Sunrise Bogged Down in Accounting
SEC Pursues Inquiry Of Senior-Care Giant

By Cecilia Kang
Washington Post Staff Writer
Monday, January 22, 2007

Theirs was a classic entrepreneurial story. In 1981, Paul and Terry Klaassen, in their 20s, bought and renovated an old nursing home in Oakton with $16,000 in savings.

Terry was motivated by personal experience: When her mother became ill, she found the level of care available at the time to be inadequate and undignified. Paul saw the business potential in developing a warmer and more personalized European model of senior care, like that in his family's native Netherlands.

The couple moved into the home and eventually turned the business, Sunrise Senior Living, into one of the nation's largest senior residential services providers, operating 436 retirement communities in the United States, Canada and Europe. The Klaassens had landed smack in the middle of a sweeping demographic shift as America's growing aging population was looking for better retirement options and willing to pay for better services.

Yet as analysts touted Sunrise's business outlook, that rosy picture began to fray.

Last week, the McLean-based company said it would again delay the filing of its financial results for all four quarters of 2006, which it had previously promised to deliver on March 1. Sunrise blamed the postponement on the complexity of an ongoing internal accounting review and a Securities and Exchange Commission inquiry into its accounting practices and allegations of insider stock sales.

"We share the disappointment of our investors and stakeholders regarding this delay," Bradley B. Rush, Sunrise's chief financial officer, said in the company's statement. "Rather than continue to predict the date of the ultimate end of the process, which depends on third parties, we will continue to provide interim updates as we proceed, as fast as possible, toward completion." Rush's office said he was unable to schedule an interview.

The troubles for Sunrise began last May, when executives announced they would implement a new way of accounting for profits and losses from certain joint ventures. The move resulted in an accounting review of past earnings reports and the reduction of $100 million in profits between 1999 and 2005.

The company's share price dropped 34 percent after the announcement, reaching the year's lowest point in late July 2006. Last week, pension funds for the United Food and Commercial Workers Union filed lawsuits against Sunrise charging the company with accounting fraud and insider stock trading. Another union pension fund, the SEIU Master Trust, has pressed the company in letters about insider stock sales and the questionable timing of stock options grants.

Sunrise has said that the SEC inquiry was prompted by the SEIU's letters. In its release last week, it accused the SEIU of writing the letters to generate media attention as part of an attempt to organize Sunrise workers. Steve Abrecht, executive director of the SEIU Master Trust, said the SEIU has no members at Sunrise and has no plans to organize a union at the company.

"We're very disappointed. They've had plenty of time to do an investigation, and why they can blame it on us is hard to imagine," Abrecht said.

The pension fund also has urged Sunrise to review the composition of the review committee the company created last December. Sunrise has not disclosed who is on the committee, and the SEIU said it suspects that it might include company directors.

"It's not appropriate to have a special committee made up of board members. It would be too conflicted; they would be investigating themselves," Abrecht said.

One question raised is the $32 million in stock sales by Sunrise executives from December 2005 to May 2006, when the new accounting system was announced. The Klaassens sold about $20 million in Sunrise shares during that period, in 12 separate transactions.

Some shareholders have alleged that company executives, including the Klaassens, knew about the accounting changes months before they were made public and unloaded their shares ahead of the news. These shareholders cite a comment made during a May 11 conference call with analysts, when a Sunrise executive said the new accounting method "came into consideration late in 2005."

The company has maintained that the board members and executives did not have prior knowledge of the financial restatement at the time of their stock sales.

Another shareholder, LongView Small Cap Index Fund of Amalgamated Bank in New York, wants a review of bonuses and awards given to senior executives during the periods when earnings were restated. In a request to be voted on by shareholders at the company's annual meeting this spring, LongView argues that executives who did not meet performance targets based on the new financial results between 1999 and 2005 should return the money, the fund said.

Even with a cloud hovering above Sunrise, many analysts who follow the industry maintain that the underlying health of the company is strong. The firm has not filed a financial report since last March.

"Fundamentals for this business are terrific," said Jerry L. Doctrow, a research analyst with Stifel Nicolaus. "Sunrise really founded the assisted-living industry in America and has the brand and reputation of a high-quality provider."

Sunrise grew quickly with the help of some savvy acquisitions, including the $150 million purchase of Marriott International's senior living operation in 2003. The company's hallmark is building communities with tony architectural details, such as French doors and vaulted ceilings, and complementing those surroundings with a broad array of concierge and health services.

The company has also experienced setbacks. In the late 1990s, Sunrise found itself competing against at least a dozen other major senior living providers, and the supply of senior housing outstripped demand. Since then, the industry has consolidated and demand has caught up with the number of residential units available. In September 2005, as the company sought to evacuate residents from areas hit by Hurricane Rita, a bus Sunrise chartered for its residents exploded and 23 people were killed.

Analysts have expressed disappointment with the latest delay in financial reporting. But they also have given the company high marks for its operations. Sunrise has said that occupancy rates at the communities it operates has risen to about 94 percent. On Jan. 11, Sunrise and Prudential Real Estate Investors announced a joint venture to develop 18 senior communities in Britain valued at $1 billion.

"We view this announcement as a reminder that the company's core strategy of developing and operating high-quality senior living properties in attractive locations is clearly on track," Ryan Daniels, an analyst at William Blair wrote in a report.

Doctrow said the company has said repeatedly that its accounting problems have not affected its operations. "The important thing for us is cash flow, and they say none of this has affected their cash flow," he said.

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