC) issued StaffAccounting Bulletin No. 101 (SAB101) "Revenue Recognition in FinancialStatements." SAB101 summarizes certain of the SEC's staff's views inapplying generally accepted accounting principles to revenue recognition in thefinancial statements. We are presently evaluating the impact, if any, thatSAB101 will have on our reported results.
**Factors That May Affect Future Operating Results**
We have made forward-looking statements in this report, including theestimated benefits to be realized from the consolidation of various Sunrisedivisions worldwide. These statements are only predictions. Actual events orresults may differ materially as a result of risks and uncertainties facing usincluding:
*Government Funding. The worldwide healthcare industry is subject tocomplex and extensive government regulation and relies heavily upon funding atthe federal and state levels. In the U.S., we are a direct Medicaid provideronly through our DynaVox subsidiary. We are not a direct provider under Medicareor Medicaid for our rehabilitation or institutional products. However, theseproducts are sold to home medical equipment providers and distributors, nursinghomes and hospitals that are providers under these programs and thus depend uponMedicare and/or Medicaid reimbursement for a portion of their revenues. We alsodepend on government funding available in Europe. Changes in U.S. or Europeanfunding practices could adversely impact our revenues and collections and putdownward pressure on prices charged for products sold by us. See "Business-- Government Funding and Regulation."

We sell some products directly to the U.S. government, particularly theDepartment of Veteran's Affairs and General Services Administration. Sales tothe U.S. government are subject to pricing and other regulatory requirements.Failure to meet these requirements may disqualify Sunrise from selling to theU.S. government in the future and subject us to fines.
*Governmental Regulation. We and our customers and suppliers are subjectto extensive federal and state regulation in the U.S., as well as regulation byforeign governments. We cannot predict the extent to which future legislativeand regulatory developments concerning our business practices and products forthe healthcare industry may affect us. Thus, any failure to comply with theselaws, rules and regulations or any changes in the regulatory framework couldhave a material adverse effect on our business, financial condition, or resultsof operations. See "Business -- Governmental Funding and Regulation."
*Competition. The medical device industry is characterized by      intense competition. We encounter significant domestic and foreign      competition from a number of established manufacturers in each of our      product lines. Many of our competitors have larger market shares and      substantially greater financial and other resources than we do and may      succeed at utilizing these resources to obtain a temporary or permanent      competitive advantage over us. See "Business -- Competition."
*Products. Our competitors may succeed in developing or marketing      products which are more effective or efficient than those that we may      market. These developments may render our products obsolete or      noncompetitive. Our future results will depend, in part, on our ability to      enhance 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 our business.
*Pricing Pressures. The growth in national chains and buying groups      among home medical equipment providers has caused manufacturers, including      us, to reduce their effective prices by offering increased volume      discounts. The increasing penetration of managed care into the home      medical equipment industry is exacerbating this trend. If we are unable to      achieve sufficient manufacturing, supply chain and technological      efficiencies to offset any future price reductions, our profit margins      will be adversely affected.
*Materials and Components. We purchase most of our raw materials,      components and supplies from a number of different vendors on a      non-exclusive basis. There can be no assurance that our vendors will not      enter into exclusive arrangements with our competitors, or cease selling      materials or products to us at commercially reasonable prices or at all.      We procure a few components and materials on a single-source basis. If one      of these single-source vendors failed to deliver components as planned, we      would be temporarily unable to ship some of our products. Historically,      prices paid by us for some raw materials, such as aluminum, foam and wood,      have fluctuated widely. When prices have increased, we have not always      been able to pass along the full effect of these increases to our      customers.
*International Operations. A significant portion of our sales in      recent years has been derived from our international operations. For the      fiscal year ended June 30, 2000, international sales accounted for 43% of      our total revenue. Our operations depend upon the economies of the markets      in which we operate and therefore are subject to fluctuations in these      economies and their corresponding currencies. Furthermore, any changes in      foreign government reimbursement policies or regulations could have a      material adverse effect on our business.

A number of our agreements are with non-U.S. entities that are governed bythe laws of, and are subject to dispute resolution in the courts of the countryor region in which the operation is located. We cannot accurately predictwhether such a forum will provide us with an effective and efficient means ofresolving disputes that may arise in the future. Even if we are able to obtain asatisfactory decision through arbitration or a court proceeding, we could havedifficulty enforcing any award or judgment on a timely basis.
*Product Liability; Claims Exposure. Our products expose us to potentialliabilities for end-user injuries or death caused by our products. Although wedesign and manufacture our products with a high degree of care and concern forsafety, our products may fail to operate properly resulting in injury or death.We believe that our current liability insurance is adequate given our claimshistory, the cost of coverage and industry practice. However, there is a riskthat our insurance coverage may not be adequate to satisfy the product liabilityawards that may arise.
*Risks Associated with our Workforce. Of our approximately 4,470 full-timeemployees, approximately 390 employees at two factories in the U.S. areunionized with collective bargaining agreements that expire in 2002. In Europe,approximately 410 employees are covered by national union arrangements. Althoughwe have never had a strike or work stoppage in our 17 year history, and althoughwe believe that our relations with our employees are good, we cannot assure youthat we will be able to negotiate a satisfactory renewal of these collectivebargaining agreements or that our employee relations will remain stable.Additionally, we have an extensive sales and distribution network upon which wegreatly depend. A loss of a large number of our sales people could have amaterial adverse effect on our business.
*Future Acquisitions. We intend in the future to pursue acquisitions ofcompanies that would help us achieve our strategic goals, although we have nopresent commitments with respect to any acquisitions. Future acquisitions by uscould result in potentially dilutive issuances of equity securities, theincurrence of debt and contingent liabilities and an increase in amortizationexpenses related to goodwill and other intangible assets, which could have amaterial adverse effect upon our business, financial condition and results ofoperations. Acquisitions involve numerous risks, including difficulties in theassimilation of the operations, technologies, services and products of theacquired companies and the diversion of management's attention from otherbusiness concerns. In the event that any acquisition were to occur, there can beno assurance that our business, financial condition and results of operationswould not be materially adversely affected.
**Euro Conversion**
On January 1, 1999, the euro was introduced as a new currency in elevenEuropean countries. As of this date, the rates of conversion between the euroand the eleven participating countries' currencies were irrevocably fixed. Thelegacy currencies will remain legal tender until January 1, 2002 when the euronotes and coins will be introduced with the legacy currencies withdrawn fromcirculation six months later. The increased price transparency in theparticipating countries that have adopted the euro as their legal currency couldaffect the ability of Sunrise and other companies to price their productsdifferently in the European markets. It is not possible to determine how theintroduction of the euro will impact pricing. We believe that modifications madeto our existing software are adequate to prevent significant operationalproblems to our business. Introduction of the euro may reduce the amount of ourexposure to changes in foreign exchange rates due to the netting effect ofhaving imports and exports denominated in a single currency instead of variouslegacy currencies. As a result, our foreign exchange hedging activity will bereduced. However, because there is less diversity in our exposure to foreigncurrency fluctuations, movements in the euro could have a more noticeableeffect, positive or negative, on our results of operations. The majority of ourbusinesses in the participating countries are euro capable. The rest of thebusinesses will have euro-capability by fiscal 2002. We do not believe the costsof conversion are material to the overall results of operations or financialposition of the company.
**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
Our primary financial market risks include fluctuations in interest rates andcurrency exchange rates. Although the majority of our transactions are in U.S.dollars, some transactions are based in various foreign currencies. We purchaseshort-term forward exchange contracts to hedge the impact of foreign currencyfluctuations on certain underlying assets, liabilities and commitments foroperating costs denominated in foreign currencies. The purpose of entering intothese contracts is to protect against economic losses associated with foreignexchange transactions. Gains and losses on the hedges offset a majority of theincreases or decreases in our local currency operating costs in thecorresponding periods. The contracts have maturity dates that do not normallyexceed 12 months. The unrealized gains and losses on these contracts aredeferred and recognized in the results of operations in the period in which thehedged transaction impacts earnings. We do not purchase short-term forwardexchange contracts for trading purposes. There were no foreign currency forwardcontracts outstanding as of June 30, 2000.

At June 30, 2000 a hypothetical 10% adverse movement in short-term interestrates on our variable rate debt would have resulted in a reduction of $0.5million in annual pre-tax income.
**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
The following are included herein:

 

Report of Management 

Independent Auditors' Report 

Consolidated balance sheets as of June 30, 2000 and July 2, 1999 

Consolidated statements of operations for the years endedJune 30, 2000, July 2, 1999, and July 3, 1998 

Consolidated statements of stockholders' equity for the years endedJune 30, 2000, July 2, 1999, and July 3, 1998 

Consolidated statements of cash flows for the years endedJune 30, 2000, July 2, 1999, and July 3, 1998 

Notes to consolidated financial statements 
** 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING        AND FINANCIAL DISCLOSURE**
None.

 

 
**REPORT OF MANAGEMENT**
The management of Sunrise Medical Inc. is responsible for the preparation,integrity and accuracy of the accompanying financial statements and relatedinformation. The consolidated financial statements have been prepared inconformity with generally accepted accounting principles applied on a consistentbasis and include amounts based on our best estimates and informed judgments, asrequired.

Management maintains a comprehensive system of internal controls supported byformal policies and procedures, management training programs, a written code ofbusiness conduct, periodic internal audits and management reviews. Although nocost-effective system will preclude all errors and irregularities, we believeSunrise Medical has in place a system of internal controls which providesreasonable assurance that assets are safeguarded against material loss fromunauthorized use or disposition, transactions are recorded in accordance withour policies, and the financial information presented to our stockholders isreliable.

The Audit Committee of the Board of Directors is comprised solely of outsidedirectors. The Audit Committee meets periodically with the independent auditors,our internal auditors and financial management to ensure that each is carryingout their responsibilities. Both the independent auditors and the internalauditors have free and direct access to the Audit Committee.

Our independent auditors are recommended by the Audit Committee and selectedby the Board of Directors. The consolidated financial statements have beenaudited by KPMG LLP, who have expressed their opinion elsewhere herein withrespect to the fairness of the statements. Their audits included a review of thesystem of internal control and tests of transactions to the extent theyconsidered necessary to render their opinion.

Michael N. HammesChief executive officer

 

Ted N. TarbetSenior vice president and chief financial officer

 

John M. RadakVice president and controller

 
**INDEPENDENT AUDITORS' REPORT**
 

To the Board of Directors and Stockholdersof Sunrise Medical Inc.:

We have audited the accompanying consolidated balance sheets of SunriseMedical Inc. and subsidiaries as of June 30, 2000 and July 2, 1999, and therelated consolidated statements of operations, stockholders' equity, and cashflows for each of the years in the three-year period ended June 30, 2000. Inconnection with our audits of the consolidated financial statements, we havealso audited the financial statement schedule as listed in Item 14.a (2). Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.

We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 abovepresent fairly, in all material respects, the financial position of SunriseMedical Inc. and Subsidiaries as of June 30, 2000 and July 2, 1999, and theresults of their operations and their cash flows for each of the years in thethree-year period ended June 30, 2000 in conformity with generally acceptedaccounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

/s/ KPMG LLP

San Diego, CaliforniaAugust 25, 2000, except for the last paragraph of Note 7 and Note 17          which is as of September22, 2000

 

 
**SUNRISE MEDICAL INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts)
 
June 30, 2000 
July 2,      1999**Assets
 

 

 

Current assets:
 

 

 

Cash and cash equivalents
$ 19,863
 

$ 1,485
Trade receivables, net of allowance for doubtful
 

 

 

accounts of $3,873 and $4,971, respectively
122,406
 

127,374
Installment receivables, net
4,845
 

23,068
Income tax refunds receivable
357
 

523
Inventories
67,413
 

87,941
Deferred income taxes
10,847
 

15,435
Other current assets
3,799
 

6,745
Total current assets
229,530
 

262,571
Property and equipment, net of accumulated depreciationamortization of $95,756                                and $90,511, respectively

67,259
 

83,560
Goodwill and other intangible assets, net of accumulatedamortization of $68,704                     and $59,280, respectively

237,333
 

250,650
Other assets, net
9,667
 

10,409
Total assets
$543,789
 

$607,190 
 

 

 
**Liabilities and Stockholders' Equity
 

 

 

Current liabilities:
 

 

 

Current installments of long-term debt
$ 859
 

$ 14,890
Trade accounts payable
54,841
 

57,879
Accrued compensation and other liabilities
63,266
 

68,913
Accrued income taxes
2,100
 

802
Total current liabilities
121,066
 

142,484 
 

 

 

Long-term debt, less current installments
148,262
 

190,948
Other long-term liabilities
6,502
 

-
Deferred income taxes
2,941
 

6,760
Stockholders' equity:
 

 

 

Preferred stock, $1 par. Authorized 5,000 shares; none issued
-
 

-
Common stock, $1 par. Authorized 40,000 shares; 22,248 and
 

 

 

22,204 shares, respectively, issued and outstanding
22,248
 

22,204
Additional paid-in capital
203,664
 

203,548
Retained earnings
55,619
 

51,492
Accumulative other comprehensive loss
(16,513)
 

(10,246)
Total stockholders' equity
265,018
 

266,998
Total liabilities and stockholders' equity
$543,789
 

$607,190** **
(See accompanying notes to consolidated financial statements)

 

 
**SUNRISE MEDICAL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)

 
 
Years Ended 
June 30,      2000 
July 2,      1999 
July 3,      1998 
Net sales
$ 644,488
$ 660,248
$ 657,169
Cost of sales
448,714
460,754
451,631
Gross profit
195,774
199,494
205,538 
Marketing, selling and administrative expenses
144,895
147,027
155,998
Research and development expenses
18,914
21,075
17,919
Amortization of goodwill and other intangibles
9,424
8,589
8,440
Re-engineering expenses and merger costs
-
-
29,016 
Operating income (loss)
22,541
22,803
(5,835) 
Other (expense) income:
Interest expense
(16,094)
(16,486)
(15,222)
Interest income
3,010
4,293
3,659
Other income and (expense), net
(985)
(2,341)
5,596 
(14,069)
(14,534)
(5,967) 
Income (loss) before income taxes
8,472
8,269
(11,802)
Income tax expense
4,345
3,771
208 
Net income (loss)
$ 4,127
$ 4,498
$ (12,010) 
Basic earnings (loss) per share
$ 0.19
$ 0.20
$      (0.55) 
Weighted average number of shares outstanding
22,239
22,195
22,001 
Diluted earnings (loss) per share
$ 0.18
$ 0.20
$ (0.55) 
Weighted average number of shares assuming dilution
22,439
22,253
22,001
(See accompanying notes to consolidated financial statements)

 

 

 
**SUNRISE MEDICAL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(in thousands)

 
 
Common Stock         
Number of Shares 
 

Amount 
Additional Paid-in Capital 
 

Retained Earnings 
Accumulative Other Comprehensive      (Loss) Income 
Total Stock-holders' Equity 
Balance at June 27, 1997
21,885
$ 21,885
$201,044
$59,004
$ 1,759
$283,692
Exercise of stock options,                including associated tax                   benefits, net

 

166
 

166
 

846
 

-
 

-
 

1,012
Issuance of stock for acquisitions
100
100
1,456
-
-
1,556
Comprehensive income:
Net loss
-
-
-
(12,010)
-
-
Foreign currency translation           adjustment

-
-
-
-
(1,590)
-
Total comprehensive loss
-
-
-
-
-
(13,600)
Balance at July 3, 1998
22,151
22,151
203,346
46,994
169
272,660
Exercise of stock options,                including associated tax                        benefits, net

 

53
 

53
 

202
 

-
 

-
 

255
Comprehensive income:
Net income
-
-
-
4,498
-
-
Foreign currency translation    adjustment

-
-
-
-
(10,415)
-
Total comprehensive loss
-
-
-
-
-
(5,917)
Balance at July 2, 1999
22,204
22,204
203,548
51,492
(10,246)
266,998
Exercise of stock options,                  including associated tax                  benefits, net

 

44
 

44
 

116
 

-
 

-
 

160
Comprehensive income:
Net income
-
-
-
4,127
-
-
Foreign currency translation           adjustment

-
-
-
-
(6,267)
-
Total comprehensive loss
-
-
-
-
-
(2,140)
Balance at June 30, 2000
22,248
$22,248
$203,664
$55,619
$(16,513)
$265,018
(See accompanying notes to consolidated financial statements)

 

 
**SUNRISE MEDICAL INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

 
 
Years Ended 
June 30,      2000 
July 2,      1999 
July 3,      1998 
 

 

 

 

 

Cash flows from operating activities:
 

 

 

 

 

Net income (loss)
$ 4,127
 

$ 4,498
 

$ (12,010)
Depreciation and amortization
16,204
 

16,161
 

15,510
Amortization of goodwill and other intangibles
9,424
 

8,589
 

8,440
Loss on asset dispositions, net
432
 

-
 

-
Provision for (benefit from) deferred income taxes
658
 

(708)
 

(1,492)
Other non-cash items
-
 

942
 

(520)
Changes in assets and liabilities, net of effect of acquisitions:
 

 

 

 

 

Trade receivables, net
2,756
 

(7,255)
 

(7,145)
Installment receivables, net
(1,019)
 

(13,545)
 

1,489
Inventories
19,047
 

5,332
 

(5,367)
Other assets
114
 

(2,125)
 

(6,509)
Trade accounts payable and other liabilities
96
 

(10,696)
 

11,820
Income taxes
1,686
 

1,695
 

556 
 

 

 

 

 

Net cash provided by operating activities
53,525
 

2,888
 

4,772 
 

 

 

 

 

Cash flows from investing activities:
 

 

 

 

 

Purchase of property and equipment, net
(16,295)
 

(15,780)
 

(16,549)
Proceeds from sale of assets
35,267
 

-
 

6,423
Net cash invested in acquisition of business
-
 

-
 

(418)
Net cash provided by (used for) investing activities
18,972
 

(15,780)
 

(10,544) 
 

 

 

 

 

Cash flows from financing activities:
 

 

 

 

 

Borrowings of long-term debt
23,000
 

159,269
 

239,283
Repayments of long-term debt
(79,270)
 

(142,931)
 

(237,982)
Proceeds from issuance of common stock
160
 

255
 

1,012 
 

 

 

 

 

Net cash (used for) provided by financing activities
(56,110)
 

16,593
 

2,313 
 

 

 

 

 

Effect of exchange rate changes on cash
1,991
 

(3,147)
 

167 
 

 

 

 

 

Net increase (decrease) in cash and cash equivalents
18,378
 

554
 

(3,292)
Cash and cash equivalents at beginning of year
1,485
 

931
 

4,223
Cash and cash equivalents at end of year
$19,863
 

$ 1,485
 

$ 931
 

(See accompanying notes to consolidated financial statements)

 

 

 
**SUNRISE MEDICAL INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share amounts)
**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
Sunrise Medical Inc. designs, manufactures and markets medical products usedby the disabled and the elderly. Products include custom, manual and powerwheelchairs and related seating systems, home respiratory devices, personal careproducts, nursing home beds and furnishings, specialized bathing systems andspeech devices.

**Basis of Consolidation.** The consolidated financial statements includedomestic and foreign subsidiaries. All significant intercompany balances andtransactions have been eliminated. The applicable local currency of each of ourforeign subsidiaries is the functional currency. The translation from theforeign currencies is performed using year-end exchange rates for assets andliabilities, and for revenue and expense accounts using a weighted averageexchange rate during the year. Gains and losses resulting from translatingassets and liabilities from the functional currency to U.S. dollars are includedin "Accumulated other comprehensive income," which is part ofstockholders' equity. As described more fully in Note 4, on April 13, 1998 wemerged with Sentient Systems, Inc., now named DynaVox Systems (DynaVox). Themerger was accounted for as a pooling of interests. Accordingly, ourconsolidated financial statements have been restated for all periods prior tothe business combination to include the results of DynaVox. The preparation offinancial statements in conformity with generally accepted accounting principlesrequires management estimates and assumptions that affect amounts reported inthe financial statements and accompanying notes. Actual results could differfrom management's estimates.

**Fiscal Year End.** Our fiscal year ends on the Friday closest to June 30,resulting in years of either 52 or 53 weeks. The years ended June 30, 2000 andJuly 2, 1999 were 52 weeks, and the year ended July 3, 1998 was 53 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 thelower of first-in, first-out (FIFO) cost or market value.

**Property and Equipment.** Property and equipment are stated at cost anddepreciated over estimated useful lives by the straight-line or decliningbalance methods. Assets recorded under capital leases and leasehold improvementsare amortized over the shorter of their useful lives or the related lease termsby the straight-line method. The estimated useful lives are three to 40 yearsfor buildings and improvements and two to 12 years for machinery and equipment.

**Goodwill.** The excess of purchase price over the fair value of net assetsof acquired businesses (goodwill) is amortized on a straight-line basis overperiods of 20 to 40 years, depending on the nature and type of businessacquired.

**Long-Lived Assets.** We evaluate long-lived assets for impairment andrecord impairment losses on long-lived assets used in operations when indicatorsof impairment are present and the undiscounted cash flows estimated to begenerated by those assets are less than the assets carrying amount. This loss ismeasured by the difference between carrying amounts and estimated fair values.

**Financial Instruments with Off-Balance Sheet Risk**. In the ordinary courseof business, we utilize derivative financial instruments to reduce our exposureto market risks from changes in interest rates and foreign exchange rates. Weenter into these transactions with major international financial institutionsutilizing over-the-counter as opposed to exchange traded instruments. Thesetransactions are entered into only for purposes of market risk management.

We attempt to minimize interest expense while also managing exposure tovariable interest rates by periodically employing interest rate exchangeagreements, or swaps, to convert bank borrowings from floating rate into theequivalent of fixed rate debt. We have used foreign-denominated borrowings fromour multi-currency credit facility to hedge against foreign currency balancesheet exposures that would otherwise result from changes in currency values.

We enter into foreign exchange forward and option contracts with financialinstitutions primarily to protect against currency exchange risks associatedwith existing assets and liabilities, and certain firmly committed transactions,as well as probable but not firmly committed transactions. In addition, we haveentered into foreign exchange forward contracts to hedge certain intercompanyloan transactions between our European divisions. Our foreign exchange riskmanagement policy calls for the company to hedge substantially all materialforeign exchange transaction exposures. However, we may not hedge certainforeign exchange transaction exposures that are immaterial either in terms oftheir minimal U.S. dollar value or in terms of their historically highcorrelation with the U.S. dollar.

Probable but not firmly committed transactions comprise sales of our productsin currencies other than the U.S. dollar. A majority of these non-U.S.dollar-based sales are made through our European subsidiaries. The duration offoreign exchange hedging instruments, whether for firmly committed transactionsor for probable but not firmly committed transactions, currently does not exceedone year.

Interest rate and foreign exchange instruments generally qualify asaccounting hedges if their maturity dates are the same as the hedgedtransactions and if the hedged transactions meet certain requirements. Soldinterest rate and foreign exchange instruments do not qualify as accountinghedges. Gains and losses on accounting hedges of existing assets or liabilitiesare generally recorded currently in income or stockholders' equity against thelosses and gains on the hedged transactions. Gains and losses related toqualifying accounting hedges of firmly committed or probable but not firmlycommitted transactions are deferred and recognized in income in the same periodas the hedged transactions. Gains and losses on interest rate and foreignexchange contracts that do not qualify as accounting hedges are recordedcurrently in income. Gains and losses on accounting hedges realized before thesettlement date of the related hedged transaction are also generally deferredand recognized in income in the same period as the hedged transactions.

We monitor interest rate and foreign exchange positions based on applicableand commonly used pricing models. The correlation between the changes in thefair value of hedging instruments and the changes in the underlying hedged itemsis assessed periodically over the life of the hedged instrument. In the eventthat it is determined that a hedge is ineffective, including if and when thehedged transactions no longer exists, we would recognize in income the change inmarket value of the instrument beginning on the date it was no longer aneffective hedge.

Further information regarding our accounting treatment of financialinstruments may be found in Note 8 - "Derivatives."

**Revenue Recognition.** We recognize revenue from product sales uponshipment and provide an appropriate allowance for estimated returns andadjustments.

**Warranty Costs.** Certain products are covered by warranties againstdefects in material and workmanship for periods of up to five years. Componentsof certain products carry a lifetime warranty. The estimated warranty cost isrecorded at the time of sale and is adjusted periodically to reflect actualexperience.

**Research and Development Costs.** Research and development costs relate toboth 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," encouragesbut does not require companies to record compensation cost for stock-basedemployee compensation plans at fair value. We have chosen to present therequired disclosures and to continue to account for stock-based employeecompensation using the method prescribed in Accounting Principles Board OpinionNo. 25 (APB 25), "Accounting for Stock Issued to Employees," and asinterpreted by the Financial Accounting Standards Board Interpretation No. 44,"Accounting for Certain Transactions Involving Stock Compensation."Accordingly, compensation cost for stock options is measured as the excess, ifany, of the quoted market price of our stock at the date of grant over theamount an employee must pay to acquire the stock.

**Net Income (Loss) per Share.** Basic EPS is calculated by dividing netincome (loss) by the weighted-average common shares outstanding during theperiod. Diluted EPS reflects the potential dilution to basic EPS that couldoccur upon conversion or exercise of securities, options, or other such items,to common shares using the treasury stock method based upon the weighted-averagefair value of our common shares during the period.

**Comprehensive Income (Loss).** Components of comprehensive income (loss)include net income (loss) and foreign currency translation adjustments.

**Cash Flow Information.** Cash payments for interest were $15,323 in 2000,$17,356 in 1999, and $14,380 in 1998. Cash payments for income taxes were $2,824in 2000, $6,012 in 1999, and $5,696 in 1998. We received income tax refunds of$1,152 in 2000, $4,400 in 1999, and $6,131 in 1998.

**2. FINANCIAL INSTRUMENTS**

**Cash and Cash Equivalents.** Cash and cash equivalents include all cashbalances and highly liquid investments with original maturities of three monthsor less. The carrying amount of cash and cash equivalents approximates theirfair value.
**Installment Receivables.Installment receivables consist of thefollowing:

  
June 30, 2000 
July 2, 1999
Current portion
$ 6,913
$27,832
Less:
Unearned interest
(653)
(3,055)
Allowance for doubtful accounts
(1,415)
(1,709)
Net current portion
4,845
23,068
Due after one year (included in other assets)
-
8,509
Total installment receivables, net
$ 4,845
$31,577
The carrying amount of installment receivables approximates their fair value.The related interest rates and terms have not varied significantly over the pasttwo years. In December 1999, the company sold approximately $23 million of itsinstallment receivable portfolio to an independent third party. The companyreceived $21 million in cash and recorded a loss of $528 on the sale, which isincluded in other income and (expense), net.

**Trade Receivables, Income Tax Refunds Receivable, Trade Accounts Payable andAccrued Expenses.** The carrying amounts of these instruments approximatetheir fair values due to their short term nature.

**Long-Term Debt.** Based on borrowing rates currently available to us forbank loans with similar terms and average maturities, the carrying amount oflong-term debt at June 30, 2000 and July 2, 1999 approximated its fair value.

**Foreign Currency Forward Exchange Contracts.** We transact business invarious foreign currencies, primarily European currencies. We use currencyforward contracts and currency options to protect against reductions in valueand volatility of future cash flows caused by changes in foreign exchange rates.The maturities of these instruments are generally less than one year. Deferredgains or losses attributable to foreign currency instruments are not material.
**3. BALANCE SHEET ITEMS**
Inventories consist of the following:

 
June 30, 2000 
July 2, 1999
Raw material
$26,735
$37,477
Work-in-progress
9,454
12,758
Finished goods
31,224
37,706
Total inventories
$67,413
$87,941
If all inventories had been valued at FIFO cost, inventories would have beenapproximately $69,166 at June 30, 2000 and $89,474 at July 2, 1999.

The components of property and equipment are as follows:

  
June 30, 2000 
July 2, 1999
Land
$ 2,277
$ 4,439
Buildings, machinery and equipment
154,724
164,410
Leasehold improvements
6,014
5,222 
163,015
174,071
Less accumulated depreciation and amortization
(95,756)
(90,511)
Property and equipment, net
$      67,259
$      83,560**In February 2000, the company entered into a $21 million sale-leasebacktransaction whereby the company sold and leased back its manufacturingfacilities in Fresno, California and Stevens Point, Wisconsin. The companyreceived net proceeds of $14 million in cash plus $4 million in notesreceivable. The company recorded deferred gains of $4.6 million, which areincluded in other liabilities. The gains are being amortized over the leaseterms, which are 20 and 15 years. The related leases are being accounted for asoperating leases.
**4. ACQUISITIONS AND MERGERS**
On April 13, 1998, we issued 2.7 million shares of our common stock for alloutstanding common stock of DynaVox, a manufacturer of speech augmentationdevices. This merger has been accounted for as a pooling of interests and,accordingly, the consolidated financial statements for periods prior to thecombination have been restated to include the accounts and results of operationsof DynaVox.
**5. RE-ENGINEERING EXPENSES AND MERGER COSTS**
In 1997 we announced the consolidation of our four U.S. rehabilitationdivisions into the Home Healthcare Group based in Longmont, Colorado, and aseries of consolidations in our European operations. These actions were designedto reduce operating costs and improve manufacturing and marketing efficiencies.

Approximately $27 million in non-recurring costs were incurred during 1998 tocomplete these activities, principally to complete our factory consolidationsand to implement related information system conversions. In addition, wecompleted our merger with DynaVox in April 1998. Merger related expensesincurred were approximately $2 million. Of the total charges of $29 millionincurred in 1998, approximately $23 million required cash payments and $6million represented non-cash charges.
**6. LEASES**
We lease office and operating facilities, machinery and equipment andautomobiles under operating leases that expire over the next 20 years. Rentexpense for operating leases was $14,076 in 2000, $12,521 in 1999, and $11,900in 1998.

Year Ended 
Amount
2001 
$ 12,955
2002 
10,846
2003 
8,387
2004 
6,216
2004 
5,769
Thereafter 
33,789
Total minimum lease payments 
$ 77,962
 
**7. LONG-TERM DEBT**
June 30, 2000
July 2, 1999
Borrowing under multi-currency credit agreement
$ 40,000
$94,000
Senior notes
100,000
100,000
Unsecured subordinated notes maturing from 2000 to 2004, payablein installments with interest rates from 6.5% to 8.0%

632
2,425
Secured European Coal and Steel Community job creation loan due2002, interest at Libor +1% payable semiannually (8.5% at June 30,2000), secured by property

3,793
3,941
Mortgages payable in monthly installments with interest at variousrates from 5.5% to 6.0%, maturing from 2001 through 2009, securedby property

4,114
4,651
Obligations under capital leases with lease periods expiring atvarious dates through 2005, interest at various rates from 6.5% to18.7%

582
821 
Total long-term debt
149,121
205,838
Less current installments
( 859)
(14,890) 
Long-term debt, net of current installments
$148,262
$190,948
As of June 30, 2000, aggregate debt maturities were as follows: 2001--$859;2002 --$4,286; 2003--$393; 2004--$40,315; 2005--$50,315; andthereafter--$52,953.

On October 28, 1997, we completed a private placement of $100 million ofunsecured senior notes, $50 million maturing after seven years, bearing interestat 7.09% and the remaining $50 million maturing after ten years at an interestrate of 7.25%. The proceeds of this debt issuance were used to reduce theoutstanding debt on our multi-currency credit facility.

Our multi-currency bank credit facility provides for maximum borrowings of$77 million divided into a $37 million unsecured revolving credit facility and$40 million secured term loan. The agreement was amended in April 1999 andSeptember 1999 relating to pricing and certain collateral matters. The agreementwas again amended in June 2000 relating to financial covenants that wereadjusted to reflect certain asset disposals made in fiscal 2000. The term loanprovides us the option of using the London Interbank Offered Rate ("LIBOR")plus 4.50% or the prime rate plus 3.25% for interest. The term loan is securedby all domestic accounts receivable. The term loan is due and payable in asingle installment in January 2001. The revolving credit agreement permitsSunrise to elect one of two variable rate interest options at the time anadvance is made. The first option is a rate equal to the prime rate plus 4.00%.The second option is a rate based on LIBOR plus 5.25%. Interest during the yearwas at LIBOR plus the applicable margin (10.7% at June 30, 2000). We have the option ofusing interbank offered rates as a basis for interest and can fix the interestrate on the outstanding portion for up to six months. A commitment fee of 1.00%per year is payable on the unused portion of the line. At June 30, 2000, theamount of funds available from the credit facility was approximately $37million. The credit facility required us to comply with certain covenants suchas maintenance of leverage ratio, tangible net worth, interest coverage minimumEBITDA, and places certain restrictions on acquisitions and payment ofdividends. The company was in compliance with all covenants at June 30, 2000.Maximum borrowings available under the $37 million revolving credit facilitywere reduced to $25 million in July 2000, in accordance with the September 1999amendment.

Subsequent to year end, this debt was refinanced (See footnote 17). As aresult of the refinancing, this debt has met the criteria of Statement ofFinancial Accounting Standard No. 6, "Classification of Short-TermObligations Expected to be Refinanced" and, accordingly, has been reclassifiedas long-term.
**8. DERIVATIVES**
We manufacture our products in the United States and Europe, but generatedapproximately 43% of 2000 revenues from sales made outside the U.S. Salesgenerated by our distribution subsidiaries generally utilize the subsidiary'slocal currency, thereby exposing us to the risk of foreign currency fluctuationswhen the subsidiary imports Sunrise manufactured products. Also, as a netborrower, we are exposed to the risk of fluctuating interest rates. We utilizederivative instruments in an effort to mitigate these risks. Our policy is notto speculate in derivative instruments to profit on the foreign currencyexchange or interest rate price fluctuation, nor to enter trades for which thereare no underlying exposures, nor enter into trades to intentionally increase theunderlying exposure. Instruments used as hedges must be effective at reducingthe risk associated with the exposure being hedged and are designated as a hedgeat the inception of the contract. Accordingly, changes in market values of hedgeinstruments are highly correlated with changes in market values of underlyinghedged items both at the inception of the hedge and over the life of the hedgecontract.

Various foreign currency contracts are used to hedge anticipated transactionsdenominated in foreign currencies and to mitigate the impact of changes inforeign currency exchange rates on our operations. We use forward contracts tohedge transactions between our foreign subsidiaries. The hedge instrumentsmature at various dates with resulting gains or losses recognized at thematurity date, which approximates the transaction date. However, we had noforward contracts outstanding at June 30, 2000 or July 2, 1999.

When we use foreign currency contracts and the hedged currency strengthensagainst foreign currencies, the decline in the value of future foreign currencycash flows is partially offset by the recognition of gains in the value of theforeign currency contracts designated as hedges of the transactions. Conversely,when the hedged currency weakens, the increase in the value of future foreigncurrency cash flows is reduced by the recognition of any loss in the value ofthe forward contracts designated as hedges. Gains and losses on these contractsare recognized in income in the same period that the underlying transactions aresettled and generally offset the losses and gains on the underlyingtransactions.
**9. BUSINESS AND CREDIT CONCENTRATIONS**
A significant portion of our receivables are due from home healthcare andmedical equipment dealers located throughout the United States, Canada andEurope. Many of these product sales to dealers are ultimately funded throughgovernment reimbursement programs such as Medicare and Medicaid. Any changes inthese programs could affect dealer liquidity and profitability. This, in turn,could put pressure on prices charged and credit terms offered for our productssold through this channel of distribution. We estimate an allowance for doubtfulaccounts based on the creditworthiness of our customers as well as generaleconomic conditions.

**10. INCOME TAXES**
The provision (benefit) for income taxes consists of the following:

Years Ended
June 30, 2000
July 2, 1999
July 3, 1998
Current
Federal
$ (998)
$ 971
$(1,470)
State
155
276
118
Foreign
3,573
2,581
3,097
2,730
3,828
1,745
Deferred
Federal
(4)
(587)
2,589
State
(156)
(186)
(74)
Foreign
1,775
716
(4,052)
1,615
(57)
(1,537)
Total
$4,345
$3,771
$ 208
Foreign income taxes (benefits) are based upon $13,434, $8,640 and $(8,308)of foreign earnings (losses) before income taxes during 2000, 1999, and 1998,respectively. No U.S. income taxes have been provided for cumulativeunrepatriated foreign earnings of approximately $70 million as the company hasno plans or intentions to repatriate foreign earnings or liquidate the relatedforeign assets.

A reconciliation between the federal statutory tax rate and the effectiveincome tax rate follows:
 
Years Ended 
June 30, 2000 
July 2, 1999 
July 3, 1998 
Statutory federal income tax rate
35.0%
35.0%
(35.0)%
Amortization of non-deductible goodwill
15.7
16.3
15.0
State income taxes, net of federal taxes
0.0
0.6
2.1
Taxation of foreign operations
11.3
1.6
18.7
Tax credits
(8.1)
(3.2)
( 0.7)
Valuation allowance change
5.7
4.9
--
Adjustment to estimated income tax accruals
(11.7)
(6.9)
--
Other, net
3.4
(2.7)
1.7
Effective income tax rate
51.3%
45.6%
1.8%
Significant components of deferred income tax assets and liabilities areshown below:
 
June 30, 2000 
July 2, 1999
Deferred income tax assets:   
Allowance for doubtful accounts
$ (730)
$ (908)
Inventories
3,329
4,496
Accrued expenses
5,845
11,539
Net operating losses and credit carryovers
6,462
4,684
State and local taxes
54
374
Total deferred income tax assets
14,960
20,185
Less: Valuation allowance
(882)
(402)
Net deferred income tax assets
14,078
19,783 
Deferred income tax liabilities:
Depreciation and amortization and other
6,172
11,108
Net deferred income taxes
$ 7,906
$ 8,675
The valuation allowance of $882 in 2000 and $402 in 1999 relates to netoperating loss carry-forwards and foreign tax credits that may expire beforebeing realized. Management believes it is more likely than not that the taxbenefit of the net deferred tax assets will be realized. At June 30, 2000, thecompany had foreign tax loss carry-forwards of approximately $13,197, consistingof $1,209 which expire in 2002 through 2003, $3,211 which expire in 2004 through2005, and $8,777 which do not expire.
**11. PROFIT SHARING/SAVINGS PLAN**
We have a 401(k) profit sharing/savings plan covering most U.S. employees(Associates). Under the profit sharing portion of the plan, we willcontribute to Associates' accounts a percentage of their salary for the fiscalyear ranging from 4 to 6 percent. The percentage amount is based upon attainmentof certain earnings targets by the company as a whole in the case of corporateoffice Associates, or by the subsidiary where the Associate works. The plan isdiscretionary with the amounts determined by the Board of Directors. During2000, 1999 and 1998, $2,395, $2,839, and $2,534, respectively, were accrued forthis plan. Under the savings feature of the plan, individual Associates may makecontributions to the plan, which are matched by the company in an amountdetermined by the Board of Directors. During 2000, 1999, and 1998, $643, $622,and $655, respectively, of Associate contributions were matched.
**12. STOCKHOLDERS' EQUITY

Common Stock Purchase Rights. In April 1990, our Board of Directorsdeclared a dividend of one common share purchase right ("Right") foreach outstanding share of common stock. Pursuant to the stockholder RightsAgreement as amended in May 1997, an exercisable Right will, under certainconditions, entitle the holder to purchase from the company one-half of oneshare of common stock at the exercise price of $60.00 per whole share, subjectto adjustment, until May 16, 2007. The Rights will become exercisable ten daysafter a person (an "Acquiring Person") acquires 15% or more of thecommon stock or ten days after a person announces a tender offer which wouldresult in such person acquiring 15% or more of the common stock. The Rights maybe redeemed by the Board of Directors for $.01 per Right at any time until tendays following the public announcement that a person has become an AcquiringPerson. Under certain circumstances after a person becomes an Acquiring Person,or after a merger or other business combination, an exercisable Right willentitle its holder (other than the Acquiring Person) to purchase shares ofcommon stock (or shares of an acquiring company) having a market value of twotimes the exercise price of one Right.
**Stock Option Plans. The 1983 Stock Option Plan as amended ("the 83Plan") provided for the grant of options to purchase up to 1,800,000 sharesof common stock to officers, key Associates and outside directors in the form ofincentive stock options or non-qualified stock options. The 83 Plan expired inAugust 1995.

In August 1993, we adopted the 1993 Stock Option Plan ("the 93Plan") providing for the grant of options to purchase up to 4,000,000shares of common stock to officers, outside directors and key Associates in theform of incentive stock options or non-qualified stock options. At the time ofadoption, 300,000 unissued shares of common stock were reserved for futuregrants under the 93 Plan. The number of unissued shares of common stock reservedfor 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 lastday of each fiscal year. The 93 Plan expires in August 2003. Options becomeexercisable in four equal annual amounts, beginning one year after the grantdate. This Plan was modified with respect to vesting of outside director'soptions, which vest 50% on the date of grant and 50% after one year. Inaddition, vesting of outside director's and officer's options is acceleratedupon retirement, termination, resignation, disability and/or death, and allowsfor outside directors to exercise options at the earlier of the full term of theoption or for five years following retirement. Any outside director's optionsoutstanding were vested 100% at the modification date. Unexercised optionsexpire up to ten years and one day after the date of grant.

As a result of the DynaVox merger in April 1998, Sunrise acquired anotherstock option plan. DynaVox originally adopted this stock option plan on March12, 1993. The plan originally covered 100,000 shares. On April 28, 1998, theplan was amended and restated by the Board of Directors. As a result, the numberof options that were outstanding under the plan and the number of options thatcould be granted in the future will now be exercised for shares of Sunrise stockin the merger ratio of 2.27 to 1. Options become exercisable in four equalannual amounts, beginning one year after the grant date. Unexercised optionsexpire up to ten years and one day after the date of grant.

In March 2000, we adopted the 2000 Stock Option Plan (the 2000 Plan)providing for the grant of options to purchase up to 3,000,000 shares of commonstock to officers and key Associates in the form of incentive stock options ornon-qualified stock options. Under the 2000 Plan, one-third of the optionsbecome exercisable in four equal annual amounts, and the remaining two-thirdsbecome exercisable based on certain performance targets being met or after sevenyears. The options expire up to ten years and one day after the date of grant.

In March 2000, we adopted an Associate Stock Purchase Plan (ASPP) providingfor the grant of options to purchase up to 1,000,000 shares of common stock toall eligible Associates. The Associate exercise price of an option is 85% of thelesser of the fair market value of a share of common stock on the grant date andthe fair market value on the exercise date. The ASPP periods run from March 1through August 31 and September 1 through February 28 or 29. The ASPP willterminate when all of the shares of our common stock authorized for sale underthe ASPP have been sold, or on February 28, 2010 (whichever is earlier), unlessterminated earlier by Sunrise's Board of Directors.

Under all plans, the option price (exercise price) is equal to the closingmarket price on the day prior to the grant date. As of June 30, 2000 there were1,753,935 unissued common stock options reserved for future grants under allplans.

Shares subject to option under both plans are summarized as follows:
 
Years Ended 
June 30, 2000 
July 2, 1999 
July 3, 1998 
Shares 
Weighted Average Exercise Price 
Shares 
Weighted Average Exercise Price 
Shares 
Weighted Average Exercise Price
Outstanding at beginning           of year
2,018,221
$ 13.91
1,697,196
$15.60
1,665,545
$15.48
Granted
3,475,000
4.31
668,550
9.81
504,860
13.94
Exercised
(43,920)
3.54
( 52,800)
4.35
( 166,373)
4.25
Canceled
(457,976)
13.14
( 294,725)
15.99
( 306,836)
18.38
Outstanding at end of           year
4,991,325
7.39
2,018,221
$13.91
1,697,196
$15.60
Exercisable at end of           year
1,046,035
15.27
968,452
$16.35
917,305
$16.13
Weighted average fair           value of options           granted during the year
$ 2.72
$ 3.98
$ 6.14
The following table summarizes information about stock options outstanding atJune 30, 2000:
  
Options Outstanding 
Options Exercisable
Range of Exercise Prices 
Number Outstanding 
Weighted Average Remaining Contractual Life 
Weighted Average Exercise Price 
Number Exercisable 
Weighted Average Exercise Price
$0.70 to $4.19 
1,936,050
9.65
$ 4.18
61,350
$ 3.72
$4.44 to $6.25 
1,256,600
9.64
$ 5.43
1,175
$ 6.25
$6.31 to $10.13 
848,650
8.04
$ 8.62
215,843
$ 9.31
$11.38 to $15.25 
514,050
6.09
$14.13
361,303
$14.05
$15.63 to $34.50 
435,975
4.15
$20.91
406,364
$21.28  
4,991,325
8.60
$ 7.50
1,046,035
$15.27
We apply APB 25 and related interpretations in accounting for grants toemployees under our stock option plans. Because the exercise price of theoptions equals the market price of the underlying stock on the date of grant, nocompensation cost has been recognized in our financial statements. Pro formadisclosures assuming compensation cost had been determined based on the fairvalue of stock options at the grant dates consistent with the method of SFAS 123are as follows:
  
2000 
1999 
1998
Net income (loss)
As reported
$4,127
$4,498
$(12,010) 
Pro forma
$3,062
$3,459
$(13,594)
Diluted earnings (loss) per share
As reported
$ 0.18
$ 0.20
$ (0.55) 
Pro forma
$ 0.14
$ 0.16
$ (0.62)
The fair value of options granted has been estimated using theBlack-Scholesoption-pricing model with the following weighted-average assumptions for grants:expected volatility of 61% for 2000, 50% for 1999 and 43% for 1998 (based ondaily closing stock prices for the preceding four years); risk-free interestrates of 6.5% for 2000, 5.8% for 1999, and 5.5% for 1998; expected lives of 4.8years and no dividend yield for 2000, 1999, and 1998. For purposes of the proforma disclosures, the estimated fair value of the options has been amortized toexpense over the vesting period of the options.

**13. NET INCOME (LOSS) PER SHARE**
The following is a reconciliation of the denominators of the basic anddiluted EPS computations:
 
Years Ended 
June 30, 2000 
July 2, 1999 
June 3, 1998      
Weighted average number of shares              outstanding
22,239 
22,195 
22,001      
Effect of dilutive stock options (1)
200 
58 
--      
Weighted average number of shares assuming              dilution
22,439 
22,253 
22,001
(1)   2,521,000, 1,861,000, and 1,033,000        potential common shares were not used to compute diluted earnings per        share in 2000, 1999, and 1998, respectively, as their effect was        antidilutive.**14. SEGMENT INFORMATION**
Operating segments are determined based on the way management measuresperformance and makes decisions about allocating resources.

Our reportable segments are strategic business units that are structured bydistribution channels. We have three reportable segments: North AmericanRehabilitation Products, European Rehabilitation Products and InstitutionalProducts. The North American rehabilitation product segment consists of fourmanufacturing divisions which produce and sell wheelchairs and seating systems,ambulatory and bath safety aids, home respiratory devices and speech devicesfocused on the needs of the disabled and elderly in the United States. TheEuropean rehabilitation products segment consists of three manufacturingdivisions which produce wheelchairs and seating systems, scooters, homestairlifts and daily living aids and six distribution divisions that distributethese products as well as respiratory products in Europe, the Middle East,Africa and Central Asia. The institutional product segment consists of threemanufacturing divisions and globally produces and sells healthcare beds andfurniture, therapeutic mattresses and other patient support surfaces andinstitutional bathing systems for patients and long term residents in nursinghomes, sub-acute facilities and assisted living centers*.*
The accounting policies of the segments are the same as those described inthe summary of significant accounting policies. We evaluate performance based onoperating income.

We account for intersegment sales and transfers as if the sales or transferswere to third parties, that is, at current market prices.

Summarized financial information concerning our reportable segments is shownin the following table. The "Other" column includes corporate relateditems and, as it relates to operating income (loss), income and expense itemsnot allocated to reportable segments.
 
North American Rehabilitation Products
 

Europe Rehabilitation Products
Institutional Products
Other
Total
2000     
Revenues
$365,321
$212,741
$66,426
-
$644,488
Operating income (loss)
19,154
14,660
(8,464)
$ (2,809)
22,541
Total assets
281,622
166,889
73,806
21,472
543,789
Capital expenditures, net
7,739
5,822
2,720
14
16,295
Depreciation and amortization
$ 12,229
$ 9,516
$ 3,646
$ 237
$ 25,628
1999
Revenues
$363,577
$219,063
$77,608
$ -
$660,248
Operating income (loss)
15,015
13,384
(4,314)
(1,282)
22,803
Total assets
334,648
179,979
89,418
3,145
607,190
Capital expenditures, net
6,545
5,776
1,789
1,670
15,780
Depreciation and amortization
$ 12,029
$ 8,820
$ 3,958
$ (57)
$ 24,750 
1998(a)
Revenues
$359,830
$217,790
$79,549
$ -
$657,169
Operating income (loss)
17,584
5,196
670
(269)
23,181
Total assets
320,482
193,596
96,550
5,677
616,305
Capital expenditures, net
5,926
5,877
4,949
(203)
16,549
Depreciation and amortization
$ 11,184
$ 8,037
$ 4,549
$ 180
$ 23,950
(a)
1998 Reconciliation of operating loss:
 
  
 
 
Operating income for reportable segments
$ 23,181 
Unallocated re-engineering expenses
(29,016) 
Consolidated operating loss
$(      5,835)
The following is a summary of our revenues by principal product line:
 
% of Revenues
2000
1999
1998
Wheelchairs
43%
 

43%
 

42%
Home respiratory products
19%
 

18%
 

19%
Personal care products
23%
 

21%
 

21%
Beds and bathing systems
12%
 

15%
 

16%
Speech devices
3%
 

3%
 

2%
Financial information relating to our operations by geographic area is asfollows:
 
Years Ended 
June 30, 2000 
July 2, 1999 
July 3, 1998
Revenues: (a)     
United States
$367,695
 

$376,638
 

$375,942
United Kingdom
78,149
 

80,545
 

78,963
Other foreign countries
198,644
 

203,065
 

202,264
Total
$644,488
 

$660,248
 

$657,169 
 

 

 

 

 

Long-lived assets: (b)
 

 

 

 

 

United States
$159,183
 

$170,078
 

$177,022
United Kingdom
76,695
 

80,855
 

85,256
France
29,241
 

39,445
 

43,664
Other foreign countries
39,473
 

43,832
 

46,677
Total
$304,592
 

$334,210
 

$352,619
(a) Revenues are attributed to geographic      areas based on the location of the customer.

(b) With the exception of goodwill, long-lived assets are        attributed to geographic areas based on the location of the asset.        Goodwill is attributed to the location of the business to which it        relates.**Major Customers**
No single customer accounted for more than 10% of our consolidated revenues.
**15.  RELATED PARTY NOTES**
The company has four notes receivable from officers/employees totaling $700,with principal to be repaid in three years, plus interest at rates ranging from6.00% to 6.97%. The loans are secured by property.

**16.  SELECTED QUARTERLY FINANCIAL DATA (Unaudited)**
(In thousands, except per share data)

FirstQuarter

SecondQuarter

ThirdQuarter

FourthQuarter

Fiscal Year
2000
Net sales
$155,542
$160,956
$165,678
$162,312
$644,488
Gross profit
48,969
47,983
49,596
49,226
195,774
Net income
1,536
1,078
269
1,244
(1)
4,127
Basic earnings per share
$ .07
$ .05
$ .01
$ .06
$ .19
Diluted earnings per share
$ .07
$ .05
$ .01
$ .05
$ .18
1999
Net sales
$164,795
$163,460
$169,715
$162,278
$660,248
Gross profit
51,577
50,904
49,748
47,265
199,494
Net income (loss)
3,557
1,816
1,779
(2,654)
4,498
Basic earnings (loss) per share
$ 0.16
$ 0.08
$ 0.08
$ (0.12)
$ 0.20
Diluted earnings (loss) per share
$ 0.16
$ 0.08
$ 0.08
$ (0.12)
$ 0.20
(1) The fourth quarter effective income tax rate was lower than the      actual year-to-date rate because actual research and development credits      were greater than the amount estimated through the third quarter and      forecasted earnings were different than actual earnings for the year.**17.  SUBSEQUENT EVENTS**
In September 2000, we refinanced our bank credit facility. The new $58million credit facility is secured by domestic accounts receivable andinventory. A portion of the proceeds from the credit facility were used torefinance short-term debt. The remainder will be used for working capitalpurposes. The agreement permits us to elect one of two variable rate interestoptions, based on the leverage ratio. The first option is a rate based on LIBORplus 2.5%. The second option is a rate equal to prime plus 1.5%. A commitmentfee of 0.5% is payable on the unused portion. The credit facility expires April2004. The agreement requires us to comply with certain covenants such as minimumEBITDA, and places restrictions on capital expenditures, asset sales and debtincurrence.
**PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**
Information regarding our directors will be included under the caption"Election of Directors" in our Definitive Proxy Statement for ourupcoming Annual Meeting of Stockholders and is incorporated herein by reference.Information regarding our executive officers is included under a separatecaption in Part I hereof and is incorporated herein by reference.
**ITEM 11. EXECUTIVE COMPENSATION**
Certain information regarding executive compensation will be set forth underthe caption "Compensation of Executive Officers" in our DefinitiveProxy Statement for our upcoming Annual Meeting of Stockholders.
**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND**MANAGEMENT**
Information regarding security ownership will be set forth under the caption"Security Ownership of Certain Beneficial Owners and Management" inour Definitive Proxy Statement for our upcoming Annual Meeting of Stockholdersand is incorporated herein by reference.
**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
Information regarding related transactions will be set forth under thecaption "Certain Transactions" in our Definitive Proxy Statement forour upcoming Annual Meeting of Stockholders and is incorporated herein byreference.**PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM        8-K.

(a)     (1) Financial Statements**
These documents are included in Part II, Section 8.
**(a)     (2) Financial Statement Schedules

(a)     (3) Exhibits**
Reference is made to the Index of Exhibits immediately preceding the exhibitshereto, which index is incorporated herein by reference.

Schedule II -- Valuation and Qualifying Accounts for the years ended

June 30, 2000, July 2, 1999, and July 3, 1998.

All other financial statement schedules have been omitted because they arenot required or are not applicable, or the information is otherwise included.
**(b)     Reports on Form 8-K**
There were no reports on Form 8-K filed during the fourth quarter of fiscalyear ended June 30, 2000.

 
**Schedule II

SUNRISE MEDICAL INC. AND SUBSIDIARIESValuation and Qualifying AccountsFiscal Years Ended June 30, 2000, July 2, 1999, and July 3,1998(In thousands)

Additions
Description
Balance at beginning of period
Charged to costs and expenses
Charged to other accounts
Deductions
Balance at end of period
1998
Allowance for doubtful          receivables
$ 5,075
5,342
(52)
(1)
(2,210)
(2)
$ 8,155
Allowance for installment          receivables
$ 2,234
898
--
(1,448)
(2)
$ 1,684
Allowance for inventory          obsolescence
$13,743
3,106
514
(2,384)
(3)
$14,979
1999
Allowance for doubtful          receivables
$ 8,155
44
(153)
(1)
(3,075)
(2)
$ 4,971
Allowance for installment          receivables
$ 1,684
1,692
--
(1,667)
(2)
$ 1,709
Allowance for inventory          obsolescence
$14,979
1,968
276
(1)
(1,862)
(3)
$15,361
2000
Allowance for doubtful          receivables
$ 4,971
3,439
(171)
(1)
(4,366)
(2)
$ 3,873
Allowance for installment          receivables
$ 1,709
2,971
-
(3,265)
$ 1,415
Allowance for inventory          obsolescence
$15,361
550
150
(2,610)
(3)
$13,451
(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.

(See accompanying independent auditors' report.)
**SIGNATURES******
Pursuant to the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on our behalf by the undersigned, thereunto duly authorized.

SUNRISE MEDICAL INC.

By: /s/ Ted N. Tarbet

Ted N. Tarbet            Senior vice president and            chief financial officer

Date: September 28, 2000

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following personson behalf of the registrant and in the capacities indicated on September 28,2000.
Signature Title/s/ Michael N. HammesMichael N. HammesChief executive officer      (principal executive officer)/s/ Ted N. TarbetTed N. TarbetSenior vice president and chief financial      officer      (principal financial officer)/s/ John M. Radak John M. RadakVice president and controller      (principal accounting officer)/s/ Murray H. Hutchison        Murray H. HutchisonChairman of the Board of Directors                                  J. R. WoodhullDirector/s/ Joseph StemlerJoseph StemlerDirector/s/ Lee A. Ault III Lee A. Ault IIIDirector/s/ William L. Pierpoint William L. PierpointDirector
 

 

 
**INDEX OF EXHIBITS**
 
Exhibit      Number  
Description3.1Certificate 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)3.3Second Amended and Restated      Bylaws of the company.(n)3.4Amendment to Certificate of      Incorporation of the company as to the number of authorized shares. (c)4.1Amended and Restated      Shareholders' Rights Agreement dated May 16, 1997.  (h)4.2Amendment to Amended and      Restated Shareholders' Rights Agreement. (n)10.1Amended and Restated Stock      Option Plan for Key Associates. (d)10.2Agreement      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.(e)10.3Asset Purchase Agreement for the      Purchase of Certain Assets of Jay Medical, Ltd.  (f)10.4Agreement 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. (g)10.5Form of Change in Control      Agreements dated June 27, 1997 between Sunrise Medical Inc. and certain      employees.(i)10.6Third Amended and Restated      Credit Agreement and Waiver dated as of August 28, 1997 among Sunrise      Medical, Inc. and certain subsidiary borrowers and guarantors, Bank of      America as agent and other lenders.(j)10.7Note Purchase Agreement dated as      of October 1, 1997 for $50 million 7.09% Series A Senior Notes Due October      28, 2004 and for $50 million 7.25% Series B Notes Due October 28, 2007.(j)10.81998 Management Incentive Bonus      Plan. (k)10.9Amended and Restated      Sentient/Sunrise Stock Option Plan. (k)10.10Supplemental Executive      Retirement Plan. (k)10.11Second Amendment to the Third      Amended and Restated Credit Agreement and Waiver dated as of August 28,      1997 among Sunrise Medical, Inc. and certain subsidiary borrowers and      guarantors, Bank of America as agent and other lenders. (l)10.12Third Amended and Restated 1993      Stock Option Plan.10.13Third Amendment to the Third      Amended and Restated Credit Agreement and Waiver dated as of August 28,      1997 among Sunrise Medical, Inc. and certain subsidiary borrowers and      guarantors, Bank of America as agent and other lenders. (n)10.14Fourth Amendment to the Third      Amended and Restated Credit Agreement and Waiver dated as of August 28,      1997 among Sunrise Medical Inc. and certain subsidiary borrowers and      guarantors, Bank of America as agent and other lenders. (n)10.15Fifth Amendment to the Third      Amended and Restated Credit Agreement and Waiver dated as of August 28,      1997 among Sunrise Medical Inc. and certain subsidiary borrowers and      guarantors, Bank of America as agent and other lenders. (n)10.16Associate Stock Purchase Plan      2000. (o)10.172000 Stock Option Plan.10.18Sixth Amendment to Third Amended      and Restated Credit Agreement dated as of August 28, 1997 among Sunrise      Medical Inc. and certain subsidiary borrowers and guarantors, Bank of      America as agent and other lenders.21List of Subsidiaries.23Consent of Independent Auditors.27Financial Data Schedule.
(a) Incorporated herein by reference to our RegistrationStatement No. 2-86314.(b) Incorporated herein by reference to our 1987 Definitive Proxy Statement.(c) Incorporated herein by reference to our Form 10-Q for the quarter endedJanuary 1, 1993.(d) Incorporated herein by reference to our 1990 Definitive Proxy Statement.(e) Incorporated herein by reference to our Form 8-K dated June 29, 1993.(f) Incorporated herein by reference to our Form 8-K dated September 16, 1994.(g) Incorporated herein by reference to our Form 8-K dated April 7, 1995.(h) Incorporated herein by reference to our Form 8-K dated May 16, 1997.(i) Incorporated herein by reference to our Form 10-K for the year ended June27, 1997.(j) Incorporated herein by reference to our Form 10-Q for the quarter endedSeptember 26, 1997.(k) Incorporated herein by reference to our Form 10-K for the fiscal year endedJuly 3, 1998.(l) Incorporated herein by reference to our Form 10-Q for the quarter endedOctober 2, 1998.(m) Incorporated herein by reference to our Form 8-K dated February 11, 1999.(n) Incorporated herein by reference to our Form 10-K for the year ended July 2,1999.(o) Incorporated herein by reference to our Form S-8 dated February 4, 2000.**************************************************************