Sunrise Medical Founder Resigns in Effort to Right Floundering Firm

The founder and chairman of Sunrise Medical Inc., a Carlsbad maker of crutches, wheelchairs and other medical devices, resigned Tuesday in an effort to allow the troubled company to start fresh after years of scandal and decreasing profit.

Richard H. Chandler, who founded the company in 1983 with $50,000 and built it until it reached $660 million in sales last year, said that the company needed a president and chairman “with a different set of skills,” and that he would concentrate on new, start-up ventures.

Chandler’s departure marks an end point of sorts for the company, which spiraled into trouble beginning with the news three years ago that it had falsified profit information for fiscal years 1993, 1994 and 1995.

The revelations shook Wall Street, prompting debate about the then-popular practice of tying executive bonuses to profit in their divisions. Sunrise had been among a number of companies that linked executive compensation to company growth.

“It is sad,” said senior vice president and chief counsel Steven Jaye, who joined the company just a month before the improprieties were discovered in 1996. “He’s been synonymous with Sunrise. He founded the company and he’s been the principal spokesman and he’s a friend. It’s sad to see him go.”

The outgoing chairman did not wish to be interviewed, but he issued a statement in which he said that the company needed someone who was more skilled in operations and cost containment than he was.

“As a major shareholder of Sunrise, I would choose others ahead of myself for the CEO position,” Chandler said.

A potent combination of factors--from lingering effects of the scandal to changes in the marketplace for medical equipment--have been pressing down Sunrise’s profit over the last several years, culminating with a loss last quarter of $2.7 million, Jaye said.

The spiral began with the news that executives at one of the company’s flagship divisions had not only inflated profits, but invented them. The division, which had reported a profit of $14 million in 1995, had actually lost money. Profit overall that year turned out to be just $20 million, about 37% down from the $35 million that the company had reported to the federal government.

But because the phony numbers masked the losses, the company was slow in responding to changes in the marketplace, partly because officials mistakenly thought Sunrise was extremely profitable.

“The financial improprieties have been cleaned up,” Jaye said, and a settlement was reached with the Securities and Exchange Commission in 1997. “But they did have a long-lasting impact on the company simply because profits we thought we were making were fictitious. And so some of the actions we should have taken to streamline the company did not occur until years after the fact.”

For example, Jaye said, the company did not move quickly enough to learn how to more efficiently manufacture some of the basic products it sells, such as crutches. The company also realized too late that its strategy of growth by acquisition had left it with a loose affiliation of subsidiaries with expensive--and duplicative--administrative structures.

To make matters worse, investors, not surprisingly, turned away in droves, plunging the stock down from a peak of $36.75 in 1995 before the scandal to half that when news of the alleged fraud came out. It has fallen even further since then, closing Tuesday at $6.75 per share, up 50 cents on the New York Stock Exchange. (The news of Chandler’s departure was announced after the markets closed.)

With Chandler’s departure, the company said it will focus on plans to impose a tighter rein on its subsidiaries and reduce the cost of producing basic items such as crutches and wheelchairs.

The company is seeking a new president, who officials hope will be skilled in cost-containment in manufacturing operations. Meanwhile, it hired Deutsche Banc Alex. Brown as an advisor on ways to raise cash, including the sale of assets or a stake in the company.

Sunrise has consolidated several of its offices, including two overseas, and has moved manufacturing of crutches from Simi Valley to Tijuana, where labor costs are cheaper.

On Tuesday, the company named Murray A. Hutchison, a Sunrise director since it was founded, to the position of interim chief executive.

The company said it had renegotiated lending agreements with its banks because covenants of the earlier accords were violated. The company’s credit line was reduced to $110 million from $120 million, and will be further cut to $65 million by July 2000.

As part of the amended agreement, $40 million of the outstanding bank debt was converted from the revolving credit facility to a term loan, which is secured by the company’s accounts receivable. Sunrise has about $91 million in total bank debt outstanding.

Borrowings under the amended credit line and the term loan are due on Jan. 14, 2001. The blended annual interest rate under the amended agreement will increase to an average of 11% at today’s prevailing rates, versus 8% in fiscal 1999, the company said in a statement.

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Ailing Stock

Sunrise Medical’s shares peaked in 1995 and have slid almost relentlessly since, as the company’s sales and earnings have struggled. Quarterly closes and latest on the New York Stock Exchange:

Tuesday: $6.75, up 50 cents