<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(Mark One)
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</TABLE>
COMMISSION FILE NUMBER 1-12040
------------------------
SUN HEALTHCARE GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 85-0410612
(State of Incorporation) (I.R.S. Employer
Identification No.)
</TABLE>
101 SUN LANE, NE
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Address and telephone number of Registrant)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------- --------------------------------------
<S> <C>
Common Stock, par value $.01 per New York Stock Exchange
share, and Preferred Stock Purchase
Rights
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
------------------------
On April 24, 1997, Sun Healthcare Group, Inc. had 49,130,217 outstanding
shares of Common Stock. Of those, 35,445,747 shares of Common Stock were held by
nonaffiliates. The aggregate market value of such Common Stock held by
nonaffiliates, based on the average of the high and low sales prices of such
shares on the New York Stock Exchange on April 24, 1997, was approximately
$559,637,000.
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<PAGE>
GENERAL
Sun Healthcare Group, Inc. ("Sun", the "Company" or the "Registrant") hereby
amends its Annual Report on Form 10-K for the fiscal year ended December 31,
1996 by deleting its responses to Items 10 through 13 contained in its original
filing and replacing such sections with the following:
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Sun are:
<TABLE>
<CAPTION>
NAME POSITION WITH SUN
- ---------------------------- ----------------------------------------------------------------
<S> <C>
Andrew L. Turner............ Chairman of the Board of Directors, President and Chief
Executive Officer
John E. Bingaman............ Director
Zev Karkomi................. Director
Robert A. Levin............. Senior Vice President for Rehabilitation Services and Director
Martin G. Mand.............. Director
Warren C. Schelling......... Senior Vice President for Pharmaceutical Services and Director
Lois E. Silverman........... Director
James R. Tolbert, III....... Director
Mark G. Wimer............... Senior Vice President for Inpatient Services and Director
R. James Woolsey............ Director
Robert D. Woltil............ Senior Vice President for Financial Services, Chief Financial
Officer and Director
Julie Collins............... Senior Vice President for Administrative Services
Susan M. LaBelle............ Senior Vice President--SunSolution Division
Warren H. McInteer.......... Vice President for Mergers and Acquisitions and Treasurer
Robert F. Murphy............ Senior Vice President, General Counsel and Secretary
William C. Warrick.......... Vice President, Corporate Controller
</TABLE>
Set forth below are the names of the directors and executive officers of Sun
and their ages as of April 30, 1997. The executive officers of Sun are chosen
annually to serve until the first meeting of the board of directors following
the next annual meeting of stockholders and until their successors are elected
and have qualified, or until death, resignation or removal, whichever is sooner.
Andrew L. Turner, age 50, is Chairman of the Board of Directors, President
and Chief Executive Officer of Sun. Mr. Turner has served in each of these
capacities for Sun since its formation. Mr. Turner is also the founder of Sun
and has overseen the development of Sun's business since its inception in 1989.
Mr. Turner was also a founder and previously served as Chief Operating Officer
of Horizon Healthcare Corporation, a healthcare services provider, from 1986 to
1989. Prior to 1986, Mr. Turner served as a Senior Vice President of Operations
of Hillhaven. Mr. Turner has over 20 years of experience in the long-term care
industry.
John E. Bingaman, age 50, joined the board of directors of Sun in 1993. Mr.
Bingaman also served as a consultant to Sun from October 1, 1994 to July 12,
1996. Between 1984 and July 1993, Mr. Bingaman was
2
<PAGE>
Chief Executive Officer of Honorcare Corporation ("Honorcare"), a provider of
long-term care services, responsible for the overall management and strategic
planning of Honorcare. Since July 1993, Mr. Bingaman has been Vice President of
BKS Properties. From July 1993 to October 1, 1994, Mr. Bingaman was the
President of Four Seasons Healthcare Management, Inc., which was Sun's
subsidiary that managed certain long-term care facilities through management
contracts. Mr. Bingaman has over 25 years of experience in the long-term care
industry. See "Compensation Committee Interlocks and Insider Participation" for
a description of certain relationships between Sun and Mr. Bingaman.
Zev Karkomi, age 73, has been a member of the board of directors of Sun
since 1993. Mr. Karkomi has over 25 years of experience in the real estate
business, with a primary emphasis on properties owned and leased to long-term
healthcare operators. He has served as President of Karell Capital Ventures,
Inc., a corporation involved in the acquisition, sale, leasing and management of
long-term care facilities, since 1980. Mr. Karkomi also serves as the President
of Zevco Enterprises, Inc. and Executive Vice President and Chairman of the
Board of Progressive Health Group, Inc., real estate investment companies. See
"Compensation Committee Interlocks and Insider Participation" for a description
of certain relationships between Sun and Mr. Karkomi.
Martin G. Mand, age 60, joined the board of directors of Sun in February
1996, when the board was increased in size from nine to ten persons. Since
January 1995, Mr. Mand has been Chairman, President and Chief Executive Officer
of Mand Associates, Limited, a financial consulting, speaking and writing firm.
Mr. Mand was previously Executive Vice President and Chief Financial Officer of
Northern Telecom, Ltd., a global manufacturer of telecommunications equipment,
from March 1990 to June 1994. Mr. Mand also previously served as Vice President
and Treasurer of E.I. du Pont de Nemours & Co., a chemical, allied products and
energy company. Mr. Mand also serves on the board of directors of the Fuji Bank
and Trust Company.
Warren C. Schelling, age 44, became a director of Sun in October 1996. Mr.
Schelling became the Senior Vice President for Pharmaceutical Services effective
January 1, 1996. This position includes responsibility for all of Sun's
pharmaceutical operations, including those of Sunscript Pharmacy Corporation
("Sunscript"), Sun's pharmacy subsidiary. From July 1994 to December 1995, Mr.
Schelling was the President of Sunscript. Prior to joining Sun, Mr. Schelling
was the President and Chief Operating Officer of HPI Health Care Services, Inc.
a subsidiary of Diagnostek, Inc., which provides pharmacy management services to
hospitals, HMOs, long-term care facilities and health systems, from January 1993
to July 1994. From January 1994 to July 1994, Mr. Schelling also served as the
Executive Vice President/Pharmacy Services Officer at Diagnostek, Inc. From
September 1985 to January 1993, Mr. Schelling was a manager in HPI Health Care
Services, Inc.
Lois E. Silverman, age 56, joined the board of directors of Sun in October
1995, when she filled a vacancy on the board caused by the resignation of
another director. Ms. Silverman, a co-founder of CRA Managed Care, Inc., a
provider of workers' compensation case management and cost containment services,
has served as the Chairman of the Board of CRA since March 1994 and as its Chief
Executive Officer since 1988. Prior to founding CRA, Ms. Silverman held the
position of Northeast Regional Manager at IntraCorp., a division of Cigna
Corporation. Ms. Silverman also serves as Trustee and Officer of Beth Israel
Hospital and Overseer of Tufts Medical School in Boston.
James R. Tolbert, III, age 62, joined the board of directors of Sun in
August 1995, when he filled a vacancy on the board caused by the resignation of
another director. Mr. Tolbert has served as the Chairman, President, Chief
Executive Officer and Treasurer of First Oklahoma Corporation, a holding
company, since July 1986. In addition, Mr. Tolbert is a member of the board of
directors of Bonray Drilling Corporation, a corporation engaged in domestic
onshore contract drilling of oil and gas wells.
Mark G. Wimer, age 43, became a director of Sun in 1993. Mr. Wimer became
the Senior Vice President for Inpatient Services effective January 1, 1996. This
position includes responsibility for all of Sun's inpatient services, including
those of Sunrise Healthcare Corporation ("Sunrise"), Sun's subsidiary
responsible for operations of Sun's long-term care facilities. Mr. Wimer
previously served as the President of Sunrise effective July 1993 until December
1995. From February 1988 to July 1993, Mr. Wimer was
3
<PAGE>
President and Chief Executive Officer of Franciscan Eldercare Corporation, a
non-profit organization that develops and manages long-term care facilities.
From November 1984 through February 1988, Mr. Wimer was Regional Vice President
of Operations for Hillhaven and had responsibility for management of long-term
care facilities for Hillhaven in Washington, Oregon, Idaho and Montana.
R. James Woolsey, age 55, joined the board of directors of Sun in October
1995, when the board was increased in size from eight to nine persons. Mr.
Woolsey has been a partner in the law firm of Shea & Gardner since January 1995,
where he previously had been a partner from 1980 to 1989 and from 1991 to 1993.
From 1993 to 1995, Mr. Woolsey served as the Director of Central Intelligence
for the United States government. From 1989 to 1991, Mr. Woolsey was the
Ambassador and U.S. Representative to the Negotiation on Conventional Armed
Forces in Europe. In addition, Mr. Woolsey is a member of the board of directors
of USF&G Corp., an insurance holding company, and Yurie Systems, Inc., a network
communications company.
Robert D. Woltil, age 42, became a director of Sun in March 1996. Mr. Woltil
became the Senior Vice President for Financial Services and Chief Financial
Officer of Sun in February 1996. From 1982 to January 1996, Mr. Woltil served in
various capacities for Beverly Enterprises, Inc. ("Beverly"), a healthcare
services provider. From May 1995 until January 1996. Mr. Woltil was President
and Chief Executive Officer of Pharmacy Corporation of America, a subsidiary of
Beverly. From 1992 to May 1995, Mr. Woltil was the Chief Financial Officer of
Beverly, and from 1990 to 1992, Mr. Woltil was the Vice President-- Financial
Planning and Control for Beverly. Mr. Woltil is also a certified public
accountant.
Robert A. Levin, age 42, became a director of Sun in April 1993 and served
as the Secretary of Sun from April 1993 to October 1996. Effective January 1,
1996, Mr. Levin became the Senior Vice President for Rehabilitation Services.
This position includes responsibility for all therapy services of Sun, including
those of Sundance Rehabilitation Corporation ("Sundance"), Sun's rehabilitation
therapy subsidiary. From January 1991 to December 1995, Mr. Levin was the
President and Chief Operating Officer of Sundance. Previously Mr. Levin was Vice
President of National Accounts for Medline Industries, Inc., a manufacturer and
distributor of medical supplies.
Julie Collins, age 49, became Senior Vice President of Administrative
Services in January 1, 1996. This position is responsible for overseeing
corporate communications, human resources, risk management, training and
corporate office facilities management. From September 1994 to December 1995,
Ms. Collins was the Vice President Human Resources. Prior to joining Sun, Ms.
Collins was the Vice President of Human Resources and Support Services for St.
Joseph Health System in Atlanta, Georgia from 1993 to 1994. From July 1991 to
1993, Ms. Collins had been the Vice President of Sunrise. From 1990 to 1991, Ms.
Collins was Director of Human Resources for Sheperd Spinal Center in Atlanta,
Georgia.
Susan M. LaBelle, age 44, became Senior Vice President--SunSolution Division
in January 1997. This position is responsible for developing a marketing program
to integrate all of Sun's ancillary services. From July 1994 to December 1996,
Ms. LaBelle was Vice President of Marketing at Baxter Healthcare Corporation, a
manufacturer and distributor of medical products. From July 1989 to July 1994,
Ms. LaBelle was Director of Marketing at McGaw, Inc., a manufacturer and
distributor of medical products.
Warren H. McInteer, age 38, became Vice President of Mergers & Acquisitions
in August 1995. Mr. McInteer became the Treasurer of Sun in June 1995. Prior to
joining Sun, Mr. McInteer was the Vice President of Financial Planning for
Continental Medical Systems ("Continental") in Mechanicsburg, Pennsylvania, from
1993 to 1995. From 1985 to 1993, Mr. McInteer was a management consultant for
Price Waterhouse working from offices in Baltimore, London and Philadelphia.
Robert F. Murphy, age 43, became Senior Vice President and the General
Counsel of Sun in November 1995 and Secretary of Sun in October 1996. From 1986
to 1995 Mr. Murphy served in several capacities as an officer and legal counsel
to FHP International Corporation, most recently as Vice President and Associate
General Counsel. Previously Mr. Murphy was in private practice beginning in
1978.
4
<PAGE>
William C. Warrick, age 34, became Vice President, Corporate Controller in
March 1994. From July 1991 to March 1994, Mr. Warrick directed financial
reporting for Continental. From July 1990 to June 1991, Mr. Warrick held a
similar position with McCrory Stores, a retail chain store company. Previously
Mr. Warrick was an accountant with KPMG Peat Marwick. Mr. Warrick is a certified
public accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and the rules promulgated thereunder
require Sun's directors and executive officers and persons who own more than ten
percent of the Sun Common Stock to report their ownership and changes in their
ownership of Sun Common Stock to Commission and the New York Stock Exchange.
Copies of the reports must also be furnished to Sun.
Based solely on a review of the copies of such forms and amendments thereto
received by Sun, or written representations from certain reporting persons, Sun
believes that during 1996 all Section 16(a) filing requirements applicable to
its directors, executive officers and greater than ten percent beneficial owners
were met.
5
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information concerning the annual and long-term
compensation for services in all capacities to Sun and its subsidiaries for the
fiscal years shown of those persons ("Named Executive Officers") who were,
during the latest fiscal year (i) the chief executive officer and (ii) the other
four most highly compensated executive officers of Sun:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ------------------------------------------------ --------- ---------- ---------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Andrew L. Turner, .............................. 1996 $ 500,000 $ 250,000 -- $ --
President and Chief Executive Officer 1995 500,000 -- 100,000 --
1994 469,235 225,000 100,000 --
Robert A. Levin ................................ 1996 330,202 -- 15,000 --
Senior Vice President for Rehabilitation 1995 281,261 125,000 15,000 --
Services 1994 211,542 125,000 8,000 57,679(1)
Mark G. Wimer, ................................. 1996 322,516 125,000 15,000 --
Senior Vice President for Inpatient Services 1995 281,261 125,000 15,000 --
1994 212,692 125,000 8,000 --
Robert D. Woltil ............................... 1996 296,164(2) 125,000 25,000 --
Senior Vice President for Financial Services
and Chief Financial Officer
Robert F. Murphy ............................... 1996 260,000 100,000 -- --
Senior Vice President, General Counsel and 1995 35,000(3) -- 10,000 --
Secretary
</TABLE>
- ------------------------
(1) Represents amounts paid by Sun for relocation expenses for Mr. Levin.
(2) Salary for 1996 represents amounts paid to Mr. Woltil in 1996 after the
commencement of his employment by Sun in February 1996. Mr. Woltil's
annualized salary for 1996 would have been $350,000.
(3) Salary for 1995 represents amounts paid to Mr. Murphy in 1995 after the
commencement of his employment by Sun in November 1995. Mr. Murphy's
annualized salary for 1995 would have been $260,000.
6
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options made to each of the Named Executive Officers during the
year ended December 31, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS GRANTED PRICE APPRECIATION FOR
SECURITIES TO EMPLOYEES IN EXERCISE OR OPTION TERM(3)
UNDERLYING FISCAL YEAR BASE PRICE EXPIRATION ----------------------
NAME OPTIONS(1) (%) ($/SH)(2) DATE 5%($) 10%($)
- -------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andrew L. Turner(4)................... -- % $ -- -- $ -- $ --
Robert A. Levin....................... 15,000 3.47 13.125 04/08/06 123,814 313,768
Mark G. Wimer......................... 15,000 3.47 13.125 04/08/06 123,814 313,768
Robert D. Woltil...................... 25,000 5.78 12.375 03/25/06 194,564 493,064
Robert F. Murphy(4)................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) All options were granted under Sun's 1996 Combined Incentive and
Non-qualified Stock Option Plan.
(2) All options were granted at an exercise price equal to the fair market value
of the Sun Common Stock on the option grant date. All options will vest and
become exercisable at a rate of one-third each year beginning on the first
anniversary of the date of grant. All options become fully exercisable on
the occurrence of a change in control as described in the plan pursuant to
which each option was granted.
(3) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercise are
dependent on the future performance of the Sun Common Stock as well as the
option holder's continued employment through the vesting period. The amounts
reflected in this table may not necessarily be achieved.
(4) Mr. Turner and Mr. Murphy did not receive stock option grants in 1996.
FISCAL YEAR-END OPTION VALUES
Set forth in the table below is information concerning the value of stock
options held as of December 31, 1996, by each of the Named Executive Officers.
None of the Named Executive Officers exercised any stock options during the year
ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
OPTIONS AT YEAR-END(#) YEAR- END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew L. Turner.......................................... -- 200,000 $ -- $ --
Robert A. Levin........................................... 25,000 38,000 62,500 5,625
Mark G. Wimer............................................. 25,000 38,000 62,500 5,625
Robert D. Woltil.......................................... -- 25,000 -- 28,125
Robert F. Murphy.......................................... -- 10,000 -- 40,000
</TABLE>
- ------------------------
(1) Based on the closing price of the Sun Common Stock, as reported on the New
York Stock Exchange, at December 31, 1996, which was $13.50 per share.
7
<PAGE>
COMMITTEES OF THE BOARD
To assist in the discharge of its responsibilities, the board of directors
of Sun has established an Audit Committee and a Compensation Committee. There is
no standing Nominating Committee to the board of directors. The members of these
standing committees are elected by the board of directors and serve at the
pleasure of the board.
AUDIT COMMITTEE. The Audit Committee has the responsibility of making
recommendations to the board concerning the engagement of Sun's independent
public accountants, reviewing the overall scope and results of the annual audit
and performing such functions as may be prescribed by the Board. The Audit
Committee also reviews proposed audit fees, fiscal year-end audit results and
the internal financial controls of Sun. The members of the Audit Committee are
elected annually by the directors. During 1996, the Audit Committee was
initially comprised of James R. Tolbert, III, Zev Karkomi and Lois E. Silverman.
Martin G. Mand became a member of the committee in February, 1996, and John E.
Bingaman became a member in June, 1996. All of these members were non-employee
directors of Sun. The Audit Committee met 12 times during 1996, and each member
of the Audit Committee as of the date of such meetings attended the meetings
with one exception.
COMPENSATION COMMITTEE. The Compensation Committee is authorized to review
the compensation of the senior officers of Sun and to determine salaries,
bonuses, stock options and any other forms of equity-based compensation, to
review recommendations to the board concerning the compensation of the directors
and to perform such other functions as the board may direct. The Compensation
Committee also administers Sun's stock option plans. The members of the
Compensation Committee are elected annually by the directors. During 1996, the
Compensation Committee was initially comprised of Messrs. Bingaman, Karkomi and
Woolsey. All of these members were non-employee directors of Sun. In June 1996,
Messrs. Bingaman and Karkomi were replaced by Lois E. Silverman and Martin G.
Mand. In 1996, the Compensation Committee held six meetings, and each member of
the Compensation Committee as of the date of such meetings attended the meetings
with three exceptions.
ATTENDANCE AT MEETINGS
During 1996, Sun's board of directors held 10 meetings by conference call or
in person and took a number of actions by written consent. No director attended
fewer than 90% of the total meetings of the board of directors.
NON-EMPLOYEE DIRECTOR COMPENSATION
All non-employee directors of Sun are entitled to receive an annual fee of
$24,000, which is payable in four equal quarterly installments. In addition,
each Chairperson of a committee of the board of directors is entitled to receive
an additional annual fee of $4,000, payable in four equal quarterly
installments. Effective after April 11, 1997 and subject to stockholder approval
of the 1997 Non-employee Director Stock Plan by the stockholders of Sun, all
non-employee directors and committee Chairpersons have the election of (1)
receiving the entire annual retainer and, in the case of committee Chairpersons,
their Chairperson fees in cash; or (2) receiving one-half of the retainer in
cash and the remaining one-half in the form of restricted stock awards. If
restricted stock is elected, for every dollar of cash given up, the recipient
will receive restricted stock worth $1.10. The receipt of the relevant annual
fee is subject to attendance by the director at no less than 75% of the total
board and committee meetings for the calendar year.
Until April 11, 1997, directors who are not employees of Sun were also
entitled to receive fees of $1,200 for each board of directors meeting attended
in person, $500 for each board of directors meeting attended by telephone and
$500 for each committee meeting of the board of directors attended in person or
by telephone, plus reimbursement of out-of-pocket expenses for attendance at
such meetings. Effective after April 11, 1997, the fee for the first board of
directors meeting or committee meeting attended in person by a non-employee
director in a single day has been increased to $1,750. Directors are entitled to
an additional $500 for each subsequent meeting attended that same day. The fees
for any meetings that are attended by telephone are $500. In addition, subject
to stockholder approval of the 1997 Non-employee
8
<PAGE>
Director Stock Plan by the stockholders of Sun, non-employee directors already
serving on the board are entitled to 4,000 shares which are to be awarded
annually in the form of non-qualified stock options and 2,000 shares which are
to be awarded annually in the form of restricted stock awards.
Non-employee directors who are elected to the board for the first time or
after a period of not serving on the board are entitled to 10,000 shares which
are to be awarded annually in the form of non-qualified stock options and 5,000
shares which are to be awarded annually in the form of restricted stock. . At
the annual meeting held in 1996, Sun's stockholders approved the 1995
Non-Employee Directors' Stock Option Plan to supersede the 1993 Non-Employee
Directors' Stock Option Plan. The 1995 Non-Employee Directors' Stock Option Plan
provides that each non-employee director will receive an option to purchase
5,000 shares upon his or her initial appointment to Sun's board of directors. In
addition, commencing January 1, 1996, each non-employee director who has not
been an employee of Sun during the previous twelve months will receive an annual
option to purchase 1,000 shares, PROVIDED, that any such director who was a
non-employee director prior to August 22, 1995 was not eligible to receive an
annual option grant in 1996. Accordingly, Messrs. Karkomi and Bingaman, who were
non-employee directors of Sun prior to August 22, 1995, did not receive an
annual option grant under the 1995 Non-Employee Directors' Stock Option Plan in
1996. All options under the 1995 Non-Employee Directors' Stock Option Plan are
non-qualified stock options and vest in four equal annual installments beginning
on the second anniversary of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the beginning of the 1996 fiscal year, the Compensation Committee was
comprised of three members, John E. Bingaman, R. James Woolsey and Zev Karkomi,
all non-employee members of Sun's board of directors. In June 1996, following
the annual meeting of stockholders, Mr. Bingaman and Mr. Karkomi were replaced
by Lois E. Silverman and Martin G. Mand, also non-employee members of Sun's
board of directors. None of these directors were employees of Sun.
Sun's nursing home subsidiary, Sunrise, is a lessee or sublessee of 56
facilities from partnerships or corporations in which Mr. Karkomi is a general
partner, stockholder or director. Sun also leases two facilities from Mr.
Karkomi as an individual. These arrangements were entered into from February
1989 to March 1997, with varying lease terms. Approximately 50% of the
facilities are under ten-year terms. The aggregate lease payments, including
base rents, contingent rents and other miscellaneous payments in connection with
these leases, totaled approximately $15,451,000 in 1996. Aggregate lease
installments paid since lease inception and all payments due through lease
termination, together with known adjustments to those lease amounts, total
approximately $216,200,000.
Sunrise and a limited partnership in which Mr. Karkomi is a general partner
entered into various agreements pursuant to which Sunrise operated a nursing
facility owned by the partnership. Sunrise operated the facility as a licensee
from July 1996 until September 1996. Pursuant to these agreements, the limited
partnership in which Mr. Karkomi is a general partner owes Sun approximately
$110,000 after receipt of a $400,000 payment in March 1997 for certain costs in
excess of revenues for the period the nursing facility was operated by Sun.
Mr. Turner guarantees Sun's obligations under the lease for a nursing home
in Connecticut that is owned by Mr. Karkomi. Mr. Turner is the guarantor of
subleases on four facilities in Illinois, the sublessor of which is a company
co-owned by Mr. Karkomi. Mr. Karkomi's company, in turn, is the guarantor of the
master lease. Mr. Turner also guarantees Sun's obligations under three facility
leases in Washington.
Sunrise is a lessee or assignee of seven facilities from partnerships in
which Mr. Bingaman has an equity interest of greater than ten percent. Each of
these lease arrangements was entered into prior to the closing of the
acquisition of Honorcare. All of the leases commenced on July 13, 1993 and
terminate in 2001. The aggregate lease payments, including base rents,
contingent rents and other miscellaneous payments in connection with these
leases, totaled approximately $2,180,000 in 1996. Aggregate lease installments
paid since lease inception and all payments due through lease termination,
together with known adjustments to lease amounts, total approximately
$16,414,000.
9
<PAGE>
Sun believes the terms of all of the foregoing transactions are as favorable
to Sun as those that could have been obtained from non-affiliated parties in
arm's-length transactions. However, Sun's contractual relationship with entities
affiliated with members of Sun's board of directors creates the potential for
conflicts of interest.
No executive officer of Sun during the last fiscal year served as a member
of a compensation committee or director of another entity in a situation in
which an executive officer of such other entity served as a member of Sun's
Compensation Committee.
EMPLOYMENT AGREEMENT
Sun entered into an employment agreement dated as of June 2, 1993 with Mr.
Turner (the "Employment Agreement") that initially provided Mr. Turner with an
annual salary of $375,000 and an annual bonus, not exceeding $250,000 per year,
pursuant to a formula established by the Compensation Committee. Mr. Turner's
annual salary was increased in April 1994 to $500,000 and remained at that level
for 1995 and 1996. See "Compensation Committee Report--Base Salaries." Pursuant
to the Employment Agreement, Mr. Turner is restricted from disclosing
confidential information that has been obtained by him or disclosed to him as a
result of his employment with Sun. In addition, during the term of his
employment by Sun and for a period of two years thereafter, Mr. Turner is
prohibited from competing with Sun or any of its affiliates, soliciting the
business of any patient or customer of Sun or any of its affiliates, and
soliciting for employment any of the employees of Sun or any of its
subsidiaries. The Employment Agreement provides that it terminates after the
expiration of five years, upon death or total disability of Mr. Turner, upon Mr.
Turner reaching mandatory retirement age under any retirement policy adopted by
Sun, by mutual agreement of Mr. Turner and Sun, upon dissolution and liquidation
of Sun, at Mr. Turner's election without cause upon six months' notice, or upon
notice by Sun to Mr. Turner for cause.
SEVERANCE AGREEMENTS
Sun has entered into severance agreements (the "Severance Agreements") with
certain executive officers, including the Named Executive Officers. Each
Severance Agreement provides that in the event of the involuntary termination of
the executive, he or she will be entitled to receive any accrued but unpaid
salary plus a pro rata portion of annual bonus. In addition, the executive will
be entitled to a severance payment equal to two times salary at the rate in
effect at the time of the executive's involuntary termination, or, in the event
that such termination occurs following a change in control of Sun (as defined
below), a severance payment equal to three times salary at the rate then in
effect. The executive will continue to receive health and other benefits for a
period of two years following his or her involuntary termination (or for a
period of three years in the event that such termination occurs following a
change in control of Sun). The Severance Agreements also provide for a gross-up
payment to be made to the executives, if necessary to eliminate the effects of
the imposition of the excise tax under Section 280G of the Code on the payments
made thereunder. The Severance Agreements contain identical noncompetition and
nondisclosure covenants, except that the noncompetition covenant in Mr. Turner's
agreement follows the noncompetition covenant in his Employment Agreement. See
"--Employment Agreement" for a description of this provision.
For purposes of the Severance Agreements, "change in control" is generally
defined as (i) the acquisition by a person or group of beneficial ownership
representing 33 1/3% of Sun's then outstanding voting stock, (ii) stockholder
approval of a merger or consolidation of Sun other than a merger of
consolidation in which the voting securities of Sun outstanding immediately
prior thereto continues to represent at least 66 2/3% of the combined voting
power of the surviving entity's outstanding voting securities, (iii) under
certain conditions, a change in the majority of the board of directors of Sun,
or (iv) stockholder approval of a reorganization of Sun or a sale of
substantially all of Sun's assets.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF PRINCIPAL MANAGEMENT
The following table and footnotes set forth certain information regarding
the beneficial ownership of Sun Common Stock as of March 31, 1997 (i) by each
incumbent director, director nominee and the five executive officers named in
the Summary Compensation Table herein and (ii) by all incumbent directors and
executive officers of Sun as a group. Except as otherwise indicated, to the
knowledge of Sun, all persons listed below have sole voting and investment power
with respect to their shares of Sun Common Stock.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS(1)(%)
- --------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Andrew L. Turner......................................... 6,847,002(2) 11) 14.0%
John E. Bingaman......................................... 182,500(3) *
Zev Karkomi.............................................. 83,850(4) *
Robert A. Levin.......................................... 163,000(5) 11) *
Martin G. Mand........................................... 1,250(6) *
Robert F. Murphy......................................... 59,000(11) *
Warren C. Schelling...................................... 63,334(7) 11) *
Lois E. Silverman........................................ 1,500(8) *
James R. Tolbert, III.................................... 1,500(8) *
Mark G. Wimer............................................ 162,000(9) 11) *
Robert D. Woltil......................................... 79,334(10 11) *
R. James Woolsey......................................... 1,500(8) *
All directors and executive officers as a group (16
persons, including those named above)(12).............. 7,709,104 16.0%
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Sun Common Stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within
60 days of March 31, 1997, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Sun Common Stock beneficially
owned.
(2) Includes 153,000 shares of Sun Common Stock owned by the Turner Children's
Trust and 300,000 shares of Sun Common Stock owned by the Turner Family
Foundation (Mr. Turner disclaims beneficial ownership of these shares). Also
includes an option to purchase 100,000 shares subject to vesting within 60
days of March 31, 1997.
(3) Includes currently exercisable options to purchase 42,500 shares of Sun
Common Stock.
(4) Includes 200 shares owned by Mr. Karkomi's grandson. Mr. Karkomi disclaims
beneficial ownership of these shares. Also includes currently exercisable
options to purchase 42,500 shares of Sun Common Stock.
(5) Consists of shares owned by Mr. Levin and his wife, as to which Mr. Levin
has shared voting and investment power. Includes currently exercisable
options to purchase 38,000 shares of Sun Common Stock.
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(6) Consists of currently exercisable options to purchase 1,250 shares of Sun
Common Stock.
(7) Consists of shares owned by Mr. Schelling and his wife, as to which Mr.
Schelling has shared voting and investment power. Includes currently
exercisable options to purchase 3,334 shares of Sun Common Stock.
(8) Consists of currently exercisable options to purchase 1,500 shares of Sun
Common Stock.
(9) Includes currently exercisable options to purchase 38,000 shares of Sun
Common Stock.
(10) Includes 5,000 shares owned by Mr. Woltil and his wife, as to which Mr.
Woltil has shared voting and investment power. Also includes currently
exercisable options to purchase 8,334 shares of Sun Common Stock.
(11) Includes restricted shares awarded under the Stock Incentive Plan which may
be subject to a substantial risk of forfeiture. The number of restricted
shares included for each executive officer listed above as having restricted
shares is as follows: Mr. Turner--251,000; Mr. Levin--122,000; Mr.
Murphy--59,000; Mr. Schelling--58,000; Mr. Wimer--124,000; and Mr.
Woltil--66,000.
(12) Includes an aggregate of 281,752 shares of Sun Common Stock issuable upon
the exercise of options that are currently exercisable or subject to vesting
within 60 days of March 30, 1997. Also includes an aggregate of 489,000
restricted shares awarded under the Stock Incentive Plan which may be
subject to a substantial risk of forfeiture.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to each other person
believed by Sun to be the beneficial owner of more than five percent of the Sun
Common Stock as of March 31, 1997.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OF CLASS(1)(%)
- ------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Andrew L. Turner .............................................................. 6,847,002(2) 14.0%
Sun Healthcare Group, Inc.
101 Sun Lane, N.E.
Albuquerque, New Mexico 87109
Neuberger & Berman LLC ........................................................ 2,708,500(3) 5.52
605 Third Avenue
New York, New York 10158-3698
Sun Healthcare Group, Inc. Grantor Stock Trust ................................ 3,008,958(4) 6.13
c/o Boatmen's Trust Company
100 North Broadway, Suite 970
St. Louis, Missouri 63102
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Sun Common Stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within
60 days of March 31, 1997, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Sun Common Stock beneficially
owned.
(2) Includes 153,000 shares of Sun Common Stock owned by the Turner Children's
Trust and 300,000 shares of Sun Common Stock owned by the Turner Family
Foundation (Mr. Turner disclaims beneficial ownership of these shares). Also
includes an option to purchase 100,000 shares subject to vesting within 60
days of March 31, 1997. Also includes 251,000 restricted shares awarded
under the Stock Incentive Plan which may be subject to a substantial risk of
forfeiture.
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(3) Based upon a Schedule 13G filed with the Securities and Exchange Commission
on February 11, 1997.
(4) As of March 31, 1997, the Sun Healthcare Group, Inc. Grantor Stock Trust and
Boatmen's Trust Company, as Trustee, each disclaim beneficial ownership of
these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Turner guarantees Sun's obligations under the lease for a nursing home
in Connecticut that is owned by Mr. Karkomi. Mr. Turner is the guarantor of
subleases on four facilities in Illinois, the sublessor of which is a company
co-owned by Mr. Karkomi. Mr. Karkomi's company, in turn, is the guarantor of the
master lease. Mr. Turner also guarantees Sun's obligations under three facility
leases in Washington.
In connection with the reorganization in April 1993 of various legal
entities that became wholly owned subsidiaries of Sun and the termination of S
corporation status for certain of Sun's subsidiaries, Mr. Turner and his spouse
(the "Indemnitees") entered into a tax indemnity agreement (the "Tax Indemnity
Agreement") with Sun and such subsidiaries. The Tax Indemnity Agreement provides
that Sun and such subsidiaries will indemnify the Indemnitees from all
liabilities and claims, subject to certain limitations, that the Indemnitees may
sustain for payment of federal and state income taxes in connection with any tax
adjustments relating to such subsidiaries when they were taxed as S corporations
to the extent that Sun or such subsidiaries receive favorable tax adjustments
subsequent to the years such subsidiaries were taxed as S corporations. In
addition, Sundance, Sun's rehabilitation therapy subsidiary, entered into an
agreement with Mr. Turner whereby Sundance agreed to change its method of
accounting for income tax purposes from the cash basis to the accrual basis so
as to be consistent with financial statement reporting. Pursuant thereto,
Sundance approved a distribution to Mr. Turner out of its prior accumulated S
corporation earnings in an amount sufficient to cover certain of his tax
obligations; Sun paid $3,682,000 in 1994 and 1993 to cover such tax obligations.
While Sundance and Mr. Turner believe such distribution will not be taxable to
Mr. Turner, Sundance has agreed to indemnify him against any tax liability
resulting from such payment.
In April 1995, Sun paid Mr. Turner $504,884 as reimbursement for expenses
incurred by him as a selling stockholder in Sun's December 1994 underwritten
public offering of Common Stock.
See "Compensation Committee Interlocks and Insider Participation" for a
description of certain relationships between Sun and the members of the
Compensation Committee of Sun's board of directors.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SUN HEALTHCARE GROUP, INC.
By: /s/ ANDREW L. TURNER
-----------------------------------------
Andrew L. Turner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
April 30, 1997
</TABLE>
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