<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report
(Date of earliest event reported): May 5, 1995
SUN HEALTHCARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 1-12040 85-0410612
- --------------------------------------------------------------------------------
State or other jurisdiction Commission IRS Employer
of incorporation File Number Identification No.
101 Sun Lane, N.E.
Albuquerque, New Mexico 87109
----------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number,
Including Area Code: (505) 821-3355
This Current Report on Form 8-K consists of __ pages.
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 5, 1995, a wholly owned subsidiary of Sun Healthcare Group,
Inc. ("Sun") merged with and into Golden Care, Inc. ("Golden Care") and Golden
Care thereby became a subsidiary of Sun. Golden Care provides respiratory
therapy services to patients in long-term and subacute care facilities. Under
the terms of the merger agreement, Sun issued 2,106,904 shares of its common
stock in exchange for all of the outstanding common stock of Golden Care. The
shareholders of Golden Care were John Brennan, Susan Bird, and Tom Futch.
In addition, an option held by Tom Futch to acquire shares of Golden Care
common stock became an option to acquire 234,100 shares of Sun common stock at
an exercise price of $500,000. Based on the closing trading price of Sun's
common stock on May 5, 1995, the acquisition had a market value of approximately
$39,600,000. The merger was accounted for as a pooling of interests.
A Form 8-K was not previously filed for Golden Care as Golden Care
did not qualify as a significant acquisition by Sun in accordance with the
definition of a significant subsidiary in Rule 3-05 of Regulation S-X.
However, when Sun restated its financial statements for 1994 and 1995 in
August 1996, Golden Care then qualified as a significant acquisition.
ITEM 7. FINANCIAL STATEMENTS.
ITEM 7(a) Financial Statements of Golden Care
Balance Sheet as of December 31, 1994
Report of Independent Public Accountants
Statement of Income for the year ended December 31, 1994
Statement of Changes in Stockholders' Equity for the year ended
December 31, 1994
Statement of Cash Flows for the year ended December 31, 1994
Notes to Financial Statements
Balance Sheet as of March 31, 1995 and as of December 31, 1994
(unaudited)
Statement of Income for the three months ended March 31, 1995
and 1994 (unaudited)
Statement of Cash Flows for the three months ended March 31, 1995
and 1994 (unaudited)
Notes to Financial Statements (unaudited)
ITEM 7(b) Pro Forma Financial Information
Sun's historical financial statements have been restated to include
the acquisition of Golden Care under the pooling of interests method for the
three years ended December 31, 1995. Such restated financial statements include
the 1994 Golden Care financial statements which are presented herein.
The restated pooled historical financial statements of Sun are
included in lieu of pro forma financial statements reflecting the acquisition
of Golden Care. The restated financial statements are incorporated by reference
herein by reference from pages F-1 to F-30 of Sun's Form 10-K/A-1 for the year
ended December 31, 1995, which pages are attached as Exhibit 99.1.
The interim pro forma financial statements as of and for the three
months ended March 31, 1995 were previously included in a Current Report on
Form 8-K, dated May 5, 1995, which was filed by Sun on June 5, 1995. Such
statements are incorporated herein by reference from pages A-1 to A-7 of that
Current Report on Form 8-K, these pages are attached hereto as Exhibit 99.2.
Sun restated its financial statements for the year ended December 31, 1994 in
its Form 10-K/A-1, which was previously filed August 6, 1996 (after such Form
8-K was filed). Therefore the statement of income for the year ended December
31, 1994 and any references to that period included in the incorporated pro
forma financial statements should be disregarded because such statements were
superseded by the Form 10-K/A-1.
ITEM 7(c) Exhibits
Exhibit 10.1(1) Agreement and Plan of Merger dated as of April 27, 1995
by and between Golden Care, Inc., Golden Acquisition
Company and Sun Healthcare Group, Inc.
Exhibit 10.2(1) Registration Rights Agreement dated as of April 27, 1995
by and between Sun, John Brennan, Susan Bird and Tom Futch
Exhibit 10.3(1) First Amendment to Agreement and Plan of Merger dated as
of May 4, 1995 by and between Golden Care, Inc., Golden
Acquisition Corporation and Sun Healthcare Group, Inc.
Exhibit 23.1 Consent of Accountant (Consent to incorporation
of 8-K report into S-8s)
Exhibit 99.1 Sun Healthcare Group, Inc.'s restated pooled historical
financial statements as contained in its Form 10-K/A-1
for the year ended December 31, 1995 on pages F-1 to F-30.
Exhibit 99.2 Sun Healthcare Group, Inc.'s pro forma financial
statements for the three months ended March 31, 1995 as
contained in its Current Report on Form 8-K dated May 5,
1995, which was filed by Sun on June 5, 1995, on pages A-1
to A-7.
(1) Incorporated by reference from Sun's Form 10-Q for the quarter ended
March 31, 1995
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Sun Healthcare Group, Inc. has duly caused this Current Report to be signed on
its behalf by the undersigned hereunto duly authorized.
Dated: March 26, 1997 SUN HEALTHCARE GROUP, INC.
/s/ William C. Warrick
------------------------------------
William C. Warrick
Vice-President and
Corporate Controller
<PAGE>
GOLDEN CARE, INC.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Sun Healthcare Group, Inc.:
We have audited the accompanying balance sheet of Golden Care, Inc. as of
December 31, 1994, and the related statements of income, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Golden Care, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Albuquerque, New Mexico
March 26, 1997
1
<PAGE>
GOLDEN CARE, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1994
ASSETS 1994
------------
Current assets:
Cash and cash equivalents $ 1,185
Accounts receivable, net of allowance for
doubtful accounts of $635,000 2,989,505
Interest receivable 10,210
Inventories 252,202
Prepaid expenses 14,374
------------
Total current assets 3,267,476
Property and equipment, net (Note 2) 1,281,739
Other assets 44,131
------------
Total assets $ 4,593,346
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 477,699
Accrued expenses 177,719
Current portion of capital
lease obligations (Note 3) 74,908
------------
Total current liabilities 730,326
Capital lease obligations,
less current portion (Note 3) 274,703
------------
Total liabilities 1,005,029
------------
Commitments and Contingencies (Note 3) -
Stockholders' equity:
Common stock, no par value, 1,000 shares
authorized, issued and outstanding 500,800
Note receivable--officer (Note 4) (500,000)
Retained earnings 3,587,517
------------
Total stockholders' equity 3,588,317
------------
Total liabilities and stockholders' equity $ 4,593,346
------------
------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
GOLDEN CARE, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
1994
-------------
Operating revenue $ 14,759,079
-------------
Operating expenses:
Respiratory services 4,544,894
Respiratory equipment and supplies 2,756,392
Marketing, promotions and related expenses 975,467
Officers salaries 505,462
Corporate, general and administrative 1,600,848
-------------
Total operating expenses 10,383,063
-------------
Income from operations 4,376,016
Other income (expense):
Interest income 10,210
Interest expense (4,793)
Other (2,614)
-------------
Net income $ 4,378,819
-------------
-------------
Net income per common share $ 4,379
-------------
-------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
GOLDEN CARE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK NOTE
---------------------- RECEIVABLE-- RETAINED
SHARES AMOUNT OFFICER EARNINGS TOTAL
------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
January 1, 1994 1,000 $ 800 $ - $ 2,868,843 $ 2,869,643
Contribution of shares (100) - - - -
Reissuance of shares for note
receivable from officer (Note 4) 100 500,000 (500,000) - -
Net income - - - 4,378,819 4,378,819
Distributions - - - (3,660,145) (3,660,145)
------- ----------- ------------ ------------- -------------
December 31, 1994 1,000 $ 500,800 $ (500,000) $ 3,587,517 $ 3,588,317
------- ----------- ------------ ------------- -------------
------- ----------- ------------ ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
GOLDEN CARE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
1994
------------
Cash flows from operating activities:
Net income $ 4,378,819
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 212,144
Provision for bad debts 883,613
Changes in operating assets and liabilities:
Accounts receivable (1,460,017)
Interest receivable (10,210)
Inventories (129,586)
Prepaid expenses and other assets (26,782)
Accounts payable 196,133
Accrued expenses 93,886
------------
Cash provided by operating activities 4,138,000
------------
Cash flows from investing activities:
Acquisitions of property and equipment (518,019)
------------
Cash used by investing activities (518,019)
------------
Cash flows from financing activities:
Payments on capital lease obligations (39,949)
Distributions to stockholders (3,660,145)
------------
Cash used by financing activities (3,700,094)
------------
Decrease in cash (80,113)
Cash, beginning of year 81,298
------------
Cash, end of year $ 1,185
------------
------------
Supplemental disclosure of cash payments:
Interest payments $ 4,793
------------
------------
Noncash transactions:
The Company entered into a capital lease in 1994 for equipment totaling
$349,611 (see Note 3). During 1994, the existing stockholders contributed
100 shares of common stock to the Company. Such shares were then purchased
by the chief executive officer of the Company in exchange for a promissory
note (see Note 4).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
GOLDEN CARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. NATURE OF BUSINESS: Golden Care, Inc. ("the Company") provides
respiratory care services and sells related medical supplies and
gases to long-term care facilities located in California, Florida,
Georgia, Indiana, and Ohio. The Company's headquarters are located
in Indianapolis, Indiana.
Below is a description of the significant accounting policies
followed in the preparation of the Company's financial statements.
b. CASH AND CASH EQUIVALENTS: Cash and cash equivalents are stated at
cost and include money market instruments with original maturities of
three months or less.
c. INVENTORIES: Inventories, which consist principally of respiratory
therapy medical supplies and related products, are stated at the
lower of cost or market with cost determined using the first-in,
first-out method.
d. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of assets, which range from three to fifteen
years.
Repair and maintenance expense is charged to operations in the
year the expense is incurred. Expenses for property and equipment
which extend the original estimated lives of the assets are
capitalized. Cost and accumulated depreciation of disposed assets
are removed from the accounts and any resulting gain or loss is
included in net income.
e. REVENUE RECOGNITION: The Company provides respiratory care services
for long-term care facilities under agreements whose terms range
from one to three years. Revenue for these services is recognized
when the service is performed.
The Company also provides respiratory equipment and performs certain
management services for hospitals that provide respiratory care
services to patients in long-term care facilities. The Company's
service agreements with such hospitals typically have terms of one
year, with annual renewal options. Revenue provided under these
arrangements is recognized when the service is performed.
The Company derives a significant portion of its revenues from
certain multifacility providers. In 1994, the Company derived 61%
of its operating revenues from three multifacility providers in
approximately even proportions. The concentration of balance
sheet credit risk approximates the sales activity to these
multifacility providers.
6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
f. CONCENTRATION OF CREDIT RISK: The Company receives payment from
long-term care facilities and hospitals (Facilities) which are
reimbursed under various third-party arrangements including
private pay and government programs. The Company's revenue is not
subject to retroactive contractual adjustment resulting from
negotiations between Facilities and third-party payors. Should
the third parties significantly alter their programs, the ability
of the Facilities to meet their obligations could be adversely
impacted.
g. INCOME TAXES: The Company has elected to be taxed as an S
Corporation. Accordingly, there is no provision for income taxes
in the accompanying financial statements. The Company's taxable
income is required to be included in the individual income tax
returns of its stockholders.
h. EARNINGS PER SHARE: Earnings per share has been computed by dividing
net income by the weighted average number of common shares
outstanding.
i. USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
j. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of
non-current capital lease obligations approximate fair value based
on borrowing rates currently available to the Company.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
DECEMBER 31,
------------
1994
-----------
Office furniture and equipment $ 247,075
Respiratory therapy equipment 1,054,227
Equipment under capital lease 349,611
Vehicles 42,386
-----------
1,693,299
Accumulated depreciation (411,560)
-----------
$ 1,281,739
-----------
-----------
7
<PAGE>
3. COMMITMENTS AND CONTINGENCIES:
The Company entered into an agreement on October 28, 1994 which provides
for an equipment lease line of credit in the amount of $2,500,000, which
expires April 30, 1995. At December 31, 1994, the Company had capacity
under the line of credit of approximately $2,150,000.
The Company also enters into long-term agreements for the lease of office
facilities and certain equipment, including vehicles. Minimum future lease
obligations under long-term noncancelable leases in effect at December 31,
1994 are as follows:
CAPITAL OPERATING
---------- ----------
1995 $ 104,061 $ 111,608
1996 104,061 89,969
1997 104,061 25,346
1998 104,061 -
---------- ----------
Net minimum lease payments 416,244 226,923
Less amount representing interest (66,633) -
---------- -----------
$ 349,611 $ 226,923
---------- ----------
---------- ----------
Rental expense was approximately $708,000 for 1994.
In the normal course of operations, the Company is subject to various
claims, legal actions and complaints. Management is of the opinion,
based on the advice of counsel, that all such matters are adequately
covered by insurance or, if not so covered are without merit or are of
such kind, or involve such amounts, that unfavorable disposition would
not have a material, adverse effect on the financial position of the
Company.
4. STOCKHOLDER TRANSACTIONS:
During 1994, the Company and its stockholders entered into an employment
agreement with the Company's chief executive officer. Among other things,
the agreement provides the chief executive officer the option to purchase
20% of the Company's authorized and issued common stock. Pursuant to the
agreement, 50% of these shares may be purchased at August 1, 1994, the
effective date of the agreement. The remaining shares may be purchased on
the earlier of :
- September 1, 1995,
- registration of the Company's intent to file for an initial public
offering, or
- the acceptance by the board of directors of an offer to purchase the
Company in whole or in part
8
<PAGE>
4. STOCKHOLDER TRANSACTIONS, CONTINUED:
The option expires on September 1, 2004. The chief executive officer
exercised the option to purchase the first 50% of the shares in 1994 by
issuing a $500,000 note payable to the Company. The note matures in
September 1999 and bears interest at an annual rate of 5%. The shares
issued to the chief executive officer were contributed to the Company by
the existing stockholders.
During 1994, the Company paid approximately $890,000 to a related
entity that provides temporary placement services of respiratory
therapists. The Company also paid approximately $100,000 in 1994
to a related entity for travel-related expenses. Both entities are
owned by certain of the Company's stockholders.
5. SUBSEQUENT EVENT:
On May 5, 1995, the Company merged with Sun Healthcare Group, Inc.
("Sun"). Under the terms of the merger agreement, Sun issued 2,106,904
shares of Sun common stock in exchange for all of the outstanding common
stock of the Company. Sun also issued options to purchase a total of
234,100 shares of Sun common stock with a total exercise price of
$500,000 as part of the consideration in the merger. These options
replaced the remaining outstanding options granted to an employee in
1994 under an employment agreement in which former Company stockholders
granted an option to an employee to acquire 10% of their holdings (Note
4). All such options vested as of the date of the merger. In connection
with the merger, the Company terminated its S corporation status and
recorded a deferred income tax provision of $1,487,000. The merger was
accounted for as a pooling of interests.
9
<PAGE>
GOLDEN CARE, INC.
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(Unaudited)
<PAGE>
GOLDEN CARE, INC.
BALANCE SHEET
AS OF MARCH 31, 1995 AND DECEMBER 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 1,185
Accounts receivable, net of allowance for doubtful
accounts of $877,600 as of March 31, 1995 and $635,000
as of December 31, 1994 3,377,181 2,989,505
Interest receivable 13,541 10,210
Inventories 238,084 252,202
Deferred insurance expense 22,062 14,374
------------ ------------
Total current assets 3,650,868 3,267,476
Property and equipment, net (Note 2) 2,292,121 1,281,739
Other assets 44,115 44,131
------------ ------------
Total assets $ 5,987,104 $ 4,593,346
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 14,547 $ --
Accounts payable 416,994 477,699
Accrued expenses 264,802 177,719
Current portion of capital lease obligations (Note 3) 241,051 74,908
------------ ------------
Total current liabilities 937,394 730,326
Capital lease obligations, less current portion (Note 3) 754,615 274,703
------------ ------------
Total liabilities 1,692,009 1,005,029
------------ ------------
Commitments and Contingencies -- --
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized, issued and
outstanding 500,800 500,800
Note receivable--officer (Note 4) (500,000) (500,000)
Retained earnings 4,294,295 3,587,517
------------ ------------
Total stockholders' equity 4,295,095 3,588,317
------------ ------------
Total liabilities and stockholders' equity $ 5,987,104 $ 4,593,346
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
<PAGE>
GOLDEN CARE, INC.
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
3/31/1995 3/31/1994
------------ ------------
<S> <C> <C>
Operating revenue $ 3,130,588 $ 3,540,120
------------ ------------
Operating expenses:
Respiratory services 1,182,111 977,351
Respiratory equipment and supplies 420,943 551,696
Marketing, promotions and related expenses 139,680 221,112
Officers salaries 153,832 102,785
Corporate, general and administrative 218,135 156,908
Provision for losses on accounts receivable 300,000 200,000
------------ -----------
Total operating expenses 2,414,701 2,209,852
------------ -----------
Income from operations 715,887 1,330,268
Other income (expense):
Interest income 3,331 --
Interest expense (8,435) (176)
Other (4,005) --
------------ -----------
Net income $ 706,778 $ 1,330,092
------------ -----------
------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
GOLDEN CARE, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
3/31/1995 3/31/1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 706,778 $ 1,330,092
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 57,412 46,778
Provision for losses on accounts receivable 300,000 200,000
Changes in operating assets and liabilities:
Accounts receivable (687,676) (158,179)
Other current assets 3,115 112,976
Other current liabilities (189,121) (206,346)
------------ -----------
Cash provided by operating activities 190,508 1,325,321
------------ -----------
Cash flows used in investing activities:
Acquisitions of property and equipment, net (187,499) 48,397
------------ -----------
Cash flows from financing activities:
Change in cash overdraft 14,547 --
Payments on capital lease obligations (18,741) (7,824)
Distributions to stockholders -- (670,538)
------------ -----------
Cash used by financing activities (4,194) (678,362)
------------ -----------
(Decrease) increase in cash (1,185) 695,356
Cash, beginning of period 1,185 81,298
------------ -----------
Cash, end of period $ -- $ 776,654
------------ -----------
------------ -----------
Supplemental disclosure of cash payments:
Interest payments $ 8,435 $ 176
------------ -----------
------------ -----------
</TABLE>
Noncash transactions:
The Company entered into capital leases during the three months ended
March 31, 1995 for equipment totaling $664,796. Additionally, during the
three months ended March 31, 1995, the Company acquired equipment totaling
$215,500, which is included in accounts payable at March 31, 1995. Payment
for the equipment is expected to be refinanced under the existing lease
line of credit.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
GOLDEN CARE, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. COMMITMENTS AND CONTINGENCIES:
The Company entered into an agreement on October 28, 1994 which provides for
an equipment lease line of credit in the amount of $2,500,000. At March 31,
1995, the Company had capacity under the line of credit of approximately
$1,486,000. The Company acquired $215,500 of equipment during the three
months ended March 31, 1995, which it expects to finance under the lease
line of credit.
In the normal course of operations, the Company is subject to various
claims, legal actions and complaints. Management is of the opinion, based
on the advice of counsel, that all such matters are adequately covered by
insurance or, if not so covered are without merit or are of such kind, or
involve such amounts, that unfavorable disposition would not have a
material, adverse effect on the financial position of the Company.
2. SUBSEQUENT EVENT:
On May 5, 1995, the Company merged with Sun Healthcare Group, Inc.
("Sun"). Under the terms of the merger agreement, Sun issued 2,106,904
shares of Sun common stock in exchange for all of the outstanding common
stock of the Company. Sun also issued options to purchase a total of
234,100 shares of Sun common stock with a total exercise price of
$500,000 as part of the consideration in the merger. These options
replaced the remaining outstanding options granted to an employee in
1994 under an employment agreement in which former Company stockholders
granted an option to an employee to acquire 10% of their holdings.
All such options vested as of the date of the merger. In connection
with the merger, the Company terminated its S corporation status and
recorded a deferred income tax provision of $1,487,000. The merger was
accounted for as a pooling of interests.
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 8-K, into the Company's previously filed
Registration Statements on Form S-8 No. 33-80540, No. 33-93692 and
No. 333-03058.
Albuquerque, New Mexico
March 26, 1997
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
AS RESTATED
-------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 23,102 $ 78,738
Restricted cash................................................................... 1,914 1,792
Accounts receivable, net of allowance for doubtful accounts of $11,035 and $9,508
in 1995 and 1994, respectively................................................... 236,797 160,705
Other receivables................................................................. 29,976 17,609
Prepaids and other assets......................................................... 18,300 13,422
Deferred tax asset................................................................ 27,098 17,863
------------- -------------
Total current assets............................................................ 337,187 290,129
------------- -------------
Property and equipment, net......................................................... 201,132 197,407
Restricted cash..................................................................... 8,132 19,836
Assets held for sale, net........................................................... -- 14,962
Goodwill, net....................................................................... 421,660 457,936
Other assets, net................................................................... 62,856 25,537
Deferred tax asset.................................................................. 8,902 48,416
------------- -------------
Total assets.................................................................... $ 1,039,869 $ 1,054,223
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 10,417 $ 18,374
Accounts payable.................................................................. 33,000 18,172
Accrued compensation and benefits................................................. 23,742 31,626
Workers' compensation accrual..................................................... 6,339 2,517
Other accrued liabilities......................................................... 23,210 15,805
Accrued interest.................................................................. 3,332 6,485
------------- -------------
Total current liabilities....................................................... 100,040 92,979
------------- -------------
Long-term debt, net of current portion.............................................. 348,460 398,534
Other long-term liabilities......................................................... 17,052 9,442
------------- -------------
Total liabilities............................................................... 465,552 500,955
------------- -------------
Minority interest................................................................... 5,275 2,819
Commitments and contingencies
Stockholders' equity:
Preferred stock of $.01 par value, authorized 5,000,000 shares, none issued....... -- --
Common stock of $.01 par value, authorized 100,000,000 shares, 47,916,367 and
45,021,219 shares issued and outstanding at December 31, 1995 and 1994,
respectively..................................................................... 479 450
Additional paid-in capital........................................................ 568,054 521,614
Retained earnings................................................................. 777 28,165
Cumulative translation adjustment................................................. (268) 220
------------- -------------
Total stockholders' equity...................................................... 569,042 550,449
------------- -------------
Total liabilities and stockholders' equity...................................... $ 1,039,869 $ 1,054,223
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
AS RESTATED
----------------------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Total net revenues................................................... $ 1,135,508 $ 673,354 $ 230,815
------------- ------------- -------------
Costs and expenses:
Operating.......................................................... 929,493 552,662 194,290
Corporate general and administrative............................... 51,468 31,633 10,675
Provision for losses on accounts receivable........................ 14,623 27,632 1,265
Depreciation and amortization...................................... 27,734 11,797 1,534
Interest, net...................................................... 21,829 10,548 341
Conversion expense................................................. 3,256 2,275 --
Merger expenses.................................................... 5,800 -- --
Strike costs....................................................... 4,006 -- --
Investigation and litigation costs................................. 5,505 -- --
Impairment loss.................................................... 59,000 -- --
------------- ------------- -------------
Total costs and expenses....................................... 1,122,714 636,547 208,105
------------- ------------- -------------
Earnings before income taxes and extraordinary loss.................. 12,794 36,807 22,710
Income taxes......................................................... 33,132 14,688 5,246
------------- ------------- -------------
Net earnings (loss) before extraordinary loss...................... (20,338) 22,119 17,464
Extraordinary loss from early extinguishment of debt, net of income
tax benefit of $2,372............................................... (3,413) -- --
------------- ------------- -------------
Net earnings (loss)................................................ $ (23,751) $ 22,119 $ 17,464
------------- ------------- -------------
------------- ------------- -------------
Pro forma data:
Historical earnings before income taxes and extraordinary loss..... $ 12,794 $ 36,807 $ 22,710
Pro forma income taxes............................................. 33,362 17,246 9,247
------------- ------------- -------------
Pro forma net earnings (loss) before extraordinary loss............ (20,568) 19,561 13,463
Extraordinary loss................................................. (3,413) -- --
------------- ------------- -------------
Pro forma net earnings (loss)...................................... $ (23,981) $ 19,561 $ 13,463
------------- ------------- -------------
------------- ------------- -------------
Pro forma net earnings (loss) per common and common equivalent share:
Pro forma net earnings (loss) before extraordinary loss.......... $ (0.43) $ 0.61 $ 0.72
Extraordinary loss............................................... (0.07) -- --
------------- ------------- -------------
Pro forma net earnings (loss).................................... $ (0.50) $ 0.61 $ 0.72
------------- ------------- -------------
------------- ------------- -------------
Pro forma weighted average number of common and common equivalent
shares outstanding.................................................. 47,418,700 31,829,904 18,607,681
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
AS RESTATED
--------------------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................................... $ (23,751) $ 22,119 $ 17,464
Adjustments to reconcile net earnings (loss) to net cash provided by
(used for) operating activities -
Extraordinary loss................................................... 5,785 -- --
Conversion expense................................................... 3,256 2,275 --
Depreciation and amortization........................................ 27,734 11,797 1,534
Provision for losses on accounts receivable.......................... 14,623 27,632 1,265
Impairment loss...................................................... 59,000 -- --
Other................................................................ (2,220) (908) 493
Accounts receivable.................................................. (90,887) (76,929) (25,707)
Other current assets................................................. 970 (4,521) (8,409)
Other current liabilities............................................ (6,334) (10,029) 6,879
Income taxes payable................................................. 18,610 (7,758) 3,352
------------ ------------ ----------
Net cash provided by (used for) operating activities............... 6,786 (36,322) (3,129)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (96,247) (37,862) (7,076)
Transfer of restricted cash............................................ -- 16,054 --
Acquisitions, net of cash acquired..................................... (25,417) (128,378) (7,584)
Purchase of minority interest in Ashbourne PLC......................... (25,874) -- --
Proceeds from operations and sale of assets held for sale.............. 36,878 (2,186) --
Proceeds from sale and leaseback of property and equipment............. 105,534 -- --
Other assets expenditures.............................................. (22,648) (3,507) (3,340)
------------ ------------ ----------
Net cash used for investing activities............................. (27,774) (155,879) (18,000)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings.............................................. 185,299 145,055 11,065
Long-term debt repayments.............................................. (115,730) (88,163) (8,555)
Transfer of restricted cash............................................ -- 667 --
Repurchase of 11 3/4% Senior Subordinated Notes due 2002............... (89,370) -- --
Conversion of Mediplex 6 1/2% Convertible Subordinated Debentures due
2003.................................................................. (16,859) (10,681) --
Net proceeds from issuance of common stock............................. 2,976 216,608 46,838
Purchase and retirement of common stock................................ -- -- (8,020)
Other financing activities............................................. (1,429) -- --
Distribution of prior S corporation earnings........................... (333) (8,889) (5,271)
------------ ------------ ----------
Net cash provided by (used for) financing activities............... (35,446) 254,597 36,057
------------ ------------ ----------
Effect of exchange rate on cash and cash equivalents..................... 798 -- --
------------ ------------ ----------
Net increase (decrease) in cash and cash equivalents..................... (55,636) 62,396 14,928
------------ ------------ ----------
Cash and cash equivalents at beginning of year........................... 78,738 16,342 1,414
------------ ------------ ----------
Cash and cash equivalents at end of year................................. $ 23,102 $ 78,738 $ 16,342
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
---------- ----------- -------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at December 31, 1992............ 5,999,563 $ 79 $ 711 $ 7,442 -- $ 8,232
Increase in common stock outstanding in
connection with the formation of Sun
Healthcare Group, Inc., including
540,000 shares issued to the minority
stockholder of Sunrise................. 8,979,000 69 7,308 -- -- 7,377
Reclassification of retained earnings as
additional paid-in capital to reflect
the change in tax status of Turner and
Sundance............................... -- -- 7,927 (7,927) -- --
Common stock offerings.................. 5,750,423 58 46,780 -- -- 46,838
Common stock issued in connection with
the Honorcare acquisition.............. 590,909 6 6,494 -- -- 6,500
Repurchase and retirement of common
stock.................................. (540,000) (5) (8,015) -- -- (8,020)
Issuance of common stock for employee
benefits............................... 285,919 3 392 -- -- 395
Distribution of prior S corporation
earnings............................... -- -- (3,900) (4,525) -- (8,425)
Net earnings............................ -- -- -- 17,464 -- 17,464
---------- ----- -------------- ----------- ----------- ---------
Balance at December 31, 1993............ 21,065,814 210 57,697 12,454 -- 70,361
---------- ----- -------------- ----------- ----------- ---------
Distribution of prior S corporation
earnings............................... -- -- 218 (5,954) -- (5,736)
Reclassification of retained earnings as
additional paid-in capital to reflect
change in tax status of CareerStaff.... -- -- 454 (454) -- --
Common stock offerings.................. 10,662,020 107 205,402 -- -- 205,509
Common stock issued pursuant to the
Mediplex merger and related
transactions........................... 11,249,544 112 213,629 -- -- 213,741
Common stock issued in connection with
other acquisitions..................... 14,186 -- 150 -- -- 150
Additional consideration recorded for
the excess of the fair value over the
exercise price of the Mediplex stock
options assumed in connection with the
merger................................. -- -- 14,473 -- -- 14,473
Issuance of common stock for employee
benefits............................... 1,051,519 11 11,088 -- -- 11,099
Conversion of 6 1/2% Convertible
Subordinated Debentures due 2003....... 978,136 10 18,503 -- -- 18,513
Cumulative translation adjustment....... -- -- -- -- 220 220
Net earnings (as restated).............. -- -- -- 22,119 -- 22,119
---------- ----- -------------- ----------- ----------- ---------
Balance at December 31, 1994 (as
restated).............................. 45,021,219 450 521,614 28,165 220 550,449
---------- ----- -------------- ----------- ----------- ---------
Distribution of prior S corporation
earnings............................... -- -- -- (333) -- (333)
Reclassification of retained earnings as
additional paid-in capital to reflect
the change in tax status of Golden
Care, Inc.............................. -- -- 3,908 (3,908) -- --
Common stock issued in connection with
immaterial poolings.................... 690,296 7 174 604 -- 785
Common stock issued in connection with
other acquisitions..................... 338,768 3 8,231 -- -- 8,234
Additional consideration recorded for
the fair value of warrants issued in
connection with the Columbia
acquisition............................ -- -- 1,095 -- -- 1,095
Issuance of common stock for employee
benefits............................... 283,179 3 2,973 -- -- 2,976
Conversion of 6 1/2% Convertible
Subordinated Debentures due 2003....... 1,582,905 16 30,059 -- -- 30,075
Cumulative translation adjustment....... -- -- -- -- (488) (488)
Net loss (as restated).................. -- -- -- (23,751) -- (23,751)
---------- ----- -------------- ----------- ----------- ---------
Balance at December 31, 1995............ 47,916,367 $ 479 $ 568,054 $ 777 $ (268) $ 569,042
---------- ----- -------------- ----------- ----------- ---------
---------- ----- -------------- ----------- ----------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF PRESENTATION
Sun Healthcare Group, Inc. ("the Company" or "Sun") was formed on April 15,
1993, as a holding company to combine, under the control of a single
corporation, the operations of Sunrise Healthcare Corporation ("Sunrise"),
Turner Enterprises, Inc. ("Turner"), Sundance Rehabilitation Corporation
("Sundance"), and Sunscript Pharmacy Corporation ("Sunscript"), which were under
the majority control of a single stockholder. Effective January 1, 1994, Turner
was merged into Sunrise.
During 1993, the stockholders of the Company, except National Medical
Enterprises, Inc., ("NME") entered into an agreement (the "Preincorporation
Agreement") with the Company. The Preincorporation Agreement provided for the
transfer to the Company of the ownership of Sunrise, Turner, Sundance, and
Sunscript in exchange for common shares of the Company. A separate agreement was
entered into among the Company, Sunrise, Turner, Sundance, Sunscript and other
stockholders of these corporations and NME that provided for NME to exchange its
shares of common stock in Sunrise (the only one of these entities in which it
owned stock) for shares of the Company. A total of 9,000,000 common shares of
the Company with $.01 par value were issued in connection with these agreements
to replace the original 21,000 outstanding common shares. The exchange of the
original shares was recorded by the Company at historical book value. A total of
540,000 shares valued at $8,020,000 with a net book value of $643,000 were
repurchased from NME and accounted for at fair market value under the purchase
method of accounting whereby goodwill of $7,377,000 was recorded. In addition,
retained earnings of Turner and Sundance totaling $7,927,000 was reclassified to
additional paid-in capital in connection with the change to C corporation status
(see Notes 9 and 10).
On May 5, 1995, a subsidiary of the Company merged with Golden Care, Inc.
("Golden Care") and on June 21, 1995, a subsidiary of the Company merged with
CareerStaff Unlimited, Inc. ("CareerStaff"). Both transactions were accounted
for as pooling of interests; accordingly, the Company's consolidated financial
statements for all periods presented prior to the combination have been restated
to reflect the combined operations (see Note 4). Certain immaterial poolings
occurred in 1995 for which prior periods financial statements were not restated.
(2) RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the years ended
December 31, 1995 and 1994. The restatement is a result of the Company's further
review and analysis of its fourth quarter of 1995 write-off of certain accounts
receivable acquired in its merger with Mediplex. Based on its review, the
Company has concluded that $23,446,000 of the Mediplex accounts receivable
written off in the fourth quarter of 1995 should have been recognized in the
fourth quarter of 1994 because such accounts receivable were impaired as of that
date or earlier and the fourth quarter of 1994 was the quarter in which the
purchase accounting for the Mediplex acquisition was finalized. Accordingly, the
1995 and 1994 financial statements have been restated to reflect the write-off
of $23,446,000 of
F-5
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
accounts receivable, originally recorded in the fourth quarter of 1995, in the
fourth quarter of 1994. The impact of these adjustments on the Company's results
of operations as originally reported is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------- ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues....................................... $ 1,135,508 $ 1,135,508 $ 673,354 $ 673,354
Earnings (loss) before pro forma income taxes and
extraordinary loss...................................... (10,652) 12,794 60,253 36,807
Pro forma earnings (loss) before extraordinary item...... (35,105) (20,568) 34,098 19,561
Pro forma net earnings (loss)............................ $ (38,518) $ (23,981) $ 34,098 $ 19,561
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Pro forma net earnings (loss) per share:
Primary --
Before extraordinary loss............................ $ (0.74) $ (0.43) $ 1.07 $ 0.61
Extraordinary loss................................... (0.07) (0.07) -- --
------------- ------------- ----------- -----------
Net earnings......................................... $ (0.81) $ (0.50) $ 1.07 $ 0.61
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Fully diluted --
Before extraordinary loss............................ $ (0.74) $ (0.43) $ 1.02 $ 0.61
Extraordinary loss................................... (0.07) (0.07) -- --
------------- ------------- ----------- -----------
Net earnings......................................... $ (0.81) $ (0.50) $ 1.02 $ 0.61
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
</TABLE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(a) NATURE OF BUSINESS
The Company is a provider of long-term, subacute and related specialty
health care services including rehabilitation and respiratory therapy services
and pharmacy services through the Company's and through other nonaffiliated
long-term and subacute facilities located in the United States. The Company also
provides long-term care and pharmacy services in the United Kingdom and
outpatient rehabilitation therapy services in Canada.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its greater than 50% owned subsidiaries that the Company controls.
Investments in affiliates, which are included in other assets, in which the
Company owns 20% to 50% are carried on the equity method. Investments in
companies owned less than 20% are carried at cost. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) CASH EQUIVALENTS
The Company considers all highly liquid, unrestricted investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents are stated at cost.
(d) NET REVENUES
Net revenues consist of patient revenues, contract therapy services
revenues, temporary therapy staffing services revenues and institutional
pharmaceutical services revenues. Net revenues are recognized as services are
provided. Net patient revenues are recorded net of provisions for discount
arrangements with commercial payors and contractual allowances with third party
payors, primarily Medicare and Medicaid. Net revenues realizable under third
party payor agreements are subject to
F-6
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING
POLICIES (CONTINUED)
change due to examination and retroactive adjustment. Estimated third party
payor settlements are recorded in the period the related services are rendered.
Differences between the net amounts accrued and subsequent settlements are
recorded in operations at the time of settlement, of which the majority is
settled in two to three years.
The Company has submitted to the Health Care Financing Administration
("HCFA") various requests for exceptions to the Medicare established routine
cost limitations for reimbursement ("RCLs"). These exceptions are permitted
under the Medicare regulations to allow providers to treat higher acuity
patients. Included in net revenues are amounts related to exceptions to the RCLs
of $8,862,000 and $103,000 for the years ended December 31, 1995 and 1994,
respectively. These amounts are net of adjustments to record management's
estimate of amounts that will ultimately be approved by HCFA. Accounts
receivable include requests for exceptions to the RCLs, including accounts
receivable acquired in the merger with Mediplex, of $11,115,000 and $2,887,000
at December 31, 1995 and 1994, respectively. As of December 31, 1995, the
Company has submitted twenty-six exception requests and has received approval on
eleven exception requests. Amounts realizable are subject to final settlement of
the respective cost reports.
(e) ACCOUNTS RECEIVABLE
The Company receives payment for services rendered from Federal and state
governments under the Medicare and Medicaid programs and private pay payors,
including third party insurers, workers' compensation plans and healthcare
providers. The following table summarizes the percent of accounts receivable by
payor category as of December 31 as restated:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Government..................................................... 51% 57%
Private and other.............................................. 49 43
--- ---
100% 100%
--- ---
--- ---
</TABLE>
Management does not believe that there are any credit risks associated with
receivables from governmental agencies. Private and other receivables consist of
receivables from a large number of payors involved in diverse activities and
subject to differing economic conditions, which do not represent any
concentrated credit risks to the Company.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals or improvements
are capitalized, whereas ordinary maintenance and repairs are expensed as
incurred. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets as follows: buildings and
improvements -- 5 to 40 years; leasehold improvements -- the shorter of the
estimated useful lives of the assets or the life of the lease; equipment -- 3 to
15 years.
The Company capitalizes certain costs associated with developing and
acquiring health care facilities and related outpatient programs. Capitalized
costs include direct incremental investigation, negotiation, development,
acquisition and preconstruction costs; indirect and general expenses related to
such activities are expensed as incurred. Preconstruction costs include the
direct costs of securing control of the development site, obtaining the
requisite certificate of need and other approvals, as well as the direct costs
of preparing for actual development and construction. The capitalized costs are
transferred to construction in progress and depreciable asset categories as
construction is begun and completed, respectively. The Company capitalizes
interest directly related to the development and construction of new facilities
as a cost of the related asset.
F-7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING
POLICIES (CONTINUED)
(g) ASSETS HELD FOR SALE
Assets held for sale represent the assets of four psychiatric facilities,
four substance abuse treatment facilities, certain outpatient clinics and three
transitional living facilities acquired in connection with the Company's merger
with Mediplex which, excluding a closed substance abuse facility and a
transitional living facility, were sold during 1995 (see Notes 4 and 6).
(h) GOODWILL/IMPAIRMENT LOSS
The excess of the purchase price over the fair value of the net assets of
the businesses acquired by the Company is amortized using the straight-line
method over periods ranging from 20 to 40 years. Accumulated amortization of
such costs was $18,721,000, $6,291,000 and $437,000 as of December 31, 1995,
1994 and 1993, respectively.
The Company periodically evaluates the carrying value of goodwill along with
any other related long-lived assets in relation to the future undiscounted cash
flows of the underlying businesses to assess recoverability. The Company adopted
Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
on December 31, 1995. Under SFAS 121, an impairment loss is recognized if the
sum of the expected long-term cash flows is less than the carrying amount of the
goodwill and other assets being evaluated. The difference between the carrying
amount of the goodwill and other assets being evaluated and the estimated fair
market value of the assets represents the impairment loss. The Company
determines fair value using certain multiples of earnings before interest,
taxes, depreciation and amortization based on current prices for comparable
assets. The impairment loss, as determined by SFAS 121, of $59,000,000 recorded
by the Company primarily relates to the goodwill associated with six of the
forty facilities acquired in the merger with Mediplex. The impairment loss at
these six facilities was the result of the following circumstances: (i) three
facilities were organized by the Service Employees International Union
subsequent to the acquisition resulting in significantly higher labor costs;
(ii) two facilities experienced significant declines in private pay census and
revenues due to, in one instance, funding reductions in certain programs
providing private pay patients and, in the other instance, the opening of two
new facilities by competitors; and (iii) the remaining facility received lower
than expected Medicaid rates from the State of Connecticut and due to the high
acuity of the patients treated at the facility, reimbursement was not adequate.
If the Company had not elected early adoption of SFAS 121, the impairment loss
would have been based solely on the difference between the assets carrying value
and cumulative long-term cash flows which would have resulted in a loss of
$48,900,000. The operations of the impaired facilities are not material to the
consolidated earnings or cash flows of the Company, and therefore, management
does not expect future operating results of the impaired facilities to have a
material adverse effect on the Company's results of operations or financial
condition. However, the impaired facilities are experiencing marginal or
negative cash flows. As they are leased under long-term operating leases, the
Company expects that this trend will continue until it can implement measures to
turn around their performance or to dispose of the facilities.
(i) OTHER ASSETS
Costs incurred in obtaining debt financing are amortized as interest expense
over the terms of the related indebtedness. The Company amortizes preopening
costs (start-up costs related to new facilities, specialty units within a
facility, new rehabilitation regions and pharmacies) over a period ranging from
one year (for costs not reimbursed by third party payors) to five years (for
costs reimbursed by third party payors, including the Medicare and Medicaid
programs).
F-8
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING
POLICIES (CONTINUED)
(j) WORKERS' COMPENSATION INSURANCE
Workers' compensation coverage is effected through self-insurance or
retrospective and high deductible insurance policies and other hybrid policies
which vary by the states in which the Company operates. Provisions for estimated
settlements are provided in the period of the related coverage. Differences
between the amounts accrued and subsequent settlements are recorded in
operations in the year of settlement.
(k) INCOME TAXES
Income tax expense (benefit) is based on reported earnings before income
taxes. Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes.
Prior to converting to C corporations, Turner, Sundance, CareerStaff and
Golden Care had elected S corporation status whereby income taxes are paid by
the stockholders rather than by the entities. Accordingly, there is no provision
for income taxes in the financial statements for these entities to the extent
such income or loss was includable by the stockholders in their personal income
tax returns (see Note 10).
(l) FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the accumulated foreign currency translation adjustment account in stockholders'
equity.
(m) STRIKE AND INVESTIGATION AND LITIGATION COSTS
During the fourth quarter of 1995, the Company recorded charges and expenses
of $4,006,000 related to averting a strike and negotiating new contracts for
certain unionized nursing homes in Connecticut. The Company also recorded
charges and expenses of $5,505,000 related to monitoring and responding to the
continuing investigation by the U.S. Department of Health and Human Services'
Office of the Inspector General ("OIG") and legal fees resulting from
shareholder litigation (see Note 16). The litigation charge also includes costs
incurred by the Company in its intended debt offering which was aborted due to
the negative publicity resulting from the OIG investigation. The negative
publicity prevented the Company from obtaining an acceptable interest rate.
(n) FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in the 1994 and 1993 consolidated financial statements and
notes have been reclassified to conform to the 1995 presentation.
(4) ACQUISITIONS
On June 21, 1995, a wholly-owned subsidiary of the Company merged with and
into CareerStaff. CareerStaff provides temporary staffing of physical,
occupational, and speech therapists to the health care industry. Under the terms
of the merger agreement, the Company issued 6,080,600 shares of its
F-9
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS (CONTINUED)
common stock in exchange for all the outstanding common stock of CareerStaff.
The merger was accounted for as a pooling of interests, and accordingly, the
Company's financial statements have been restated to include the accounts and
operations of CareerStaff for periods prior to the merger.
On May 5, 1995, a wholly-owned subsidiary of the Company merged with and
into Golden Care. Golden Care provides respiratory therapy services to long-term
and subacute care facilities. Under the terms of the merger agreement, the
Company issued 2,106,904 shares of its common stock in exchange for all of the
outstanding common stock of Golden Care. In connection with the merger, Golden
Care terminated its S corporation status and recorded a deferred income tax
provision of $1,487,000. The merger was accounted for as a pooling of interests,
and accordingly, the Company's financial statements have been restated to
include the accounts and operations of Golden Care for periods prior to the
merger.
In connection with the mergers of the Company with CareerStaff and Golden
Care, the Company recognized $5,800,000 of merger costs. These costs include
transaction costs and advisory fees and transitional costs related to
consolidating operations.
Separate results of the combining entities for periods prior to combination
are as follows, except as described in Note (1) (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 (1) 1994 1993
------------- ----------- -----------
<S> <C> <C> <C>
AS RESTATED
--------------------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Net Revenues:
Sun.......................................................... $ 1,086,985 $ 603,337 $ 191,495
CareerStaff.................................................. 45,116 55,258 27,180
Golden Care.................................................. 4,022 14,759 12,140
Less: Intercompany revenues.................................. (615) -- --
------------- ----------- -----------
$ 1,135,508 $ 673,354 $ 230,815
------------- ----------- -----------
------------- ----------- -----------
Net Earnings (Loss):
Sun.......................................................... $ (26,644) $ 13,859 $ 10,428
CareerStaff.................................................. 2,319 3,881 1,065
Golden Care.................................................. 574 4,379 5,971
------------- ----------- -----------
$ (23,751) $ 22,119 $ 17,464
------------- ----------- -----------
------------- ----------- -----------
Pro Forma Net Earnings (Loss) (see Note 9):
Sun.......................................................... $ (26,644) $ 13,859 $ 9,168
CareerStaff.................................................. 2,319 3,094 659
Golden Care.................................................. 344 2,608 3,636
------------- ----------- -----------
$ (23,981) $ 19,561 $ 13,463
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
- ------------------------
(1) Sun results for the twelve months ended December 31, 1995 include the
results of CareerStaff and Golden Care and the elimination of the
intercompany revenues for the period following the consummation of each of
the mergers.
F-10
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS (CONTINUED)
In May and June of 1995, the Company acquired a total minority interest of
20% in Ashbourne PLC, an operator of nursing homes in the United Kingdom, for
$25,874,000. On the date of acquisition, the Company's investment exceeded the
underlying equity in net assets by approximately $13,700,000.
On November 30, 1995, the Company acquired 75% of the common stock of
Columbia Health Care, Inc. ("Columbia") stock for $8,500,000. The Company has
agreed to purchase the remaining shares in three to five years based on a
multiple of Columbia's earnings. In addition, the Company issued warrants to
purchase 500,000 shares of the Company's common stock with an exercise price of
$15.375 per share to former owners of Columbia which had a value of $1,095,000
at the date of acquisition. As of December 31, 1995, the warrants were
exercisable and expire in approximately four years. The Columbia acquisition was
accounted for as a purchase. The effects of the Ashbourne PLC and the Columbia
acquisitions, individually and in the aggregate, are immaterial to the results
of the Company, and therefore pro forma information is not provided.
On June 23, 1994, the Company, through a wholly-owned subsidiary, acquired
by merger all of the outstanding capital stock of Mediplex, which as of June 23,
1994 provided long-term and subacute health care services to patients through 36
inpatient facilities, six ambulatory surgery centers and related outpatient
programs. Pursuant to the merger, the Company issued 11,249,544 shares of the
Company's common stock and paid approximately $106,482,000 in cash to the
stockholders of Mediplex. The merger was accounted for as a purchase and
accordingly, the results of Mediplex's operations have been included in the
Company's consolidated financial statements from the date of acquisition. The
fair market value of assets acquired, including goodwill of $426,542,000, was
$761,548,000 and liabilities assumed totaled $397,560,000.
Concurrent with the execution of the Mediplex merger agreement between the
Company and Mediplex, the Company entered into a restructuring agreement (the
"Meditrust Restructuring") with Meditrust, a health care real estate investment
trust that is Mediplex's principal landlord and lender, to obtain the consent of
Meditrust to the Mediplex merger as required under the terms of the existing
leases and mortgages between Mediplex and Meditrust. Pursuant to the Meditrust
Restructuring, the Company entered into a guaranty agreement relating to all
leases and loans with Meditrust, restructured the terms of all existing leases
and entered into new leases for certain facilities, restructured certain
Mediplex debt arrangements, purchased three facilities for $115,000,000 of which
$41,000,000 was paid in cash and $74,000,000 was financed through mortgages,
received $11,000,000 pursuant to a mortgage entered into on a rehabilitation
hospital and received $41,570,000 through four sale leaseback transactions.
Also, concurrent with the Mediplex merger, certain Mediplex assets were sold to
and certain Mediplex liabilities were assumed by the former Chairman of the
Board, Chief Executive Officer and principal stockholder of Mediplex. The
consideration received by the Company for these assets was $23,486,000 in cash
and 1,137,683 shares of the Company's common stock. These related transactions
were included in the purchase accounting for the Mediplex merger.
As a result of the Mediplex merger, the Company acquired four psychiatric
facilities, four substance abuse treatment facilities, certain outpatient
clinics and three transitional living facilities, including three former
substance abuse or psychiatric care facilities which had been closed by Mediplex
in 1992 and 1993 (See Note 6). In recent years, these facilities have
experienced declines in revenues and occupancy rates. In addition, certain of
these facilities are not in geographic areas consistent with the Company's
regional management structure. In view of the operating trends and the Company's
desire to focus on its primary lines of business, management decided to dispose
of these facilities and units and developed a plan of disposition, which was
approved by the Board of Directors in the third quarter of 1994. Accordingly, in
connection with the Mediplex merger, these assets were
F-11
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACQUISITIONS (CONTINUED)
recorded at their estimated net realizable value and additional goodwill of
approximately $16,000,000 has been recorded to provide for the estimated costs
related to the disposal and operating results during the holding period.
On September 2, 1994, the Company, through its wholly owned subsidiary, Sun
Healthcare Group International Ltd. ("SHGI"), acquired for approximately
$12,400,000, a 68% interest in Exceler Health Care Group PLC ("Exceler"), an
English corporation that at December 31, 1995 operated 28 nursing homes with
1,437 registered beds throughout the United Kingdom. Simultaneously, Exceler
acquired all of the outstanding shares of Forest Health Care Limited ("Forest")
for approximately $7,100,000. The acquisition was accounted for by the purchase
method of accounting. The sellers of Forest received an additional $2,400,000
during 1995 as required under the terms of the purchase agreement. In February
1995, the Company purchased the remaining 32% interest in Exceler for
approximately $4,700,000 in cash and deferred purchase payments if certain
earnings targets for Exceler are achieved, of which $474,000 was paid in 1995,
and up to L700,000 ($1,085,000 as of December 31, 1995) is payable on September
30, 1996. Amounts paid pursuant to the terms of the purchase agreement will be
recorded as additional costs in excess of the net assets of the acquired
companies.
In July 1993, the Company acquired Honorcare, which at the date of
acquisition, operated 14 long-term care facilities. The purchase consideration
was payable in $6,500,000 cash and 590,909 shares of common stock of the Company
valued at $6,500,000. This acquisition was accounted for under the purchase
method of accounting and resulted in goodwill of $13,000,000. Seven of these
long-term care facilities were operated under management agreements which the
Company converted to operating leases after the acquisition during 1993 and
1994, for consideration of a $672,000 note payable from the Company and the
Company's assumption of assets and liabilities of certain of these facilities.
The following unaudited pro forma condensed consolidated statements of
earnings present the summarized consolidated results of operations of the
Company after giving effect to the acquisition of Mediplex for the year ended
December 31, 1994, as if such acquisition had been consummated on January 1,
1994 as restated (in thousands, except per share data):
<TABLE>
<S> <C>
Total net revenues....................................................... $ 846,500
Total costs and expenses................................................. 801,165
---------
Earnings before income taxes............................................. 45,335
Pro forma income taxes................................................... 21,397
---------
Pro forma net earnings................................................... $ 23,938
---------
---------
Pro forma net earnings per common and common equivalent share............ $ .60
---------
---------
</TABLE>
The pro forma results are presented for informational purposes only and are
not necessarily indicative of what results of operations actually would have
been had such acquisitions been consummated at the beginning of such period or
of future operations or results. The effects of the other acquisitions are
immaterial.
F-12
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land.......................................................................... $ 12,358 $ 14,042
Buildings and improvements.................................................... 79,868 93,021
Leasehold improvements........................................................ 33,433 14,395
Equipment..................................................................... 55,031 35,678
Construction in progress...................................................... 37,353 47,116
----------- -----------
Total..................................................................... 218,043 204,252
Less accumulated depreciation and amortization................................ (16,911) (6,845)
----------- -----------
Total property and equipment, net......................................... $ 201,132 $ 197,407
----------- -----------
----------- -----------
</TABLE>
On September 30, 1995, under five sale and leaseback agreements, the Company
sold five of its long-term and subacute care facilities for $69,988,000 and
leased them back under ten year leases. Also in 1995, under sale and leaseback
agreements, the Company, through its United Kingdom subsidiary, sold fifteen of
its long-term care facilities for $35,546,000 and leased them back under a
twelve year lease. These transactions produced no material gain or loss.
(6) ASSETS HELD FOR SALE
As discussed in Notes 2 and 3, as a result of the Mediplex merger, the
Company acquired certain facilities providing psychiatric, substance abuse and
transitional living services. On September 30, 1995, the Company completed the
sale of five of the operating psychiatric care and substance abuse treatment
facilities and all of the related outpatient facilities for a sales price of
$39,900,000 consisting of cash and the assumption of indebtedness secured by one
of the facilities. As part of the sale, the Company provided a five-year
$12,500,000 working capital line of credit to the buyer, which is secured by the
accounts receivable of the facilities sold and is restricted to a borrowing base
determined by the amount of accounts receivable of the facilities. Under the
terms of the working capital line of credit, principal is due in full on
September 30, 2000 and interest accrues at either LIBOR plus 2.5% or Prime plus
1.5%. As of December 31, 1995, $12,500,000 had been advanced on the working
capital line of credit. The Company also subleased two other operating
transitional living facilities and sold the working capital of these facilities
to the current administrator of one of these facilities, who has assumed
responsibility for approximately 60% of the Company's obligations under the
present leases and will pay the Company a total of $13,400,000 over the term of
such leases. On May 17, 1995 and August 2, 1995, the Company completed the sale
of two of the closed facilities for $2,000,000 and $2,500,000, respectively. As
a result of the terms of the sales, the Company has retained net liabilities
totaling approximately $10,200,000 and long-term liabilities of approximately
$8,600,000 which, as of December 31, 1995, have been reclassified from Assets
Held for Sale, net to the natural classifications on the balance sheet. As of
December 31, 1995, the Company continues to lease a transitional living facility
which will be purchased and then sold in 1996, and the Company owns an interest
in a substance abuse facility which was closed in 1992.
F-13
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) ASSETS HELD FOR SALE (CONTINUED)
The results of operations of these facilities including the gain on the sale
of certain facilities, were as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD JUNE 24,
YEAR ENDED 1994 THROUGH
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -------------------
<S> <C> <C>
Net revenues.................................................... $ 63,236 $ 38,281
-------- --------
-------- --------
Loss from operations before income taxes........................ 3,527 1,936
Income tax benefit.............................................. 1,425 762
-------- --------
Loss from assets held for sale.................................. $ 2,102 $ 1,174
-------- --------
-------- --------
</TABLE>
(7) LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revolving Line of Credit (see below).................................................... $ 177,600 $ --
Convertible Subordinated Debentures due 2004, interest at 6% per annum.................. 83,300 83,300
Convertible Subordinated Debentures due 2003, interest at 6 1/2% per annum, includes
unamortized premium of $3,142 and $10,793 as of December 31, 1995 and 1994,
respectively........................................................................... 25,566 72,666
Senior Subordinated Notes due 2002, interest at 11 3/4% per annum, includes unamortized
premium of $131 and $5,353 as of December 31, 1995 and 1994, respectively.............. 6,292 90,333
Mortgage notes payable due at various dates through 2005, interest at rates from 10.5%
to 14.0%, collateralized by various facilities......................................... 35,375 113,332
Mortgage notes payable due in pound sterling and at various dates through 2017, interest
at 2.5% to 4% plus the FHBR rate ("Finance House Base Rate"), collateralized by various
facilities in the United Kingdom....................................................... 10,332 19,908
Industrial Revenue Bonds due 2015, interest rate at 5.5% as of December 31, 1994,
collateralized by a psychiatric hospital............................................... -- 8,920
Industrial Revenue Bonds due 2016, interest rate at 10.25% as of December 31, 1995,
collateralized by a rehabilitation hospital............................................ 4,060 4,165
Notes payable to a bank due 1996, payable in pound sterling with interest at a rate of
3% plus the FHBR rate, collateralized by the assets of various facilities.............. 4,582 11,153
Notes payable to a bank due 1998, interest at prime rate less .25%, collateralized by
the assets of the ambulatory surgery centers........................................... 5,096 6,741
Obligations under capital lease agreements, imputed interest at rates ranging from 5.4%
to 11.5%; due through 1999, collateralized by leased equipment......................... 2,937 2,104
Other long-term debt.................................................................... 3,737 4,286
----------- -----------
Total long-term debt.................................................................... 358,877 416,908
Less current portion.................................................................... (10,417) (18,374)
----------- -----------
Long-term debt, net of current portion.................................................. $ 348,460 $ 398,534
----------- -----------
----------- -----------
</TABLE>
F-14
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LONG-TERM DEBT (CONTINUED)
Annual maturities for the next five years at December 31, 1995, are as
follows (in thousands):
<TABLE>
<S> <C>
1996..................................................... $ 10,417
1997..................................................... 7,915
1998..................................................... 5,200
1999..................................................... 1,747
2000..................................................... 179,219
Thereafter............................................... 154,379
---------
$ 358,877
---------
---------
</TABLE>
In July 1995, the Company entered into a Third Amended and Restated Credit
Agreement (the "Credit Facility") with NationsBank of Texas, N.A. as
administrative lender. The Credit Facility provides up to $315,000,000 in a
revolving line of credit and letters of credit. The Credit Facility expires on
July 21, 2000 and is collateralized by a pledge of all stock of the Company's
subsidiaries. Borrowings bear interest at either the prevailing prime rate or
the LIBOR rate plus 0.5% to 1.5% depending on the Company's consolidated debt to
cash flow ratio. The Credit Facility, among other things, (i) requires the
Company to maintain certain financial ratios, (ii) restricts the Company's
ability to incur debt and liens, make investments, liquidate or dispose of
assets, merge with another corporation, create or acquire subsidiaries, and make
acquisitions, and (iii) restricts the payment of dividends, the acquisition of
treasury stock and the prepayment or modification of certain debt of the
Company. Because of the temporary use of the proceeds from the Company's public
offering of its common stock in December 1994 to reduce borrowings pending
completion of the tender offer, there were no outstanding borrowings under the
former Credit Facility as of December 31, 1994. The Company had $177,600,000 of
outstanding borrowings and $22,165,000 of outstanding standby letters of credit
under the Credit Facility at December 31, 1995.
On March 1, 1994, the Company issued $83,300,000 aggregate principal amount
of 6% Convertible Subordinated Debentures due 2004 (the "6% Debentures") which
are convertible into shares of the Company's common stock at a conversion price
of $21.84 per share, subject to adjustment under certain conditions. The Company
received net proceeds of approximately $80,600,000 from the offering. Part of
the net proceeds was used to pay a portion of the cash consideration of the
Mediplex merger. The 6% Debentures are redeemable by the Company at par, in
whole or in part, after March 1, 1997.
Holders of the 6 1/2% Convertible Subordinated Debentures due 2003 (the
"6 1/2% Debentures") are entitled under the indenture to receive the Mediplex
merger consideration in respect of each share of Mediplex common stock into
which the 6 1/2% Debentures would have been convertible at the time of the
Mediplex merger. The Company has agreed to be a co-obligor of the 6 1/2%
Debentures. In January 1995, $39,449,000 of the 6 1/2% Debentures were
converted. Pursuant to the conversion terms under the indenture, the Company
paid $13,603,000 and issued 1,582,905 shares of the Company's common stock to
the converting holder. In addition, the Company paid accrued interest plus a
conversion fee of $3,256,000 to the converting holder, which was expensed in the
first quarter of 1995, to induce conversion. In August 1994, $24,377,000 of the
6 1/2% Debentures were converted into 978,136 shares of the Company's common
stock. Pursuant to the conversion terms under the indentures, the Company paid
$8,406,000 to the converting holder. In addition, the Company paid accrued
interest plus a conversion fee of $2,275,000 to the converting holder to induce
conversion, which was expensed in the third quarter of 1994. Conversion of the
remaining $22,424,000 of outstanding 6 1/2%
F-15
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) LONG-TERM DEBT (CONTINUED)
Debentures would require the issuance of an additional 899,771 shares of the
Company's common stock and a payment of $7,732,000 in cash pursuant to the
conversion terms under the indenture relating to the 6 1/2% Debentures.
In January 1995, the Company completed a tender offer for $78,698,000 of the
11 3/4% Senior Subordinated Notes due 2002 (the "11 3/4% Notes") at a price of
$1,120 per $1,000 of principal amount of the notes. The Company recorded an
extraordinary loss, net of related tax benefits, of $3,413,000 as a result of
the extinguishment of such debt. Concurrent with the tender offer, the Company
deleted by amendment certain covenants contained in the original indenture that
restricted the Company from fully integrating Mediplex into its operations. In
addition, the amendments modified certain provisions relating to mergers and
consolidations and events of default. In conjunction with the amendments, the
Company became a co-obligor on the 11 3/4% Notes.
The Company has $33,135,000 of mortgages with Meditrust as of December 31,
1995, which contain less restrictive covenants than in the Credit Facility and
which include cross default provisions with all of such mortgages and leases
also financed by Meditrust. The Company also is the obligor on an outstanding
letter of credit with a bank of $4,028,000 as of December 31, 1995 to guarantee
outstanding debt obligations of $3,955,000 as of December 31, 1995 for a
partnership through which the Company acquired a 50% interest. The partnership
owns a long-term care facility which is leased to a third party operator.
In connection with the Mediplex merger, the Company acquired, through
Mediplex, an interest rate hedge swap agreement with a commercial bank, having a
total notional principal amount of $100,000,000 and expiring in 1999. This
agreement called for the payment of variable rate interest by the Company in
return for the assumption by the other contracting party of a fixed rate cost.
For the period beginning June 23, 1994 and ending June 30, 1995, the Company
received a fixed rate of interest of 6.60% and paid interest at the 90 day LIBOR
rate (5.0% for the three months ended October 14, 1994, 5.625% for the three
months ended January 17, 1995, and 6.25% for the three months ended April 12,
1995 and for the period ended June 30, 1995). The Company terminated the
transaction on June 30, 1995 and received cash proceeds of $1,680,000 in
connection with such termination. The resulting gain is being amortized over the
original hedge period as an adjustment to interest expense.
(8) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company has various non-cancelable operating leases for facilities with
initial lease terms generally ranging from 6 to 20 years and renewal options of
5 to 40 years. Certain of the lease agreements provide for payment escalations
coincident with increases in certain economic indices.
Future minimum lease payments under non-cancelable operating leases at
December 31, 1995, are as follows (in thousands):
<TABLE>
<S> <C>
1996..................................................... $ 75,039
1997..................................................... 76,432
1998..................................................... 76,331
1999..................................................... 77,252
2000..................................................... 77,798
Thereafter............................................... 414,587
---------
$ 797,439
---------
---------
</TABLE>
F-16
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Several leases contain contingent rental provisions based on operating
results. Rent expense totaled $73,727,000, $43,626,000 and $15,578,000 in 1995,
1994 and 1993, respectively, including contingent rentals of approximately
$182,000, $254,000 and $101,000 during 1995, 1994 and 1993, respectively.
The Company leases or subleases 52 facilities from affiliates of two
directors of the Company as of December 31, 1995, which is included in the
information above. The aggregate lease expense for these facilities was
approximately $13,800,000, $12,800,000 and $8,300,000 in 1995, 1994 and 1993,
respectively. Future minimum lease commitments related to these facilities total
approximately $137,600,000 at December 31, 1995. The Company's management
believes the terms of all of the foregoing leases are as favorable to the
Company as those that could have been obtained from nonrelated parties.
(b) CONSTRUCTION COMMITMENTS
The Company has capital expenditure commitments, as of December 31, 1995,
under various contracts, including approximately $18,500,000 of contracts in the
United States and L14,700,000 ($22,700,000 as of December 31, 1995) of contracts
in the United Kingdom, including the construction and completion of one and ten
new long-term and subacute care facilities in the United States and United
Kingdom, respectively. The $8,132,000 classified as long-term restricted cash as
of December 31, 1995, has been set aside to fund the completion of a portion of
these projects.
(c) LITIGATION
The Company is a party to various legal actions and administrative
proceedings and subject to various claims arising in the ordinary course of
business. The Company does not believe that the ultimate disposition of these
matters will have a material adverse effect on the financial position or results
of operations of the Company (see Notes 3 and 16).
(9) INCOME TAXES
Income tax expense (benefit) on earnings (loss) before extraordinary loss
consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
AS RESTATED
--------------------
Current:
Federal............................................................. $ (212) $ 16,829 $ 1,916
State............................................................... (102) 3,362 632
--------- --------- ---------
(314) 20,191 2,548
--------- --------- ---------
Deferred:
Federal............................................................. 27,744 (4,894) 2,368
State............................................................... 5,702 (609) 330
--------- --------- ---------
33,446 (5,503) 2,698
--------- --------- ---------
Total............................................................. $ 33,132 $ 14,688 $ 5,246
--------- --------- ---------
--------- --------- ---------
</TABLE>
Foreign income taxes were immaterial.
F-17
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
Actual tax expense (benefit) differs from the "expected" tax expense
(benefit) on earnings (loss) before extraordinary loss, computed by applying the
U.S. Federal corporate income tax rate of 35% in 1995 and 1994, and 34% in 1993,
to pretax net earnings (loss) of the Company as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
AS RESTATED
--------------------
Computed "expected" tax expense (benefit)............................ $ 4,478 $ 12,882 $ 7,721
Adjustments in income taxes resulting from:
Amortization of goodwill........................................... 3,235 1,492 --
Impairment loss.................................................... 15,452 -- --
Increase in valuation allowance.................................... 3,038 -- --
Conversion fee..................................................... 1,139 796 --
Merger expenses.................................................... 1,199 -- --
S corporation earnings not taxable to the Company (at Federal
rates)............................................................ (230) (2,251) (3,863)
State income tax expense, net of Federal income tax benefit........ 3,332 1,730 635
Recognition of deferred income taxes for former S corporations..... 1,487 -- 638
Other.............................................................. 2 39 115
--------- --------- ---------
$ 33,132 $ 14,688 $ 5,246
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
AS RESTATED
-----------
Deferred tax assets:
Provision for losses on accounts receivable........................................ $ 14,851 $ 13,977
Accrued liabilities................................................................ 8,788 6,975
Property and equipment............................................................. 10,650 27,064
Intangible assets.................................................................. 8,190 20,105
Carryforward of deductions limited by Internal Revenue Code Section 382............ 6,380 6,250
Long-term debt premium............................................................. 51 2,085
Write-down of assets held for sale and reserve for estimated costs of disposal and
future operating losses........................................................... 7,989 14,511
Deferred income.................................................................... 2,771 --
Alternative minimum tax credit..................................................... 899 --
Other.............................................................................. 212 --
---------- -----------
Total gross deferred tax asset..................................................... 60,781 90,967
Less valuation allowance:
Federal........................................................................ (18,526) (16,006)
State.......................................................................... (2,512) (1,994)
---------- -----------
Total valuation allowance........................................................ (21,038) (18,000)
Deferred tax asset................................................................... 39,743 72,967
---------- -----------
Deferred tax liabilities:
Golden Care change in its method of accounting for income taxes from cash to
accrual basis..................................................................... (1,109) --
Revenues related to third party settlements........................................ -- (2,326)
Property and equipment attributable to United Kingdom operations................... (2,634) (4,362)
---------- -----------
Total gross deferred tax liability................................................... (3,743) (6,688)
---------- -----------
Deferred tax asset, net.............................................................. $ 36,000 $ 66,279
---------- -----------
---------- -----------
</TABLE>
$18,000,000 of the valuation allowance was recorded in connection with
deferred tax assets acquired in the Mediplex merger. Accordingly, any tax
benefits recognized in future periods attributable to this portion of the
valuation allowance will be allocated to reduce goodwill. The $3,038,000
increase in the valuation allowance relates to uncertainties in the realization
of tax deductible intangibles included in the impairment loss (see Note 3(H)).
Sundance entered into an agreement with its majority stockholder effective
May 5, 1993, whereby Sundance agreed to change its method of accounting for
income tax purposes from the cash basis to the accrual basis pending approval by
the Internal Revenue Service (IRS). In connection therewith, Sundance approved
future distributions to the majority stockholder out of its prior accumulated S
corporation earnings in an amount sufficient to cover certain of his tax
obligations, which the Company estimated would be approximately $3,900,000 and
which was charged to additional paid-in capital in 1993. In 1994, the Company
determined that the obligation under this agreement was $3,682,000 and the
difference of $218,000 was included as an adjustment to additional paid-in
capital in 1994. Such distributions totaled $2,936,000 and $746,000 during 1994
and 1993, respectively.
F-19
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
Upon merging with the Company on May 5, 1995, Golden Care terminated its S
Corporation status for Federal and state income tax purposes. In connection with
this termination, the Company recorded a deferred income tax provision and
liability of $1,487,000.
(10) PRO FORMA INCOME TAXES -- (UNAUDITED)
For financial reporting purposes, a pro forma provision for income taxes has
been reflected in the consolidated statements of earnings to present taxes on
the results of operations of Turner and Sundance for the period from January 1,
1993 to April 15, 1993, CareerStaff for the period from January 1, 1994 through
June 22, 1994 and the year ended December 31, 1993, and Golden Care for the
period January 1, 1995 through May 5, 1995 and for the years ended December 31,
1994 and 1993 on the basis that is required upon their change in tax status from
S corporation to C corporation. These amounts ($230,000, $2,558,000 and
$4,001,000 in 1995, 1994 and 1993, respectively) are equal to the required
Federal and state income tax provisions that would have been recorded if these
entities had not elected S corporation status and were subject to and liable for
Federal and state income taxes as C corporations prior to each of the companies'
termination of their S corporation status. CareerStaff terminated its S
corporation status for Federal and state income tax purposes on June 22, 1994.
Golden Care terminated its S corporation status upon merging with the Company on
May 5, 1995. In connection with Golden Care's termination of its S Corporation
status, the Company recorded a deferred income tax provision and liability of
$1,487,000 in the second quarter of 1995. The Company distributed a total of
$333,000, $8,889,000 and $5,271,000 in 1995, 1994 and 1993, respectively, of
prior S corporation earnings to stockholders for certain of these tax
obligations.
(11) SUPPLEMENTARY INFORMATION RELATING TO STATEMENTS OF CASH FLOWS
Supplementary information for the consolidated statements of cash flows is
set forth below (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the period for:
Interest, net of $2,839, $3,705 and $38 capitalized in 1995, 1994
and 1993, respectively............................................. $ 26,951 $ 10,942 $ 516
Income taxes........................................................ 12,150 22,446 1,894
</TABLE>
Supplemental schedule of non-cash investing activities:
The Company's acquisitions during 1995, the Company's merger with
Mediplex on June 23, 1994, the related transactions and other acquisitions
during 1994 and the Company's acquisition of Honorcare during 1993 and other
related transactions and acquisitions involved the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- ------------ ---------
<S> <C> <C> <C>
Fair value of assets acquired...................................... $ 43,825 $ 785,694 $ 14,084
Liabilities assumed................................................ (9,079) (443,575) --
Fair value of stock issued (Note 3)................................ (9,329) (213,741) (6,500)
--------- ------------ ---------
Cash payments made, net of cash received from others............... $ 25,417 $ 128,378 $ 7,584
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
In January 1995, the Company issued 1,582,905 shares of its common stock
upon the conversion of $39,449,000 principal amount of 6 1/2% Debentures and in
August 1994, the Company issued 978,136 shares of its common stock upon the
conversion of $24,377,000 principal amount of 6 1/2% Debentures (see Note 7).
F-20
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 23,102 $ 23,102 $ 78,738 $ 78,738
Long-term debt, including current portion....... (358,877) (352,843) (416,908) (465,830)
Interest rate swap and cap agreements........... -- -- (808) (3,180)
</TABLE>
The cash and cash equivalents carrying amount approximates fair value
because of the short maturity of these instruments. The fair value of the
Company's long-term debt was estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The fair value of the interest rate swap and
cap agreements are the estimated amounts that the Company would receive or pay
to terminate the swap agreements, taking into account current interest rates.
The interest rate swap and cap agreements were terminated on June 30, 1995 (see
Note 7).
(13) CAPITAL STOCK
(a) SALE OF COMMON SHARES -- SUN
In connection with the Company's merger with Mediplex, the Company issued
4,472,420 shares of its common stock in a public offering resulting in net
proceeds of $83,605,000. In December 1994, the Company completed a public stock
offering of 5,365,000 shares of its common stock resulting in net proceeds of
$111,878,000. In July 1993, the Company completed an initial public stock
offering of 4,700,000 of its common shares resulting in net proceeds of
$46,432,000. In connection therewith, the Company acquired Honorcare (see Note
4) and repurchased and retired the 540,000 shares of its common stock issued to
NME (see Note 1) for cash of $8,020,000.
SALE OF COMMON SHARES -- CAREERSTAFF
Prior to the Company's merger with CareerStaff, CareerStaff in June 1994
completed an initial public stock offering of 824,600 equivalent shares of Sun's
common stock resulting in net proceeds of approximately $9,526,000. In 1993 and
1992, CareerStaff completed private placements of 1,050,423 and 943,643
equivalent shares of Sun common stock resulting in net proceeds of $406,000 and
$443,000, respectively.
(b) STOCK OPTION PLANS
STOCK INCENTIVE PLAN
During 1993, the Company adopted the Company's 1993 Combined Incentive and
Nonqualified Stock Option Plan (the "Stock Incentive Plan"). The Plan reserves
3,000,000 shares of the Company's common stock for grant and authorizes the
Board of Directors or a committee appointed by the Board of Directors to
administer the plan and to grant to certain employees, officers, and consultants
of the Company's incentive stock options or nonqualified stock options at an
exercise price not less than the fair market value per share of the Company's
common stock at the date of grant. Each option grant under the Stock Incentive
Plan becomes fully exercisable three years after the date of grant and expires
ten years from the date of grant. As of December 31, 1995, there were options
outstanding under the Stock Incentive Plan to purchase 2,800,457 shares of
common stock with exercise prices ranging from $9.50 to $24.00 per share.
F-21
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) CAPITAL STOCK (CONTINUED)
DIRECTOR STOCK OPTION PLAN
During 1993, the Company adopted the Director Stock Option Plan (the
"Original Director Stock Plan"). Under the Original Director Stock Plan, each
nonemployee director serving as a director at the time of the Company's initial
public offering received at the time of the initial public offering an initial
grant of options for 20,000 shares and annual grants in January 1994, 1995 and
1996 of options for 7,500 shares, with an exercise price equal to the initial
public offering price of $11.00 per share. At December 31, 1995, options to
purchase 66,500 shares of common stock were outstanding and exercisable under
the Original Director Stock Plan with an exercise price of $11.00 per share. No
options will be granted under the Original Director Stock Plan after January
1996. All options to nonemployee directors are nonqualified stock options and
become fully exercisable one year after the date the option is granted, but only
if the director attends at least 75% of the total board and committee meetings
for the calendar year in which the option was granted.
During 1995, the Company adopted a new Nonemployee Director Stock Option
Plan ("Director Stock Plan") to supersede the Original Director Stock Plan which
restricted stock option grants to only those nonemployee directors who were
serving as directors at the time of the Company's initial public offering in
1993. Under the new Director Stock Plan, each person who is a nonemployee
director is granted an option to purchase 5,000 shares of common stock on the
date such person first becomes a nonemployee director. On each subsequent
anniversary of the initial option grant such person will receive an option to
purchase 1,000 shares of common stock. Each option is a nonqualified stock
option and is granted at an exercise price equal to the fair market value of the
Company's common stock at the date of grant. Each option becomes exercisable
after two years in quarterly increments per year and expires ten years from the
date of grant. As of December 31, 1995, there were options outstanding to
purchase a total of 15,000 shares of common stock outstanding under the new
Director Stock Plan at exercise prices ranging from $9.50 to $15.75 per share. A
total of 200,000 shares of the Company's common stock have been reserved for
issuance under the new Director Stock Plan. All options granted under the new
Director Stock Plan have been made subject to defeasance if the Company's
stockholders do not approve the Director Stock Plan at the Company's annual
meeting of stockholders in 1996.
MEDIPLEX OPTION PLANS
In connection with the Mediplex merger, the Company assumed and converted
the outstanding Mediplex stock options under existing plans into options to
purchase a total of 1,704,500 shares of the Company's common stock with exercise
prices ranging from $6.75 to $18.50. As of December 31, 1995, options to
purchase 623,182 shares of common stock, of which 419,085 were exercisable, were
outstanding with exercise prices ranging from $7.75 to $17.63. The difference
between the fair market value of the Company's common stock at the date of the
merger and the exercise price of the assumed options was accounted for as
additional consideration in the merger. The fair market value approximated the
intrinsic value of the Company's common stock and the difference between the two
valuations had the intrinsic value been used would not have been material to net
earnings or to net equity as of the date of the merger.
CAREERSTAFF OPTION PLANS
In connection with the CareerStaff merger, the Company assumed and converted
the outstanding CareerStaff stock options granted in 1995 and 1994 under
existing plans into options to purchase a total of 302,386 shares of the
Company's common stock with exercise prices ranging from $12.96 to $22.47. As of
December 31, 1995, all of the outstanding options to purchase a total of 142,386
shares of the Company's common stock were exercisable.
F-22
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) CAPITAL STOCK (CONTINUED)
The following is a summary of the stock options under the Stock Incentive
Plan, the Director Stock Option Plans and the assumed Mediplex and CareerStaff
Option Plans:
<TABLE>
<CAPTION>
EXERCISE PRICE PER
SHARES SHARE
------------ -------------------
<S> <C> <C>
Balance at December 31, 1992......................................... -- --
Granted............................................................ 819,000 $11.00- $15.75
Cancelled.......................................................... (82,000) 11.00- 15.75
------------ -------------------
Balance at December 31, 1993......................................... 737,000 11.00- 15.75
Granted............................................................ 1,885,976 11.00- 22.50
Options assumed in connection with the Mediplex Merger............. 1,704,500 6.75- 18.50
Exercised.......................................................... (1,051,519) 6.75- 12.63
Cancelled.......................................................... (268,782) 11.00- 19.00
------------ -------------------
Balance at December 31, 1994......................................... 3,007,175 7.75- 22.50
Granted............................................................ 1,530,673 9.50- 24.00
Exercised.......................................................... (283,179) 9.25- 23.25
Cancelled.......................................................... (607,144) 9.50- 24.00
------------ -------------------
Balance at December 31, 1995......................................... 3,647,525 $ 7.75- $24.00
------------ -------------------
------------ -------------------
</TABLE>
At December 31, 1995, options to purchase 627,971 common shares were
exercisable.
OPTIONS ISSUED IN CONNECTION WITH THE GOLDEN CARE MERGER
The Company issued options to purchase a total of 234,100 shares of the
Company's common stock with a total exercise price of $500,000 as part of the
consideration in the Company's merger with Golden Care. These options represent
10% of the total shares of the Company's common stock issued in connection with
the Golden Care merger. These options replaced options granted to an employee in
1994 under an employment agreement in which former Golden Care stockholders
granted an option to an employee to acquire 10% of their holdings. All such
options vested as of the date of the merger.
(14) PREFERRED STOCK PURCHASE RIGHTS
On June 2, 1995, the Board of Directors declared a dividend of one preferred
stock purchase right ("Right") for each outstanding share of common stock of the
Company for stockholders of record on June 15, 1995 and for all future issuances
of common stock. The Rights are currently not exercisable or transferable apart
from the common stock and have no voting rights. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock, par value $0.01 per share. The Rights become
exercisable ten business days following the date a person or group of affiliated
persons acquires 15% or more of the Company's common stock, or announces a
tender or exchange offer which would result in the beneficial ownership by a
person or group of affiliated person of 15% or more of the outstanding Company's
common stock. The Rights also become exercisable if any person, who is the
beneficial owner of 15% or more of the Company's common stock as of the date of
record, acquires an additional 1% or more of the outstanding Company's common
stock. The Rights may be redeemed by the Company at a price of $.001 per Right
before their expiration on June 2, 2005.
In the event that the Company is acquired in a merger or other business
combination or certain other events occur, provision shall be made so that each
holder of a Right, excluding the Rights beneficially owned by the acquiring
persons, shall have the right to receive, upon exercise thereof at
F-23
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) PREFERRED STOCK PURCHASE RIGHTS (CONTINUED)
the then current exercise price, that number of shares of common stock of the
surviving company which at the time of such transaction will have a market value
of two times the exercise price of the Right.
(15) PRO FORMA NET EARNINGS (LOSS) PER SHARE
Pro forma net earnings (loss) per common and common equivalent share for the
year ended December 31, 1995 and 1994 is based upon the weighted average number
of common shares outstanding during the period including the common stock
transactions of CareerStaff and Golden Care plus the effect, if dilutive, of
incremental shares of common stock contingently issuable in respect of stock
options. Pro forma fully diluted net earnings per share for certain of the
quarters during the years ended December 31, 1995 and 1994 is determined on the
assumption that the 6% Debentures and the 6 1/2% Debentures were converted as of
the dates of issuance and acquisition on March 1, 1994, and June 23, 1994,
respectively. Net earnings is adjusted for the interest on the debentures, net
of interest related to additional assumed borrowings to fund the cash
consideration on conversion of the 6 1/2% Debentures and the related income tax
benefits.
Pro forma net earnings per share for the year ended December 31, 1993, is
calculated based upon the number of shares of the Company's common stock issued
upon the formation of Sun Healthcare Group, Inc. on April 15, 1993, which placed
under the control of a single corporation all of the Company's operations and
the appropriate weighted average number of shares of the Company's common stock
for common stock transactions of the Company subsequent to the Preincorporation
Agreement and also include the appropriate weighted average number of shares of
the Company's common stock for common stock transactions of CareerStaff and
Golden Care for the year ended December 31, 1993.
(16) OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
The Company's rehabilitation therapy subsidiary is under investigation by
the OIG. The allegations underlying the investigation have not been fully
disclosed to the Company, and the OIG is still in the process of collecting
additional information. The Company believes that the investigation includes a
review of whether the Company's rehabilitation therapy subsidiary has engaged in
improper practices, including the provision of, and billing for, concurrent
therapy services and unnecessary or unordered services to residents of skilled
nursing facilities. In addition, the Company's rehabilitation therapy subsidiary
provides therapy services to, among others, the Company's long-term care
subsidiary. The Company understands that the OIG is also reviewing claims filed
by its long-term care subsidiary with respect to the services. The Company has
cooperated and continues to cooperate with the investigation. If there have been
improper practices or the investigation is broader in scope, depending on the
nature and extent of such impropriety, the investigation could result in the
imposition of civil, administrative, or criminal fines, penalties, or
restitutionary relief, and may have a negative impact on the Company. The
Company is unable to determine at this time when the investigation is to be
concluded, however, based on the facts currently available, it does not believe
that the outcome of the OIG investigation will have a material adverse effect on
the Company's results of operations or financial condition.
(b) LITIGATION
A holder of CareerStaff's common stock has filed a lawsuit (the "CareerStaff
Litigation") as a purported class action against CareerStaff and the directors
of CareerStaff alleging breach of fiduciary duty in entering into a merger
agreement with the Company and against the Company alleging that the Company
aided and abetted the alleged breach of fiduciary duty by the CareerStaff
directors. In
F-24
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) OTHER EVENTS (CONTINUED)
February 1996, the plaintiff filed a status report with the court stating that
the plaintiff intends to file a stipulation of dismissal without prejudice. The
Company believes that the CareerStaff Litigation is without merit; however,
there can be no assurance that the CareerStaff Litigation will not have an
impact on the Company's accounting for the merger.
On June 30, 1995, two civil class-action complaints were filed against the
Company and certain of its current and former directors and officers in the
United States District Court for the District of New Mexico. Two more
complaints, based on the same underlying events, were filed on August 30, 1995.
On October 6 and October 10, 1995, two additional complaints were filed, also
based on the same underlying events. These six complaints were consolidated by a
court order dated November 27, 1995, and an amended class action complaint,
captioned IN RE SUN HEALTHCARE GROUP, INC. LITIGATION (the "Complaint"), was
filed in the United States District Court for the District of New Mexico on
January 26, 1996. The Complaint was purportedly brought on behalf of all persons
who either exchanged their shares of common stock of CareerStaff for shares of
Sun common stock pursuant to a merger agreement between CareerStaff and the
Company, or who purchased shares of Sun common stock between October 26, 1994
and June 27, 1995. The Complaint alleges that defendants misrepresented or
failed to disclose material facts about the OIG investigation and about the
Company's operations and financial results, which plaintiffs contend
artificially inflated the price of the Company's securities.
On or about January 23, 1996, two of the Golden Care selling stockholders
filed a lawsuit (the "Golden Care Litigation") against the Company and certain
of its officers and directors in the United States District Court for the
Southern District of Indiana. Plaintiffs allege, among other things, that the
Company did not disclose material facts concerning the OIG investigation and
that the Company's financial results were misstated. The Complaint purports to
state claims, INTER ALIA, under federal and state securities laws and for breach
of contract, including a breach of the registration rights agreement pursuant to
which Sun agreed to register the shares for resale by such Golden Care selling
stockholders. The Company believes that the Golden Care Litigation is without
merit; however, there can be no assurance that the Golden Care Litigation will
not have an impact on the Company's accounting for the merger.
On September 8, 1995, derivative action was filed in the United States
District Court for the District of New Mexico, captioned BRICKELL PARTNERS V.
TURNER, ET AL. The complaint was not served on any defendant. On June 19, 1996,
an amended complaint alleging breach of fiduciary duty by certain current and
former of the Company's directors and officers based on substantially the same
events as those set forth in the above described securities class actions was
filed and subsequently served on the defendants.
The Company has reviewed the allegations in the complaints, believes them to
be without merit, and intends to defend itself vigorously. Relief sought in the
action is unspecified. The Company believes the shareholder actions will not
have a material adverse impact on its results of operations or financial
condition.
F-25
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) SUMMARIZED FINANCIAL INFORMATION
The Company acquired Mediplex on June 23, 1994 and became a co-obligor with
Mediplex with respect to the 6 1/2% Debentures and the 11 3/4% Debentures
subsequent to the acquisition (see Notes 4 and 7). Summarized financial
information of Mediplex, after giving effect to the restatement discussed in
Note 2, is provided below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
AS RESTATED
------------------------
Current assets............................................................. $ 130,794 $ 112,831
Noncurrent assets.......................................................... 461,592 634,173
Current Liabilities........................................................ 34,823 41,146
Noncurrent Liabilities..................................................... 91,150 302,806
Due to Parent.............................................................. 168,222 48,817
</TABLE>
The results of operations of Mediplex subsequent to the date of acquisition
by Sun are labeled "Company", and the financial position and results of
operations of Mediplex for the period prior to the acquisition by Sun are
labeled "Predecessor."
<TABLE>
<CAPTION>
COMPANY
JUNE 24, 1994 COMPANY
COMPANY TO JANUARY 1, 1994
YEAR ENDED DECEMBER 31, TO
DECEMBER 31, 1995 1994 JUNE 23, 1994
----------------- --------------- -----------------
<S> <C> <C> <C>
AS RESTATED
----------------------------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.............................................. $ 448,254 $ 205,300 $ 221,640
----------------- --------------- -----------------
Costs and expenses........................................ 432,730 217,572 208,455
Impairment loss........................................... 52,621 -- --
----------------- --------------- -----------------
Earnings (loss) before intercompany charges, income taxes
and extraordinary loss................................... (37,097) (12,272) 13,185
Intercompany charges (1).................................. 39,205 -- --
----------------- --------------- -----------------
Earnings (loss) before income taxes and extraordinary
loss..................................................... (76,302) (12,272) 13,185
Income taxes (benefit).................................... (7,432) (8,909) 3,645
----------------- --------------- -----------------
Net earnings (loss) before extraordinary loss......... (68,870) (3,363) 9,540
Extraordinary loss, net of income tax benefit............. (3,413) -- --
----------------- --------------- -----------------
Net earnings (loss)................................... $ (72,283) $ (3,363) $ 9,540
----------------- --------------- -----------------
----------------- --------------- -----------------
</TABLE>
- ------------------------
(1) Through various intercompany agreements entered into by Sun and Mediplex,
Sun provides management services, licenses the use of its trademarks and
acts on behalf of Mediplex to make financing available for its operations.
Sun charged Mediplex for management services totaling $20,478,000 for the
year ended December 31, 1995. On September 30, 1995, Sun and Mediplex
finalized licensing agreements and financing agreements which were effective
January 1, 1995. Royalty fees charged to Mediplex for the year ended
December 31, 1995, for the use of Sun trademarks were $4,725,000.
Intercompany interest charged to Mediplex for the year ended December 31,
1995, for advances from Sun was $14,002,000. During 1994, Sun did not charge
Mediplex for these same services.
F-26
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited consolidated quarterly financial information follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (2)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues............................................ $ 256,734 $ 278,980 $ 289,273 $ 310,521
Earnings (loss) before income taxes and extraordinary loss.... 20,013 19,306 27,359 (53,884)
Net earnings (loss) before extraordinary loss................. 10,826 8,741 16,415 (56,320)
Net earnings (loss) before extraordinary loss (1)............. 10,541 8,796 16,415 (56,320)
Extraordinary loss............................................ (3,413) -- -- --
----------- ----------- ----------- -----------
Net earnings (loss) (1)................................... $ 7,128 $ 8,796 $ 16,415 $ (56,320)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings (loss) per share
Fully diluted (1)(3)
Net earnings (loss) per share before extraordinary loss
(1)(3)................................................... $ 0.21 $ 0.18 $ 0.33 $ (1.18)
Extraordinary loss (3).................................... (0.06) -- -- --
----------- ----------- ----------- -----------
Net earnings (loss) (1)(3).............................. $ 0.15 $ 0.18 $ 0.33 $ (1.18)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER (2)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues............................................ $ 95,404 $ 118,627 $ 222,315 $ 237,008
Earnings (loss) before income taxes........................... 7,327 9,408 20,307 (235)
Net earnings (loss)........................................... 5,383 6,532 11,027 (823)
Pro forma net earnings (loss) (1)............................. $ 4,464 $ 5,683 $ 10,521 $ (1,107)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma net earnings (loss) per share
Fully diluted (1)(3)........................................ $ 0.21 $ 0.23 $ 0.25 $ (0.03)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) A provision for pro forma income taxes has been reflected in the
consolidated quarterly financial information for periods in which certain
entities were not subject to Federal and state income taxes (See Note 10).
(2) Amounts have been restated (See Note 2).
(3) Earnings per share are computed independently for each of the quarters
presented (See Note 15).
(19) SUBSEQUENT EVENTS
On February 21, 1996, the Company announced that the Company had reached an
agreement in principle for the sale of SunSurgery Corporation, its ambulatory
surgery subsidiary.
On February 23, 1996, the Company announced that its Board of Directors
approved a common stock repurchase program to acquire up to $25,000,000 of its
outstanding common stock.
F-27
<PAGE>
EXHIBIT A
SUN HEALTHCARE GROUP, INC.
PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Consolidated Balance Sheet of Sun
Healthcare Group, Inc. ("Sun") as of March 31, 1995 is presented by adjusting
the historical balance sheet of Sun to reflect the acquisition of a 15%
interest in Ashbourne PLC ("Ashbourne") in May 1995, and the acquisition of
Golden Care, Inc. ("Golden Care") in May 1995, as if such transactions
occurred on March 31, 1995.
The Unaudited Pro Forma Consolidated Statements of Income of Sun for the
year ended December 31, 1994 and the three months ended March 31, 1995 are
presented by combining with the adjustments described in the accompanying
notes, (i) the historical results of operations of Sun for the year ended
December 31, 1994 and the three months ended March 31, 1995, (ii) the results
of operations of The Mediplex Group, Inc. ("Mediplex") for the period prior
to the Mediplex Merger (January 1, 1994 to June 23, 1994), including the
effects of the offering of the 6% Convertible Debentures due 2004 (the "6%
Debenture Offering") used to fund a portion of the cash consideration paid in
the Mediplex Merger, (iii) the results of operations of Exceler Health Care
Group PLC ("Exceler") and Golden Care and pro forma interest expense to fund
the acquisition of a 15% interest in Ashbourne (collectively, the
"Insignificant Acquisitions") for the period prior to Sun's consolidation of
Exceler (January 1, 1994 to September 1, 1994) for Exceler and the year ended
December 31, 1994 and three months ended March 31, 1995 for Golden Care and
Ashbourne, and (iv) the impact of the tender offer completed in January 1995
resulting in the repurchase by Mediplex of $78,698,000 or 11 3/4% Senior
Subordinated Notes due 2002 (the "11 3/4% Notes") (the "Tender Offer") and
conversion of $39,449,000 of the 6 1/2% Convertible Debentures due 2003 (the
"6 1/2% Convertible Debentures") (before extraordinary items and excluding
the pro forma impact of the debt conversion fee for the year ended December
31, 1994), as if the Mediplex Merger, Insignificant Acquisitions, 6%
Debenture Offering, Tender Offer and conversion of the 6 1/2% Convertible
Debentures had been consummated on January 1, 1994.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do
not necessarily reflect the financial position or results of operation of Sun
that would have actually resulted had the transactions described above
occurred as of March 31, 1995 or January 1, 1994, respectively, or the future
financial position or results of operations of Sun. The Unaudited Pro Forma
Condensed Consolidated Financial Statements should be read in conjunction
with the accompanying notes and with the Financial Statements of Sun and
Mediplex included in the Annual Reports on Form 10-K of Sun and Mediplex for
the year ended December 31, 1994 and Quarterly Reports on Form 10-Q of Sun
and Mediplex for the three months ended March 31, 1995.
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION> ASHBOURNE
GOLDEN CARE ACQUISITION
SUN ACQUISITION(1) ADJUSTMENT(2) PRO FORMA
----------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 19,681 $ __ $ __ $ 19,681
Restricted cash . . . . . . . . . . . . . . . 1,792 __ __ 1,792
Receivables, net. . . . . . . . . . . . . . . 215,350 3,377 __ 218,727
Other current assets. . . . . . . . . . . . . 42,130 274 __ 42,404
------ ----- ------ ---------
Total current assets. . . . . . . . . . . . 278,953 3,651 __ 282,604
Property and equipment, net . . . . . . . . . . 241,799 2,292 __ 244,091
Restricted Cash . . . . . . . . . . . . . . . . 14,787 __ __ 14,787
Assets held for sale. . . . . . . . . . . . . . 19,035 __ __ 19,035
Notes receivable. . . . . . . . . . . . . . . . __ __ __ __
Goodwill, net . . . . . . . . . . . . . . . . . 467,853 __ __ 467,853
Other assets, net . . . . . . . . . . . . . . . 16,433 44 19,400 35,877
Deferred tax asset. . . . . . . . . . . . . . . 46,044 __ __ 46,044
--------- ----- ------ ---------
Total assets. . . . . . . . . . . . . . . . $1,084,904 $5,987 $19,400 $1,110,291
--------- ----- ------ ---------
--------- ----- ------ ---------
Current liabilities:
Current portion of long-term debt . . . . . . $ 14,042 $ 241 $ __ $ 14,283
Other current liabilities . . . . . . . . . . 72,568 696 __ 73,264
--------- ----- ------ ---------
Total current liabilities . . . . . . . . . 86,610 937 __ 87,547
Long-term debt, net of current portion. . . . . 373,053 755 19,400 393,208
Other long-term liabilities . . . . . . . . . . 28,904 __ __ 28,904
--------- ----- ------ ---------
Total liabilities . . . . . . . . . . . . . 488,567 1,692 19,400 509,659
Minority interest . . . . . . . . . . . . . . . 2,569 __ __ 2,569
Stockholders' equity. . . . . . . . . . . . . . 593,768 4,295 __ 598,063
--------- ----- ------ ---------
Total liabilities and stockholders' equity. $1,084,904 $5,987 $19,400 $1,110,291
--------- ----- ------ ---------
--------- ----- ------ ---------
</TABLE>
______________________
(1) The Golden Care acquisition has been accounted for under the pooling-of-
interests method of accounting. Accordingly, no pro forma adjustments have
been reflected in the Unaudited Pro Forma Condensed Consolidated Balance
Sheet.
(2) In May 1995, Sun acquired a 15% interest in Ashbourne for $19,400,000
funded by additional borrowings under the NationsBank Credit Facility.
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Mediplex
and Related
Debenture
Offering Insignificant Debt
Insignificant Pro Forma Aquisitions Transactions
Sun Mediplex Acquisitions Adjustments(1) Adjustments(2) Adjustments(3) Pro Forma
--------- ---------- ------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues. . . . . . . . $ 603,337 $ 221,640 $ 25,866 $ (5,279)(a) $ -- $ -- $ 802,349
347 (b)
(40,004)(c)
(3,558)(i)
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Operating . . . . . . . . . . . 496,554 187,984 14,410 (2,569)(a) -- -- 658,626
(205)(a)
2,546 (b)
(36,471)(c)
(65)(d)
(3,558)(i)
Corporate general and
administrative. . . . . . . . 28,225 6,940 3,698 (1,226)(a) -- -- 35,137
(2,500)(e)
Provision for losses on
patient care receivables. . . 3,324 4,898 522 (2,736)(c) -- 6,008
Interest, net . . . . . . . . . 10,584 4,040 1,358 (268)(a) 329 (a) (4,731)(a) 10,407
(1,353)(b) 1,310 (c) (1,185)(b)
(257)(c)
341 (d)
188 (d)
(828)(f)
833 (i)
46 (k)
Conversion expense. . . . . . . 2,275 -- -- -- -- 2,275
Depreciation and amortization . 11,420 4,593 178 (424)(a) 68 (b) 18,328
(505)(b)
(509)(c)
125 (d)
5,330 (g)
(1,948)(h)
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses. . . . 552,382 208,455 20,166 (46,013) 1,707 (5,916) 730,781
--------- --------- --------- --------- --------- --------- ---------
Earnings before income taxes. . 50,955 13,185 5,700 (2,481) (1,707) 5,916 71,568
Income taxes. . . . . . . . . . . 22,559 3,645 431 926 (l) 1,035 (d) 2,426 (c) 31,022
--------- --------- --------- --------- --------- --------- ---------
Earnings before extraordinary
item. . . . . . . . . . . . . $ 28,396 $ 9,540 $ 5,269 $ (3,407) $ (2,742) $ 3,490 $ 40,546
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share before
extraordinary item:
Primary . . . . . . . . . . . . $1.19 $0.99(4)
---- ----
---- ----
Fully diluted . . . . . . . . . $1.10 $0.96(4)
---- ----
---- ----
Weighted average number of shares:
Primary . . . . . . . . . . . . 23,849 40,951(4)
Fully diluted . . . . . . . . . 28,703 46,093(4)
</TABLE>
(NOTES ON FOLLOWING PAGE)
A-3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Insignificant Debt
Acquisition Transactions Pro Forma
Sun Golden Care Adjustments(2) Adjustments(3)
-------- ----------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Total net revenues ................ $233,693 $3,131 $ -- $ -- $236,824
-------- ------ ------ ------ --------
Costs and expenses:
Operating ....................... 190,575 1,897 -- -- 192,472
Corporate general and
administrative ................. 11,176 218 -- -- 11,394
Provision for losses on patient
care receivables .............. 913 300 -- -- 1,213
Interest, net .................. 3,762 9 53(a) (600)(a) 3,530
437(c) (131)(b)
Conversion expense ............. 3,256 -- -- -- 3,256
Depreciation and
amortization ................... 6,330 -- 17(b) -- 6,347
-------- ------ ------ ------ --------
Total costs and expenses ......... 216,012 2,424 507 (731) 218,212
-------- ------ ------ ------ --------
Earnings before income taxes
and extraordinary
item .......................... 17,681 707 (507) 731 18,612
Income taxes ..................... 8,587 -- 70 (d) 300 (c) 8,957
-------- ------ ------ ------ --------
Earnings before extraordinary
item .......................... $ 9,094 $ 707 $ (577) $ 431 $ 9,655
-------- ------ ------ ------ --------
-------- ------ ------ ------ --------
Earnings per share before
extraordinary item:
Primary ........................ $0.23 $0.23 (4)
----- -----
----- -----
Fully diluted .................. $0.22 $0.22 (4)
----- -----
----- -----
Weighted average number of
shares:
Primary ........................ 39,536 41,877 (4)
Fully diluted .................. 44,521 46,862 (4)
</TABLE>
(NOTES ON FOLLOWING PAGE)
A-4
<PAGE>
SUN HEALTHCARE GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF INCOME
(1) The Mediplex and Related Debenture Offering Pro Forma Adjustments
consist of the following:
(a) Pursuant to the sale of certain assets of Mediplex to Abraham Gosman
in connection with the Mediplex Merger (the "Asset Sale"), the
operations related to the net assets sold have been eliminated as
follows:
PERIOD FROM JANUARY 1
TO JUNE 23, 1994
---------------------
Decrease in revenues. . . . . . . . . . . . . . $5,279,000
----------
Decrease in cost and expenses:
Operating . . . . . . . . . . . . . . . . . . 2,569,000
Rent. . . . . . . . . . . . . . . . . . . . . 205,000
Corporate general and administrative. . . . . 1,226,000
Interest. . . . . . . . . . . . . . . . . . . 268,000
Depreciation and amortization . . . . . . . . 424,000
----------
Total decrease in cost and expenses . . . . 4,692,000
----------
Decrease in earnings before income taxes. . $ 587,000
----------
(b) Sun renegotiated certain facility lease obligations to and
mortgage interest rates with Meditrust pursuant to a
restructuring agreement between Meditrust and Sun (the
"Meditrust Restructuring") to provide fixed annual increases
in rent and interest payments and extended base lease terms
for which Sun recorded a deferred liability of approximately
$4,974,000 related to unfavorable lease rates. In addition,
Meditrust granted Mediplex a one-time rent concession for
certain facilities, for which Mediplex recognized a reduction
in rent expense. In the Meditrust Restructuring, these
facilities were not granted these same incentives and
therefore these pro forma adjustments remove the effect of these
incentives. Sun also entered into sale-leaseback transactions
with Meditrust on certain properties and refinanced another
property through a mortgage. This impacted earnings before
income taxes as follows:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1 TO JUNE 23, 1994
--------------------------------------
MEDITRUST SALE-LEASEBACK
RESTRUCTURING TRANSACTIONS TOTAL
------------- --------------- -----
<S> <C> <C> <C>
Increase in revenues. . . . . . . . . . . . . $ -- $ 347,000 $ 347,000
----------- ------------ -----------
Cost and expenses:
Rent expense. . . . . . . . . . . . . . . . 97,000 2,449,000 2,546,000
Interest, net . . . . . . . . . . . . . . . -- (1,353,000) (1,353,000)
Depreciation and amortization expense . . . -- (505,000) (505,000)
----------- ------------ -----------
Total cost and expenses . . . . . . . . . 97,000 591,000 688,000
----------- ------------ -----------
Decrease in earnings before
income taxes. . . . . . . . . . . . . $ (97,000) $ (244,000) $ (341,000)
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
(c) In connection with the Mediplex Merger, Sun will dispose of the
Assets Held For Sale. The related operations have been
eliminated as follows:
PERIOD FROM JANUARY 1
TO JUNE 23, 1994
---------------------
Decrease in revenues . . . . . . . $40,004,000
-----------
Cost and expenses:
Operating expenses . . . . . . . 36,471,000
Provision for losses on patient
care receivables . . . . . . . 2,736,000
Interest, net. . . . . . . . . . 257,000
Depreciation and amortization
expenses . . . . . . . . . . . 509,000
-----------
Total cost and expenses. . . . 39,973,000
-----------
Earnings before income taxes . . $ 31,000
-----------
-----------
A-5 (NOTES CONTINUED ON FOLLOWING PAGE)
<PAGE>
(NOTES CONTINUED FROM PREVIOUS PAGE)
(d) In connection with the purchase of a certain facility from
Mediplex Construction of Florida, Inc. ("Construction"), Sun
assumed two existing mortgages with an interest expense of
approximately $341,000 for the period from January 1, 1994 to
June 23, 1994, would have incurred depreciation expense of
$125,000 for the period from January 1, 1994 to June 23, 1994 and
will not incur prior rent expense of $65,000, which was paid
during the period from January 1, 1994 to June 23, 1994. In
addition, interest income of $188,000 during the period from
January 1, 1994 to June 23, 1994 related to the note receivable
from Construction that has been forgiven, is eliminated.
(e) As a result of the Mediplex Merger, the corporate offices of
Mediplex were closed and duplicate corporate administrative and
general expenses totaling approximately $2,500,000 for the period
from January 1, 1994 to June 23, 1994 were eliminated. Such
duplicate corporate administrative and general expenses consist
primarily of Mediplex payroll and benefits for the former senior
executives not continuing with the merged company and duplicate
administrative, accounting, information systems and marketing
operations that were eliminated.
(f) The 11 3/4% Notes and the 6 1/2% Convertible Debentures acquired
in the Mediplex Merger are recorded at fair market value in
connection with purchase accounting. This resulted in a premium of
$21,050,000. Amortization of this premium resulted in a decrease
in interest expense of approximately $828,000 for the period from
January 1, 1994 to June 23, 1994.
(g) The excess purchase price over the fair value of the assets
acquired is $426,542,000. This excess purchase price will be
amortized over 40 years resulting in additional amortization of
$5,330,000 for the period from January 1, 1994 to June 23, 1994.
(h) As a result of the Mediplex Merger, land, buildings and equipment
and intangible assets were revalued at fair market value.
Accordingly, depreciation and amortization of $1,948,000 for the
period from January 1, 1994 to June 23, 1994, related to these
revalued assets has been eliminated.
(i) Reflects amounts eliminated for rehabilitation therapy and
institutional pharmacy services provided by Sun to Mediplex prior
to the Mediplex Merger.
(j) Represents pro forma interest expense on the 6% Convertible
Debentures at a rate of 6% per annum, an aggregate of $833,000
for the period prior to issuance on March 1, 1994.
(k) Represents pro forma amortization of deferred financing costs of
$2,750,000 based upon the 10-year term of the 6% Convertible
Debentures, an aggregate of $46,000 for the period prior to
issuance on March 1, 1994.
(l) The effective pro forma tax rate for the year ended December 31,
1994 is the Sun combined Federal and state tax rates.
(2) The Insignificant Acquisitions Adjustments consist of the following:
(a) Represents pro forma interest on borrowings to fund the
acquisition of the remaining 32% minority interest in Exceler.
(b) Represents the pro forma increase in goodwill amortization related
to the acquisition of the remaining 32% minority interest in
Exceler.
(c) Represents the pro forma interest on borrowings to fund the
acquisition of a 15% interest in Ashbourne.
(d) The effective pro forma tax rate for the year ended December 31,
1994 and the three months ended March 31, 1995 is the Sun combined
Federal and state tax rates plus pro forma income taxes estimated
at 40% for the Golden Care operation, which was not subject to
income taxes as an S corporation.
(3) The Debt Transactions Adjustments consist of the following:
(a) Represents the pro forma reduction of interest expense of
$4,731,000 (net of the impact of capitalized interest and the
amortization of premium recorded in connection with the Mediplex
Merger purchase accounting) for the year ended December 31, 1994
and $600,000 for the three months ended March 31, 1995 pursuant
to the purchase of $78,698,000 of the 11 3/4% Notes in the Tender
Offer in January, 1995 as if the transactions had occurred on
January 1, 1994.
(b) Represents the pro forma reduction of interest expense of
$1,185,000 for the year ended December 31, 1994 and $131,000 for
the three months ended March 31, 1995, net of (i) interest expense
on additional borrowings to fund the conversion and (ii) the
impact of reduced amortization of premium recorded in connection
with the Mediplex Merger purchase accounting, pursuant to the
conversion of $39,449,000 of 6 1/2% Convertible Debentures in
January 1995 as if the transaction had occurred on January 1,
1994. In connection with the conversion, an inducement fee of
$3,256,000 was recorded in the three months ended March 31, 1995.
Such fee was not included in the pro forma adjustments for the
year ended December 31, 1994 and
A-6 (NOTES CONTINUED ON FOLLOWING PAGE)
<PAGE>
(NOTES CONTINUED FROM THE PREVIOUS PAGE)
represents $.08 and $.07 per share on a primary and fully diluted
basis, respectively, in the pro forma statement of income for the
three months ended March 31, 1995.
(c) The effective pro forma tax rate for the year ended December 31,
1994 and the three months ended March 31, 1995 is the Sun combined
Federal and state tax rates.
(4) The Pro Forma Net Earnings Per Share Data is calculated as follows:
Applicable Earnings - Assuming Full Dilution
Year Ended Three Months
December 31, Ended March 31,
1994 1995
------------ --------------
Earnings before extraordinary item . . . . . . . . $40,546,000 $9,655,000
Interest expense on 6 1/2% Convertible
Debentures and 6% Convertible Debentures, net
of premium amortization, interest to fund the
$11.00 Mediplex Merger Consideration upon
conversion of the 6 1/2% Convertible Debentures
and related income taxes . . . . . . . . . . . . . 3,813,000 799,000
------------ --------------
Earnings used for computation of fully diluted
earning per share before extraordinary item . . . $44,359,000 $10,454,000
------------ --------------
------------ --------------
Applicable Common Shares
<TABLE>
<CAPTION>
Year Ended December 31, 1994
----------------------------------------------
Weighted Average Weighted Average
Number of Shares for Number of Shares for
Primary Earnings Per Fully Diluted Earnings
Share(a) Per Share(a)(b)
-------------------- ----------------------
<S> <C> <C>
Actual Sun shares outstanding at
December 31, 1993 . . . . . . . . . . . . 13,751,000 13,751,000
1994 activity:
Shares issued in Mediplex Merger. . . . . 11,250,000 11,250,000
Incremental shares issuable in
respect of Sun & Mediplex stock option
plans . . . . . . . . . . . . . . . . . . 963,000 1,228,000
Weighted average shares issued upon
exercise of options . . . . . . . . . . . 412,000 412,000
Weighted average number shares issued
upon conversion of 6 1/2% Convertible
Debentures . . . . . . . . . . . . . . . 2,397,000 2,397,000
Conversion of 6 1/2% Convertible
Debentures (incremental shares) . . . . . -- 1,063,000
Conversion of 6% Convertible
Debentures (incremental shares) . . . . . -- 3,814,000
Actual shares issued in May 1994
(financing for Mediplex Merger) . . . . . 4,472,000 4,472,000
Actual shares issued in December 1994
(financing for Tender Offer) . . . . . . 5,365,000 5,365,000
Pro forma shares issued in connection
with the Golden Care, Inc.
acquisition . . . . . . . . . . . . . . . 2,341,000 2,341,000
---------- ----------
Pro forma applicable common shares . 40,951,000 46,093,000
---------- ----------
---------- ----------
Three Months Ended March 31, 1995
----------------------------------------------
Weighted Average Weighted Average
Number of Shares for Number of Shares for
Primary Earnings Per Fully Diluted Earnings
Share(a) Per Share(a)(b)
-------------------- ----------------------
Weighted average shares outstanding
at March 31, 1995 . . . . . . . . . . . . 39,536,000 44,521,000
Pro forma shares issued in connection
with the Golden Care, Inc. acquisition . 2,341,000 2,341,000
---------- ----------
41,877,000 46,862,000
---------- ----------
---------- ----------
</TABLE>
- ----------
(a) The pro forma effect of common stock equivalents (consisting of Sun and
Multiplex options) is dilutive.
(b) The pro forma effect of conversion of the 6% Convertible Debentures and
6 1/2% Convertible Debentures is dilutive.
A-7
