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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
January 4, 1996
SUNRISE MEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
0-12744 95-3836867
(Commission File Number) (I.R.S. Employer Identification No.)
2382 Faraday Avenue, Suite 200
Carlsbad, California 92008
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(619) 930-1500
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Item 5. Other Events.
On January 4, 1996, the Registrant issued the press release attached hereto
as Exhibit 99 announcing the results of an internal investigation into financial
reporting irregularities at one of its subsidiaries. As a result of the
investigation, the Registrant announced that it will restate its financial
statements for fiscal years 1994 and 1995. The Registrant also announced a
number of key management changes, the implementation of a comprehensive profit
improvement plan, and the signing of an agreement for the sale of certain
assets. In addition, the Registrant announced that it will release its results
of operations for the first and second quarters of fiscal 1996 as soon as they
are available.
Item 7. Exhibits.
99 Press Release dated January 4, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNRISE MEDICAL, INC.
By Steven Jaye
Vice President, General Counsel and Secretary
Date: January 4, 1996
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EXHIBIT 99
[SUNRISE MEDICAL LOGO]
FOR IMMEDIATE RELEASE JANUARY 4, 1996
CONTACTS: Richard H. Chandler, chairman, president and chief executive officer
Ted N. Tarbet, senior vice president and chief financial officer
(619) 930-1500
SUNRISE MEDICAL ANNOUNCES RESULTS OF INTERNAL INVESTIGATION AND RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS
CARLSBAD, CALIF. --Sunrise Medical Inc. (NYSE: SMD) announced today the
results of its internal investigation into financial reporting irregularities at
its subsidiary, Bio Clinic Corporation. As a result of the investigation, the
Company will restate its financial statements for fiscal years 1994 and 1995,
reducing previously reported consolidated net income by $4.0 million in 1994 and
$11.2 million in 1995.
The Company also announced a number of key management changes, a
comprehensive profit improvement plan called "Operation Rebound," and the
signing of an agreement, subject to contingencies, to sell the Bio Clinic air
therapy rental business.
The Company will release its results of operations for the first and second
quarters of fiscal 1996 as soon as they are available. The Company expects the
results for these quarters to be adversely affected by the results of the
investigation. In the second quarter, the Company expects to record a $32 to $38
million pre-tax charge to cover, among other things, the estimated costs of the
investigation and restatement, expected attorneys' fees associated with the
defense of shareholder litigation, the write down of goodwill and other assets
at Bio Clinic, and Operation Rebound expenses.
Results of Internal Investigation and Restatement
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The Company has concluded, with the concurrence of its independent
auditors, that it is necessary to restate its financial statements for fiscal
1994 and 1995. The Company expects to file amendments to its prior SEC filings
for these years. Quarterly comparisons with prior years' results are not being
made due to the Company's present inability to restate fiscal quarters in 1994
and 1995. The restatement will reduce previously reported net income by
approximately 16% in fiscal 1994 and 37% in fiscal 1995, resulting in an
earnings per share reduction of $.22 and $.60, respectively. The restatement
will include the following:
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<TABLE>
<CAPTION>
Year ended July 1, 1994 Year ended June 30, 1995
-------------------------- --------------------------
As reported As restated As reported As restated
----------- ----------- ----------- -----------
(All figures in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $467,906 $466,942 $603,978 $601,927
Corporate operating income 48,679 42,263 61,095 43,020
Income before taxes 42,584 36,168 51,938 33,863
Net income 25,857 21,809 30,680 19,471
Earnings per share $ 1.41 $ 1.19 $ 1.63 $ 1.03
BALANCE SHEET DATA
Total assets $478,052 $471,667 $619,058 $597,909
Stockholders' equity 263,587 259,539 314,750 299,493
</TABLE>
A Special Committee, comprised of the outside directors of the Company,
directed the internal investigation, which was conducted by outside counsel,
Latham & Watkins. The forensic accounting unit of Price Waterhouse LLP was
retained by Latham & Watkins to assist in the investigation. The investigation
was initiated after certain financial irregularities were reported to the senior
management of the Company. As a result of the investigation, the Company has
concluded that accounting and financial reporting practices at Bio Clinic, and
its Comfort Clinic division, were erroneous in numerous respects. Personnel at
Bio Clinic and Comfort Clinic failed to properly report revenues and expenses on
the divisional financial statements, resulting in the overstatement of revenue,
income and assets and the understatement of liabilities at these divisions. The
improper accounting was concealed by Bio Clinic and Comfort Clinic personnel
through a series of improper accounting entries and falsified computer reports
that circumvented the Company's internal accounting controls and avoided
detection. While these practices required the restatement of fiscal 1994 and
1995 financial statements, they also occurred during certain prior years in
amounts that were immaterial to the Company's consolidated financial statements.
The cumulative effect of these earlier amounts will be included in the pre-tax
charge in the second quarter of fiscal 1996. The Company has thus far found no
misappropriation of funds throughout the periods under investigation.
Robert Barton, Bio Clinic's vice president of finance since 1988, as well
as three other employees in Bio Clinic's and Comfort Clinic's accounting and MIS
departments, are no longer employed by the Company.
As a result of these events, the Company is reviewing and implementing
enhancements to its internal controls and outside audit scope to ensure the
consistent application of proper accounting practices, while also strengthening
the financial and MIS functions at Bio Clinic. The investigation found no
accounting improprieties at other Sunrise subsidiaries or at its corporate
office.
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Sunrise Medical understands that the Securities and Exchange Commission
(SEC) has entered a formal order of private investigation into this matter, and
the Company is cooperating fully with the SEC's investigation. In addition,
following the Company's October 26, 1995 press release announcing the internal
investigation, the Company and certain of its officers, directors and employees
were named as defendants in a number of shareholder class actions, which have
been consolidated. A derivative action has also been filed. The Company intends
to vigorously defend this litigation.
The Company has received from its bank group a waiver until March 29,
1996 of compliance with certain financial covenants under the Company's
revolving credit facility, by which time the Company believes appropriate
amendments to the facility will be agreed upon.
Commenting on the results of the investigation, Richard Chandler,
chairman, president and chief executive officer of Sunrise, stated, "The
financial reporting inaccuracies turned up by the internal investigation show
that Bio Clinic and Comfort Clinic, and therefore Sunrise Medical, have been
less profitable during the past two years than we had all believed. Besides
taking appropriate steps with the people involved, all of whom have left the
company, we responded with an immediate, comprehensive action plan that we call
'Operation Rebound.' This profit improvement program involves four major
elements: the consolidation of Sunrise Medical's U.S. sales forces from twelve
to six; the integration of a number of the Company's smaller divisions operating
within the same country or marketplace; the launching of a company-wide cost
reduction program that is eliminating 6% of our workforce while squeezing out
expenses in every area of our business; and the sale of Bio Clinic's air therapy
rental business. The overriding goal of Operation Rebound is to improve the
Company's profitability at the earliest possible time. Sunrise remains a strong
company with leading positions in a number of attractive healthcare markets."
Management Changes
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Larry C. Buckelew, 42, who served as president of Bio Clinic from
November, 1986 to June, 1993, and more recently as Sunrise Medical's president
and chief operating officer, has resigned from the Company, effective today, and
has also resigned from the board of directors.
Richard H. Chandler, 52, has reassumed the title of corporate president,
which he held prior to 1993, in addition to his present positions of chief
executive officer and chairman of the board.
Brad Nutter, 43, Sunrise Medical's senior vice president, corporate
marketing, who previously served as president of Bio Clinic from July 1, 1993 to
June 30, 1995, has resigned from the Company.
The Company also announced that two proven Sunrise Medical executives
have been promoted to newly created senior management positions. Tom O'Donnell,
52, who joined the Company in 1987 and has been the president of Quickie Designs
for seven years, was named
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senior vice president--North America, responsible for all operations
headquartered in the United States and Canada. He will relocate to the Company's
Corporate Office in Carlsbad, California.
Barrie Payne, 58, a Sunrise division president since 1983, most recently
as managing director of Sunrise Medical U.K., was named senior vice president--
Europe, responsible for all of Sunrise Medical's European operations. He will
move into a new European headquarters office which will be established near
Sunrise Medical U.K. Both O'Donnell and Payne will report to Richard Chandler.
In another management change, Susanne Johnson, 34, who joined the
Company in 1991 as a divisional area sales vice president, has been appointed
vice president, corporate marketing, reporting to Tom O'Donnell. She will have
responsibility for coordinating Sunrise's marketing efforts and national account
sales to the U.S. home medical equipment industry.
SECOND QUARTER PRE-TAX CHARGE AND "OPERATION REBOUND"
The Company expects to record a pre-tax charge of $32 to $38 million in
the second quarter ending December 29, 1995, which will include: the estimated
cost of the internal investigation, restatement, and re-issuance of historical
financial statements; the expected attorneys' fees associated with defending the
shareholder litigation; the write-down of goodwill and other assets at Bio
Clinic and Comfort Clinic to reflect revised estimates of net asset
realizations; immaterial Bio Clinic adjustments related to periods prior to
fiscal 1994; and the one-time estimated expenses associated with Operation
Rebound, including severance, facility closing and write-downs associated with
discontinued low volume products.
Operation Rebound will make significant changes to the Company's
organizational structure and how it services its customers. The Company will
integrate its U.S. operations within four markets: home medical equipment (HME),
nursing homes, hospitals and consumer. Within the HME market, the Company's six
sales forces will be consolidated into three: Sunrise Rehab (Quickie, Jay),
Sunrise Respiratory (DeVilbiss), and Sunrise Homecare (Guardian, SunTec, Bio
Clinic homecare products). As previously announced, SunMed Service (SMS), the
Company's new logistics division, will provide customer service, order entry,
distribution and credit functions for standard HME products manufactured by all
U.S. divisions. The start-up of SMS operations, scheduled for February 1996,
continues to progress as planned under the leadership of vice president and
general manager Bill Rossi, who now reports to Tom O'Donnell. Within the nursing
home market, the Company's three sales forces (Joerns, Hoyer, Parker) will be
merged into one. A single hospital products sales force will now sell both Bio
Clinic foam and air products, while the Comfort Clinic sales force will continue
to cover the consumer retail market. As a result of these actions, scheduled to
be implemented on February 1, 1996, Sunrise Medical's twelve sales forces in the
U.S. will be consolidated into six, reducing the Company's selling costs while
promoting closer customer relationships through smaller territory sizes.
In Europe, Sunrise Medical's operations will be organized geographically
by country, with a country executive in charge in each of Germany, France, and
the U.K. Within each
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country, sales and marketing efforts will be integrated around healthcare
markets, similar to the U.S. structure, and some facilities will be consolidated
to eliminate administrative duplication.
Operation Rebound also involves a comprehensive review of spending in
every department within every area of the Company. Savings are expected to be
generated from workforce reduction, sales force consolidation, facilities
closings, process simplification, materials cost reductions and the elimination
of non-essential programs. As a result of Operation Rebound, the Company expects
to reduce its workforce by approximately 250 people, or 6% of the total, by
January 31, 1996 as compared to October 31, 1995.
Sale of Air Therapy Rental Business
- -----------------------------------
As part of Operation Rebound, Sunrise has decided to exit from Bio
Clinic's air therapy rental business, which was launched in 1992. This business
rents on a daily and monthly basis a variety of Bio Clinic-manufactured low air
loss beds and portable mattress systems to nursing homes, hospitals and home
care dealers through 31 company-owned rental service centers. It generated
approximately $12 million of rental revenues in fiscal 1995. Sunrise signed
today an agreement to sell the assets of the air therapy rental business to a
qualified buyer, with a scheduled closing in the third quarter of fiscal 1996.
The consummation of the sale is subject to a number of significant contingencies
and closing conditions, including the satisfactory completion of a due diligence
review by the buyer. If the sale is consummated, it is contemplated that the
buyer will purchase certain amounts of Bio Clinic manufactured products over the
next three years. Besides acquiring the assets, the agreement also provides that
the buyer will hire a majority of the 83 Bio Clinic employees involved in
selling, service and delivery functions. In the event the sale is not completed
with the buyer, Sunrise plans to pursue a sale with other interested potential
purchasers. Sunrise will be closing the 31 rental service centers after the
sale, the estimated costs of which are included in the second quarter pre-tax
charge.
In the future, Bio Clinic's strategy will be to focus on its core
business of manufacturing a full range of pressure management products, from
inexpensive Eggcrate(R) foam overlays to sophisticated air therapy bed systems,
and selling (but not renting) these products to all healthcare market segments,
including hospitals, nursing homes and home medical equipment providers.
Commenting on the investigation and restatement impact, Chandler said,
"Now that we understand the true situation at both Bio Clinic and Comfort
Clinic, we have taken strong corrective action. All of us at Sunrise Medical are
committed to putting this matter behind us, implementing Operation Rebound and
getting back to what we do best: designing and manufacturing products that
improve people's lives."
Sunrise Medical designs, manufactures and markets medical products used
in institutional and home care settings that address the recovery,
rehabilitation and respiratory needs of the patient.
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