<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUN HEALTHCARE GROUP, INC.
and the Guarantors listed on Schedule A
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
SEE SCHEDULE A 8051 SEE SCHEDULE A
(State or other jurisdiction (Primary standard (I.R.S. employer
of incorporation or industrial classification identification number)
organization) code number)
</TABLE>
------------------------
101 SUN LANE, N.E.
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
ROBERT F. MURPHY, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
SUN HEALTHCARE, INC.
101 SUN LANE, N.E.
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES OF CORRESPONDENCE TO:
WILLIAM H. HINMAN, JR.
SHEARMAN & STERLING
555 CALIFORNIA STREET, SUITE 2000
SAN FRANCISCO, CALIFORNIA 94104
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE (1) FEE (2)
<S> <C> <C> <C> <C>
9 1/2% Senior Subordinated Notes due
2007..................................... $250,000,000 100% $250,000,000 $75,758
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Pursuant to Rule 457(n), no separate registration fee is payable with
respect to the subsidiary guarantees.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
I.R.S. EMPLOYER
STATE OF IDENTIFICATION
COMPANY INCORPORATION NUMBER
- ---------------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Accelerated Care Plus, L.L.C.......................................... Delaware 48-1167102
Bay Colony Health Service, Inc........................................ Massachusetts 04-2761614
Bergen Eldercare, Inc................................................. New Jersey 04-2916682
Cal-Med, Inc.......................................................... California 33-0579128
Clipper Home Affiliates, Inc.......................................... New Hampshire 02-0388298
Clipper Home of North Conway, Inc..................................... New Hampshire 02-0417606
Clipper Home of Portsmouth, Inc....................................... New Hampshire 02-0350094
Clipper Home of Rochester, Inc........................................ New Hampshire 02-0402767
Clipper Home of Wolfeboro, Inc........................................ New Hampshire 02-0382521
Community Re-Entry Services of Cortland, Inc.......................... Delaware 04-3200915
G-WZ of Stamford, Inc................................................. Connecticut 04-3148131
Golan Healthcare Group, Inc........................................... Massachusetts 04-3327918
Goodwin Nursing Home, Inc............................................. New Hampshire 02-0303002
HC, Inc............................................................... Kansas 48-1070267
Hospital Therapy Service of Michigan, L.L.C........................... Michigan 38-3192020
Hospital Therapy Service of Texas, Inc................................ Texas 75-2449812
HTA of New Jersey, Inc................................................ New Jersey 22-3227978
Langdon Place of Dover, Inc........................................... New Hampshire 02-0417605
Langdon Place of Exeter, Inc.......................................... New Hampshire 02-0410985
Langdon Place of Nashua, Inc.......................................... New Hampshire 02-0438981
Living Services, Inc.................................................. Washington 91-0921669
LTC Staffinders, Inc.................................................. Connecticut 04-3201528
Manatee Springs Nursing Center, Inc................................... Florida 58-1534760
Masthead Corporation.................................................. New Mexico 74-2839804
Mediplex Atlanta Rehabilitation Institute, Inc........................ Massachusetts 58-2081719
Mediplex Management, Inc.............................................. Massachusetts 04-2802626
Mediplex Management of Palm Beach County, Inc......................... Florida 04-2983837
Mediplex Management of Texas, Inc..................................... Texas 04-3154661
Mediplex of Colorado, Inc............................................. Colorado 93-0962981
Mediplex of Concord, Inc.............................................. Massachusetts 04-2587669
Mediplex of Connecticut, Inc.......................................... Connecticut 04-2587669
Mediplex of Kentucky, Inc............................................. Kentucky 06-12255960
Mediplex of Maryland, Inc............................................. Maryland 04-2983832
Mediplex of Massachusetts, Inc........................................ Massachusetts 04-2667612
Mediplex of New Hampshire, Inc........................................ New Hampshire 04-2773669
Mediplex of New York, Inc............................................. New York 04-2818624
Mediplex of Ohio, Inc................................................. Ohio 04-3156001
Mediplex of Tennessee, Inc............................................ Tennessee 04-3203009
Mediplex of Virginia, Inc............................................. Virginia 04-2916681
Mediplex Rehabilitation of Massachusetts, Inc......................... Massachusetts 04-3135281
New Bedford Acquisition Corp.......................................... Massachusetts 04-3170901
New Bedford Nursing Center, Inc....................................... Massachusetts 04-3170900
Nursing Home, Inc..................................................... Washington 91-1572371
Oakview Treatment Centers of Kansas, Inc.............................. Kansas 04-2935538
P.M.N.F. Management, Inc.............................................. New Jersey 22-2470101
Pharmacy Factors of California, Inc................................... California 95-4488888
Pharmacy Factors of Florida, Inc...................................... Florida 59-3086319
Pharmacy Factors of Texas, Inc........................................ Texas 59-3421095
Quality Care Holding Corp............................................. Massachusetts 04-2981931
Quality Nursing Care of Massachusetts, Inc............................ Massachusetts 04-2981932
SHG International Holdings, Inc....................................... Delaware [applied for]
Special Medical Services, Inc......................................... Texas 75-2269050
Spofford Land, Inc.................................................... New Hampshire 04-2817522
Sun Alliance, Inc..................................................... Delaware 74-2843588
SunBridge, Inc........................................................ New Mexico 85-0436352
Sun Care Corp......................................................... Delaware 04-3097714
SunCare Respiratory Services, Inc..................................... Indiana 35-1812159
SunChoice Medical Supply, Inc......................................... New Mexico 85-0444598
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
I.R.S. EMPLOYER
STATE OF IDENTIFICATION
COMPANY INCORPORATION NUMBER
- ---------------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Sundance Rehabilitation Corporation................................... Connecticut 06-1310410
SunFactors, Inc....................................................... Flordia 59-3199708
Sun Healthcare Group, Inc............................................. Delaware 85-0410612
Sun Lane Purchase Corporation......................................... New Mexico [applied for]
Sunmark of New Mexico................................................. New Mexico 85-0431051
SunQuest Consulting, Inc.............................................. New Mexico 85-0416094
Sunrise Healthcare of Colorado, Inc................................... Colorado 84-1270639
Sunrise Healthcare of Florida, Inc.................................... Florida 74-2782684
Sunrise Healthcare Corporation........................................ New Mexico 85-0370802
Sunrise Rehab of Colorado, Inc........................................ Colorado 84-1270638
SunScript Pharmacy Corporation........................................ New Mexico 85-0406441
SunSolution, Inc...................................................... Delaware [applied for]
SunSpectrum Outpatient Rehabilitation-Concord, Inc.................... Massachusetts 04-3175073
The Mediplex Group, Inc............................................... Massachusetts 04-2803133
Valley View Psychiatric Services, Inc................................. Colorado 84-1175509
Worcester Nursing Center, Inc......................................... Massachusetts 04-3335449
</TABLE>
<PAGE>
SUN HEALTHCARE GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN THE
PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN FORM S-4
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
- -------------------------------------------------------- ------------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Facing Page of the Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................. Available Information; Incorporation of Certain Documents by
References; Outside Back Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.............. Prospectus Summary; Risk Factors; Ratio of Earnings to Fixed
Changes Selected Consolidated Financial Data
4. Terms of the Transaction..................... Prospectus Summary; Risk Factors; The Exchange Offer;
Description of New Notes; Plan of Distribution; Certain
Federal Income Tax Considerations
5. Pro Forma Financial Information.............. Not Applicable
6. Material Contracts With the Company Being
Accepted................................... Not Applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters............................ Not Applicable
8. Interests of Named Experts and Counsel....... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not Applicable
10. Information with Respect to S-3
Registrants................................ Prospectus Summary
11. Incorporation of Certain Information by
Reference.................................. Available Information; Incorporation of Certain Documents by
Reference
12. Information with Respect to S-2 or S-3
Registrants................................ Not Applicable
13. Incorporation of Certain Information by
Reference.................................. Not Applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants................ Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
- -------------------------------------------------------- ------------------------------------------------------------
<C> <S> <C>
15. Information with Respect to S-3 Companies.... Not Applicable
16. Information with Respect to S-2 or S-3
Companies.................................. Not Applicable
17. Pro Forma Financial Information.............. Not Applicable
18. Information if Proxies, Consents or
Authorization Are To Be Solicited.......... Not Applicable
19. Information if Proxies, Consents or
Authorizations Are Not To Be Solicited or
in an Exchange Offer....................... Prospectus Summary; The Exchange Offer; Description of the
New Notes
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION -- DATED OCTOBER 10, 1997
PROSPECTUS
SUN HEALTHCARE GROUP, INC.
---------------
Offer to Exchange 9 1/2% Series B Senior Subordinated Notes due 2007, which
have been registered under the Securities Act of 1933, as amended, for any and
all outstanding 9 1/2% Series A Senior Subordinated Notes due 2007.
The Exchange Offer will expire at 5:00 p.m., New York City time, on November
, 1997, unless extended.
The 9 1/2% Series B Senior Subordinated Notes due 2007 (the "New Notes") of
Sun Healthcare Group, Inc. ("Sun" or the "Company"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which this Prospectus is a part, are hereby offered,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying letter of transmittal (the "Letter of Transmittal" and,
together with this Prospectus, the "Exchange Offer"), in exchange for an equal
principal amount of outstanding 9 1/2% Series A Senior Subordinated Notes due
2007 (the "Old Notes"), of which $250,000,000 aggregate principal amount is
outstanding as of the date hereof. The New Notes and the Old Notes are
collectively referred to herein as the "Notes."
Any and all Old Notes that are validly tendered and not withdrawn on or
prior to 5:00 p.m., New York City time, on the date the Exchange Offer expires,
which will be November , 1997 (20 business days following the commencement of
the Exchange Offer) unless the Exchange Offer is extended (such date, including
as extended, the "Expiration Date") will be accepted for exchange. Tenders of
Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the Exchange
Offer is subject to certain customary conditions, which may be waived by the
Company, and to the terms of the Registration Rights Agreement (the
"Registration Rights Agreement"), dated as of July 8, 1997, among the Company,
the Guarantors named therein (the "Guarantors") and Donaldson, Lufkin & Jenrette
Securities Corporation, Credit Suisse First Boston Corporation, J.P. Morgan
Securities, Inc. and NationsBanc Capital Markets, Inc. (the "Initial
Purchasers"). Old Notes may be tendered only in integral multiples of $1,000.
See "The Exchange Offer."
The New Notes will be entitled to the benefits of the same Indenture (as
defined herein) that governs the Old Notes and will govern the New Notes. The
form and terms of the New Notes are the same in all material respects as the
form and terms of the Old Notes, except that the New Notes do not contain terms
with respect to the liquidated damages provisions and the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. See "The Exchange Offer" and "Description of
New Notes."
(CONTINUED ON FOLLOWING PAGE)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF
THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED PRIVATE
NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON NOVEMBER ,
1997, UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE
DISCRETION (THE "EXPIRATION DATE"). TENDERS OF PRIVATE NOTES MAY BE WITHDRAWN AT
ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE
EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF PRIVATE
NOTES BEING TENDERED FOR EXCHANGE. PRIVATE NOTES MAY BE TENDERED ONLY IN
INTEGRAL MULTIPLES OF $1,000. IN THE EVENT THE COMPANY TERMINATES THE EXCHANGE
OFFER AND DOES
<PAGE>
NOT ACCEPT FOR EXCHANGE ANY PRIVATE NOTES, THE COMPANY WILL PROMPTLY RETURN ALL
PREVIOUSLY TENDERED PRIVATE NOTES TO THE HOLDERS THEREOF.
--------------------------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The New Notes will initially be represented by global notes in fully
registered form and will be deposited with the Trustee as custodian for and
registered in the name of a nominee of The Depository Trust Company (the "DTC").
Beneficial interests in the global notes will be shown on, and transfers thereof
will be effected through, records maintained by the DTC and its participants.
Interest is payable in cash semi-annually in arrears on January 1 and July 1
of each year commencing January 1, 1998. The New Notes will mature on July 1,
2007. On or after July 1, 2002, the Company may redeem the New Notes, in whole
or in part, at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined herein), if any, to the date of
redemption. In addition, upon a Change of Control (as defined herein), each
holder of Notes will have the right to require the Company to repurchase all or
any part of such holder's Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase.
The New Notes will be senior subordinated, unsecured, general obligations of
the Company, and, as such, subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Company. The New Notes will rank
PARI PASSU with all existing and future senior subordinated indebtedness of the
Company and will rank senior to all other existing and future subordinated
indebtedness of the Company. The New Notes will be fully and unconditionally
guaranteed on an unsecured, senior subordinated and joint and several basis (the
"Guarantees") by all existing and future material Subsidiaries (as defined) of
Sun other than the CareerStaff Companies (as defined herein) and the Foreign
Companies (as defined herein) (collectively, the "Guarantors"), each of which is
listed on Schedule A hereto. The New Notes will also be effectively subordinated
to (i) all existing and future liabilities of the Company's subsidiaries which
are not Guarantors and (ii) all existing and future Senior Debt of the
Guarantors. As of June 30, 1997, the aggregate amount of indebtedness (excluding
intercompany indebtedness) that effectively ranked senior to the New Notes and
the Guarantees was approximately $ million. As of June 30, 1997, after
giving effect to the Notes Offering (as defined herein), Mergers and the
consumation of the Senior Credit Facilities (as defined herein) approximately
$ million of indebtedness ranking PARI PASSU in right of payment with the New
Notes and/or the Guarantees and $ million of indebtedness ranking subordinate
in right of payment to the New Notes and/or the Guarantees was outstanding. All
of the Guarantors have guaranteed the Company's obligations under the Company's
Senior Credit Facilities as have the CareerStaff Companies (which entities are
not Guarantors).
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to third
parties, including Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1988), Morgan Stanley & Co. Incorporated, SEC No-Action
Letter (available June 5, 1991) and Shearman & Sterling, SEC No-Action Letter
(available July 2, 1993) (collectively, the "Exchange Offer No-Action Letters"),
the Company believes that the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by holders thereof
(other than a broker-dealer who acquires such New Notes directly from the
Trustee for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act or any holder that is an
"affiliate" of the Company as defined in Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in a distribution of such New
Notes. By tendering the Old Notes in exchange for New Notes, each holder, other
than a broker-dealer, will represent to the Company that: (i) it is not an
affiliate of the Company (as defined in Rule 405 under the Securities Act) or a
broker-dealer tendering Old Notes acquired directly from the Company for its own
account; (ii) any New Notes to be received by it will be acquired in the
ordinary course of its business; and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes. If a holder of
Old Notes is engaged in or intends to engage in a distribution of the New Notes
or has any arrangement or
2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder may not rely on the applicable
interpretations of the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer (a
"Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities. Pursuant to
the Registration Rights Agreement, the Company has agreed that starting on the
Expiration Date it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
The Company will not receive any proceeds from this offering. The Company
has agreed to pay the expenses of the Exchange Offer. No underwriter is being
utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL JANUARY , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN
CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Old Notes have been designated as eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages market. Prior to this
Exchange Offer, there has been no public market for the New Notes. If such a
market were to develop, the New Notes could trade at prices that may be higher
or lower than their principal amount. Sun does not intend to apply for listing
of the New Notes on any securities exchange or for quotation of the New Notes
through The Nasdaq Stock Market's National Market or otherwise. The Initial
Purchasers have previously made a market in the Old Notes and Sun has been
advised that the Initial Purchasers currently intend to make a market in the New
Notes, as permitted by applicable laws and regulations, after consummation of
the Exchange Offer. The Initial Purchasers are not obligated, however, to make a
market in the Old Notes or the New Notes and any such market making activity may
be discontinued at any time without notice at the sole discretion of the Initial
Purchasers. There can be no assurance as to the liquidity of the public market
for the New Notes or that any active public market for the New Notes will
develop or continue. If an active public market does not develop or continue,
the market price and liquidity of the New Notes may be adversely affected. See
"Risk Factors -- Absence of a Public Market for the New Notes."
3
<PAGE>
SCHEDULE A
Accelerated Care Plus, L.L.C.
Bay Colony Health Service, Inc.
Bergen Eldercare, Inc.
Cal-Med, Inc.
Clipper Home Affiliates, Inc.
Clipper Home of North Conway, Inc.
Clipper Home of Portsmouth, Inc.
Clipper Home of Rochester, Inc.
Clipper Home of Wolfeboro, Inc.
Community Re-Entry Services of Cortland, Inc.
G-WZ of Stamford, Inc.
Golan Healthcare Group, Inc.
Goodwin Nursing Home, Inc.
HC, Inc.
Hospital Therapy Service of Michigan, L.L.C.
Hospital Therapy Service of Texas, L.L.C.
HTA of New Jersey, Inc.
Langdon Place of Dover, Inc.
Langdon Place of Exeter, Inc.
Langdon Place of Nashua, Inc.
Living Services, Inc.
LTC Staffinders, Inc.
Manatee Springs Nursing Center, Inc.
Masthead Corporation
Mediplex Atlanta Rehabilitation Institute, Inc.
Mediplex of Colorado, Inc.
Mediplex of Concord, Inc.
Mediplex of Connecticut, Inc.
Mediplex of Kentucky, Inc.
Mediplex of Maryland, Inc.
Mediplex of Massachusetts, Inc.
Mediplex of New Hampshire, Inc.
Mediplex of New York, Inc.
Mediplex of Ohio, Inc.
Mediplex of Tennessee, Inc.
Mediplex of Virginia, Inc.
Mediplex Management, Inc.
Mediplex Management of Palm Beach County, Inc.
Mediplex Management of Texas, Inc.
Mediplex Rehabilitation of Massachusetts, Inc.
New Bedford Acquisition Corp.
New Bedford Nursing Center, Inc.
Nursing Home, Inc.
Oakview Treatment Centers of Kansan, Inc.
P.M.N.F Management, Inc.
Pharmacy Factors of California, Inc.
Pharmacy Factors of Florida, Inc.
Pharmacy Factors of Texas, Inc.
Quality Care Holding Corp.
4
<PAGE>
SCHEDULE A CONTINUED
Quality Nursing Care of Massachusetts, Inc.
SHG International Holding, Inc.
Special Medical Services, Inc.
Spofford Land, Inc.
Sun Alliance, Inc.
SunBridge, Inc.
Sun Care Corp.
SunCare Respiratory Services, Inc.
SunChoice Medical Supply, Inc.
Sundance Rehabilitation Corporation
SunFactors, Inc.
Sun Healthcare Group, Inc.
Sun Lane Purchase Corporation
Sunmark of New Mexico
SunQuest Consulting, Inc.
Sunrise Healthcare of Colorado, Inc.
Sunrise Healthcare of Florida, Inc.
Sunrise Healthcare Corporation
Sunrise Rehab of Colorado, Inc.
SunScript Pharmacy Corporation
SunSolution, Inc.
SunSpectrum Outpatient Rehabilitation-Concord, Inc.
The Mediplex Group, Inc.
Valley View Psychiatric Services, Inc.
Worcester Nursing Center, Inc.
5
<PAGE>
AVAILABLE INFORMATION
Sun is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the following public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy statements and other
information regarding registrants that file electronically with the Commission,
including Sun. In addition, reports, proxy statements and other information
concerning Sun may be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement") filed
by Sun with the Commission, through the Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), under the Securities Act, with respect to the New
Notes offered hereby. This Prospectus omits certain of the information contained
in the Registration Statement, and reference is hereby made to the Registration
Statement for further information with respect to Sun and the securities offered
hereby. Although statements concerning and summaries of certain documents are
included herein, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-1204) are
incorporated herein by reference:
1. Sun Healthcare Group, Inc.'s Quarterly Reports on Form 10-Q for the
quarterly period ended March 31, 1997 and June 30, 1997;
2. Sun Healthcare Group, Inc.'s Amendment No. 1 to the Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1996 filed April 30,
1997;
3. Sun Healthcare Group, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1996;
4. Sun Healthcare Group, Inc.'s Current Reports on Form 8-K filed February
14, 1997, February 24, 1997, March 28, 1997, April 14, 1997, May 30,
1997, June 16, 1997, July 9, 1997 and August 26, 1997.
All reports and any definitive proxy or information statements filed by Sun
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Registration Statement and prior to the termination of the
offering of the New Notes offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated herein by reference, or contained in this Prospectus, shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
This Prospectus incorporates documents by reference that are not presented
herein or delivered herewith. These documents are available without charge to
any person to whom a Prospectus is delivered, upon written or oral request of
such person, Sun Healthcare Group, Inc., 101 Sun Lane, N.E., Albuquerque, New
Mexico 87109, Attention: Secretary, telephone (505) 821-3355. In order to ensure
timely delivery of the documents, any request should be made by ,
1997 [5 days before Expiration Date].
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH OR REFERRED TO UNDER THE HEADING
"RISK FACTORS." OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS CONTAINED
IN THIS PROSPECTUS, INCLUDING STATEMENTS AS TO FUTURE FINANCIAL PERFORMANCE,
CONSTITUTE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS PROSPECTUS, THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUN'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS PROSPECTUS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN
THE SECTION SET FORTH UNDER THE HEADING "RISK FACTORS." PROSPECTIVE PURCHASERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE
REQUIRES, ALL REFERENCES TO "SUN" OR THE "COMPANY" INCLUDE SUN HEALTHCARE GROUP,
INC. AND ITS DIRECT AND INDIRECT SUBSIDIARIES.
THE COMPANY
Sun is a leading provider of high quality and cost efficient long-term,
subacute and related specialty healthcare services. At June 30, 1997, Sun
operated 183 long-term and subacute care facilities with 22,004 licensed beds in
21 states in the United States and 133 long-term care facilities with 7,632 beds
in the United Kingdom. Sun also is a leading provider of ancillary services,
including rehabilitation therapy, respiratory therapy, temporary therapy
staffing services and pharmaceutical products and services. Sun provides these
services to over 1,000 affiliated and nonaffiliated long-term and subacute care
facilities in the United States.
Sun's inpatient care facilities provide a broad range of healthcare
services, including nursing care, subacute care, therapy and other specialized
services such as care to patients with Alzheimer's disease. Sun's long-term and
subacute care operations have experienced significant growth since Sun's
inception in 1989, primarily from acquisitions of additional facilities. Sun
believes its inpatient care operations provide it with a platform to expand its
therapy and pharmaceutical businesses (which include dispensing pharmaceuticals
for such purposes as infusion therapy, pain management, antibiotic therapy and
parenteral nutrition) to affiliated and nonaffiliated long-term and subacute
care facilities. Sun believes that its expertise in operating long-term and
subacute care facilities enables it to provide its therapy and pharmaceutical
services more effectively and efficiently than providers without such operating
expertise.
Sun believes it is one of the three largest providers of contract therapy in
the United States, offering rehabilitation therapy through Sundance
Rehabilitation Corporation ("Sundance") and respiratory therapy through SunCare
Respiratory Services, Inc. ("SunCare"). At June 30, 1997, Sun provided therapy
services to 1,012 facilities in 43 states, 844 of which were operated by
nonaffiliated parties and 168 of which were affiliated facilities. As of June
30, 1997, Sun's contract therapy business had experienced compound annual
revenue growth of 44% since 1994.
Through CareerStaff Unlimited, Inc. ("CareerStaff"), the Company is a
nationwide provider of temporary therapy staffing. CareerStaff provides licensed
therapists skilled in the areas of physical, occupational and speech therapy
primarily to hospitals and nursing home contract service providers. At June 30,
1997, Sun had 23 division offices providing temporary therapy staffing services
in major metropolitan areas and eight division offices specializing in
placements of temporary travelling therapists in smaller cities and rural areas.
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Through Sunscript Pharmacy Corporation ("Sunscript"), the Company operates
25 pharmacies and one pharmaceutical billing and consulting center which
together provided pharmaceutical products and services to a total of 537
long-term and subacute care facilities in 23 states, 394 of which were
nonaffiliated. Sunscript acquired or opened two pharmacies in two states in 1996
and seven pharmacies in seven states in the six months ended June 30, 1997. In
addition, the Company operated twelve pharmacies in the United Kingdom at June
30, 1997.
Sun completed two substantial acquisitions in the United Kingdom, making the
Company the second largest operator of long-term care facilities in that market.
In December 1996, Sun acquired APTA Healthcare PLC ("APTA"), which operated 32
facilities with 1,264 registered beds, for total consideration of approximately
L13.7 million (approximately $24 million as of December 31, 1996). In January
1997, Sun acquired the 71% of Ashbourne PLC ("Ashbourne") that it did not
already own for approximately L67 million (approximately $110 million as of the
respective dates of payment) plus the assumption of approximately L88 million
(approximately $147 million as of June 30, 1997) of Ashbourne's indebtedness. As
of the date of acquisition, Ashbourne operated 49 facilities with 3,613
registered beds.
The market for long-term care services is less developed in the United
Kingdom than in the United States, and legislative changes in the early 1990s
combined with undercapacity has led to the significant development of new
long-term care facilities. Of the 133 facilities that Sun operated as of June
30, 1997 in the United Kingdom (including the 81 facilities previously operated
by Ashbourne and APTA), five, fifteen and six were opened in 1995, 1996 and the
first six months of 1997, respectively. Sun believes that the financial results
of its United Kingdom operations will be enhanced as these newer facilities, as
well as the nine additional facilities currently under development, mature and
approach normal occupancy levels.
The Company agreed in February 1997 to acquire Retirement Care Associates,
Inc. ("Retirement Care"), which as of June 30, 1997 operated 111 skilled nursing
facilities and assisted living centers to be acquired by Sun. Retirement Care
also owns (and Sun would acquire) approximately 65% of Contour Medical, Inc.
("Contour"), a national provider of medical/surgical supplies. The amended terms
of the merger (the "RCA Merger") provide for a purchase price of approximately
$178 million in Common Stock (based upon the closing price of the Common Stock
as of August 25, 1997) and the assumption of approximately $ million of
indebtedness. Retirement Care recently restated its fiscal 1997 financial
statements for the quarters ended September 30, 1996, December 31, 1996 and
March 31, 1997, resulting in an aggregate reduction of pre-tax income of
approximately $13.5 million for the first nine months of its fiscal 1997. The
Company expects that the RCA Merger will be accounted for as a pooling of
interests. Sun has also agreed to acquire the remaining 35% of Contour not
presently owned by Retirement Care for approximately $35 million, payable in
Common Stock or cash, at the option of Sun (the "Contour Merger"). The Company
believes that the acquisition of Retirement Care will enable it to establish a
strong market position in the southeastern United States for its long-term care
operations and provide an opportunity to expand its ancillary services business
in that region. In addition, the Company believes that the acquisition of
Contour will add significant market share to the Company's medical/surgical
supply business. While there can be no assurance that either the RCA Merger or
the Contour Merger will be consummated, these mergers are currently expected to
close during the fourth quarter of 1997.
On July 8, 1997, the Company issued the $250 million aggregate principal
amount of Series A 9 1/2% Senior Subordinated Notes due 2007 being offered for
exchange hereby. The net proceeds from the sale were used to reduce outstanding
borrowings under the Company's prior $490 million revolving credit facility (the
"Old Credit Facility").
On October 8, 1997, Sun announced that it had completed the acquisition (the
"Regency Merger") of Regency Health Services, Inc. ("Regency"), an operator of
skilled nursing facilities and a diversified provider of rehabilitation therapy,
institutional pharmacy and home health services, for approximately $625 million,
including approximately $367 million in cash (approximately $22.00 per
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Regency share) and the assumption or refinancing of approximately $258 million
of Regency's indebtedness.
Pursuant to the Regency Merger, Sun acquired 110 long-term care facilities
with 11,440 beds, 26 outpatient rehabilitation therapy clinics (23 of which have
health service locations) and eight institutional pharmacies. As of June 30,
1997, Regency had rehabilitation therapy contracts with 202 facilities and
pharmacy contracts with 164 facilities.
Sun financed the Regency Merger as well as the repayment of Sun's
outstanding borrowings under Sun's Old Credit Facility through borrowings under
a new $1.2 billion credit facility (the "Senior Credit Facilities"). In
connection with the Regency Merger, Sun also acquired in a tender offer $160
million of Regency's subordinated debt, which was subsequently retired.
In July 1997, Sun acquired 68.5% of the equity of Eurosar, S. A.
("Eurosar"), a privately owned nursing home operator in Spain, for approximately
$12 million in cash. At June 30, 1997, Eurosar operated seven nursing homes with
1,426 licensed beds.
In August 1997, Sun acquired 38% of the equity of Alpha Healthcare Limited
("Alpha"), a publicly held acute care provider in Australia, for approximately
$12 million in cash. At June 30, 1997, Alpha operated six facilities with 361
licensed beds.
The Company's principal executive offices are located at 101 Sun Lane, N.E.,
Albuquerque, New Mexico 87109, and its telephone number at such address is (505)
821-3355. The Company maintains a Web site at http://www.sunh.com.
THE EXCHANGE OFFER
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Registration Rights
Agreement................... The Old Notes were issued on July 8, 1997 to the
Initial Purchasers. The Initial Purchasers placed
the Old Notes with institutional investors. In
connection therewith, the Company and the Initial
Purchasers entered into the Registration Rights
Agreement, providing, among other things, for the
Exchange Offer. See "The Exchange Offer."
The Exchange Offer............ New Notes are being offered in exchange for an
equal principal amount of Old Notes. As of the
date hereof, $250,000,000 aggregate principal
amount of Old Notes are outstanding. Old Notes may
be tendered only in integral multiples of $1,000.
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Resale of New Notes........... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, including the Exchange
Offer No-Action Letters, the Company believes that
the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other
than a broker-dealer who acquires such New Notes
directly from the Company for resale pursuant to
Rule 144A under the Securities Act or any other
available exemption under the Securities Act or
any holder that is an "affiliate" of the Company
as defined in Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and
such holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and
have no arrangement or understanding with any
person to participate in a distribution of such
New Notes. By tendering the Old Notes in exchange
for New Notes, each holder, other than a broker-
dealer, will represent to the Company that: (i) it
is not an affiliate of the Company (as defined
under Rule 405 of the Securities Act) or a
broker-dealer tendering Old Notes acquired
directly from the Company for its own account;
(ii) any New Notes to be received by it were
acquired in the ordinary course of its business;
and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to
participate in a distribution of the New Notes. If
a holder of Old Notes is engaged in or intends to
engage in a distribution of the New Notes or has
any arrangement or understanding with respect to
the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder may
not rely on the applicable interpretations of the
staff of the Commission and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
secondary resale transaction. Each Participating
Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer
in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes
were acquired by such Participating Broker-Dealer
as a result of market-making activities or other
trading activities. The Company has agreed that,
starting on the Expiration Date and ending on the
close of business 180 days after the Expiration
Date, it will make this Prospectus
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available to any Participating Broker-Dealer for
use in
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connection with any such resale. See "Plan of
Distribution." To comply with the securities laws
of certain jurisdictions, it may be necessary to
qualify for sale or register the New Notes prior
to offering or selling such New Notes. The Company
has agreed, pursuant to the Registration Rights
Agreement and subject to certain specified
limitations therein, to register or qualify the
New Notes for offer or sale under the securities
or "blue sky" laws of such jurisdictions as may be
necessary to permit the holders of New Notes to
trade the New Notes without any restrictions or
limitations under the securities laws of the
several states of the United States.
Consequences of Failure to
Exchange Old Notes.......... Upon consummation of the Exchange Offer, subject
to certain exceptions, holders of Old Notes who do
not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to
registration rights and will not be able to offer
or sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act
(which, subject to certain limited exceptions, the
Company will have no obligation to do), except
pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable
state securities laws. See "Risk Factors --
Consequences of Failure to Exchange" and "The
Exchange Offer -- Terms of the Exchange Offer."
Expiration Date............... 5:00 p.m., New York City time, on November ,
1997 (20 business days following the commencement
of the Exchange Offer), unless the Exchange Offer
is extended, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended.
Interest on the New Notes..... The New Notes will accrue interest at the
applicable per annum rate set forth on the cover
page of this Prospectus, from the last date on
which interest was paid on the Old Notes
surrendered in exchange therefor or, if no
interest has been paid, from the Issue Date of
such Old Notes Interest on the New Notes is
payable on January 1 and July 1 of each year.
Conditions to the Exchange
Offer....................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However the Exchange Offer
is subject to customary conditions, which may be
waived by the Company. See "The Exchange Offer --
Conditions." Except for the requirements of
applicable federal and state securities laws,
there are no federal or state regulatory
requirements to be complied with or obtained by
the Company in connection with the Exchange Offer.
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Procedures for Tendering Old
Notes....................... Each holder of Old Notes (other than certain
members of the Automated Tendering Offering
Program ("ATOP") at the Depository Trust Company
who choose to use ATOP) wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any other
required documentation to the Exchange Agent (as
defined herein) at the address set forth herein or
effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein. See "The Exchange Offer -- Procedures for
Tendering" and "-- Book Entry Transfer."
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Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
and a properly completed Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Old
Notes, a written or facsimile transmission notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein under "The
Exchange Offer -- Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes....... Subject to certain conditions, any and all Old
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date will be accepted for exchange.
The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
Certain Tax Considerations.... The exchange of New Notes for Old Notes should not
be a sale or exchange or otherwise a taxable event
for Federal income tax purposes. See "Certain U.S.
Federal Income Tax Consequences."
Exchange Agent................ First Trust National Association is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
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Fees and Expenses............. All expenses incident to the Company's
consummation of the Exchange Offer and compliance
with the Registration Rights Agreement will be
borne by the Company. See "The Exchange Offer --
Fees and Expenses."
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Use of Proceeds............... There will be no cash proceeds payable to Sun from
the issuance of the New Notes pursuant to the
Exchange Offer. The proceeds from the sale of the
Old Notes were used to repay amounts outstanding
under the Old Credit Facility (as defined), which
may be subsequently reborrowed. See "Use of
Proceeds."
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SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $250,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be entitled to the benefits of the same Indenture
that governs the Old Notes and will govern the New Notes. The form and terms of
the New Notes are the same in all material respects as the form and terms of the
Old Notes, except that the New Notes do not contain terms with respect to
liquidated damages provisions and the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. See "Description of New Notes."
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Maturity Date..................... July 1, 2007.
Interest Payment Dates............ January 1 and July 1, commencing on January 1, 1998.
Mandatory Redemption.............. None.
Optional Redemption............... The New Notes may not be redeemed prior to July 1, 2002.
At any time on or after July 1, 2002, the New Notes may
be redeemed for cash at the option of Sun, in whole or
in part, at the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages, if
any, to the date of redemption, in a manner set forth in
"Description of New Notes -- Optional Redemption."
Change of Control................. Upon a Change of Control, each holder of New Notes will
have the right to require Sun to repurchase all or any
part of such holder's New Notes for cash at 101% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of
repurchase. The terms of certain of Sun's indebtedness
require that Sun repay or refinance such indebtedness in
the event of a "change of control," as defined therein.
Such change of control provisions may be triggered under
such indebtedness prior to the occurrence of a Change of
Control with respect to the New Notes, thereby requiring
that such indebtedness be repaid or refinanced prior to
Sun repurchasing any New Notes upon the occurrence of a
Change of Control. There can be no assurance that Sun
will have the financial resources to repurchase the New
Notes in the event of a Change of Control. See
"Description of New Notes -- Repurchases at the Option
of Holders -- Change of Control."
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Ranking........................... The New Notes will be senior subordinated, unsecured,
general obligations of Sun, and, as such, subordinated
in right of payment to all existing and future Senior
Debt of Sun. The New Notes will rank PARI PASSU with all
existing and future senior subordinated indebtedness of
Sun and will rank senior to all other existing and
future subordinated indebtedness of Sun. The Guarantees
will be senior subordinated, unsecured, general
obligations of the Guarantors. The New Notes will also
be effectively subordinated to (i) all existing and
future liabilities of Sun's subsidiaries which are not
Guarantors and (ii) all existing and future Senior Debt
of the Guarantors. As of June 30, 1997, after giving
effect to the Notes Offering, Mergers and the
consummation of the Senior Credit Facilities, the
aggregate amount of indebtedness (excluding intercompany
indebtedness) that effectively ranked senior to the New
Notes and the Guarantees was approximately $ million
(substantially all of which was secured) and assuming
Sun acquires the remaining 35% of Contour for Common
Stock). As of June 30, 1997, after giving effect to the
Notes Offering, Mergers and consummation of the Senior
Credit Facilities, approximately $ million of
indebtedness ranking PARI PASSU in right of payment with
the New Notes and/or the Guarantees and $ million of
indebtedness ranking subordinate in right of payment to
the New Notes and/or the Guarantees was outstanding
(assuming Sun acquires the remaining 35% of Contour for
Common Stock). All of the Guarantors and the CareerStaff
Companies (which entities are not Guarantors) have
guaranteed the Company's obligations under the Company's
Senior Credit Facilities.
Certain Covenants................. The indenture governing the New Notes (the "Indenture")
will contain certain covenants, including, but not
limited to, covenants limiting: (i) the incurrence by
Sun and its Subsidiaries of additional indebtedness and
the issuance of preferred stock; (ii) the payment of
dividends on and the redemption of capital stock by Sun;
(iii) the creation of liens securing indebtedness; (iv)
restrictions on the ability of Subsidiaries to pay
dividends or make other restricted payments; (v)
transactions with affiliates; (vi) certain sales of
assets; (vii) the ability of Sun to engage in certain
businesses; and (viii) Sun's ability to consolidate or
merge with or into, or to transfer all or substantially
all of its assets to, another person. See "Description
of New Notes -- Certain Covenants."
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RISK FACTORS
Prospective purchasers of the New Notes should carefully review the
information contained and incorporated by reference in this Prospectus and
should particularly consider the following matters:
FINANCIAL RESULTS SUBJECT TO FLUCTUATION
The Company's financial results may fluctuate on a quarterly basis as a
result of a number of factors, including the factors described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Effects from Changes in Reimbursement" in Sun's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997. A material shortfall in revenue or
increase in expenses in a given quarter or for longer periods, or a delayed or
unrealized ability to achieve synergies from acquisitions, could have a material
adverse effect on the Company's financial condition and results of operations.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
Sun has substantial indebtedness. As of June 30, 1997, after giving pro
forma effect to the issuance of the $250 million of Notes (the "Notes Offering")
and the application of the net proceeds therefrom as described in "Use of
Proceeds," Sun would have had on a consolidated basis approximately $896.1
million of indebtedness and approximately $608.4 million of stockholders'
equity. After giving effect to the Notes Offering, the Mergers, Sun would have
had outstanding approximately $ million of indebtedness and approximately
$ million of stockholders' equity (assuming Sun acquires the remaining 35% of
Contour for Common Stock). After giving pro forma effect to the Notes Offering,
the Mergers and the consummation of the Senior Credit Facilities, Sun would have
had the ability to borrow approximately an additional $ million under the
Senior Credit Facilities as of June 30, 1997 (assuming Sun acquires the
remaining 35% of Contour for Common Stock). See "Business -- Acquisitions" in
Sun's Annual Report on Form 10-K for the year ended December 31, 1996.
At June 30, 1997, Sun had outstanding commitments for construction and
development costs of approximately $28.1 million in the United States and
approximately L17.2 million (approximately $28.6 million as of June 30, 1997) in
the United Kingdom. Sun also expects to loan up to $47.0 million (of which
approximately $23.5 million had been funded as of June 30, 1997) for the
development, construction and operation of assisted living facilities. Any such
advances are expected to be funded by borrowings under the Senior Credit
Facilities and will be subject to certain conditions, including the approval of
each project by Sun. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in Sun's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997.
The degree to which Sun is leveraged could have important consequences to
holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of Sun's cash flow from operations will be required to be
dedicated to debt service and will not be available for other purposes,
including acquisitions; (ii) Sun's ability to obtain additional financing in the
future could be limited; (iii) certain of Sun's borrowings are at variable rates
of interest, which could result in higher interest expense in the event of
increases in interest rates; and (iv) the indenture with respect to the Notes,
the Senior Credit Facilities and the United Kingdom revolving credit facilities
generally contain or will contain financial and restrictive covenants that limit
the ability of Sun to, among other things, borrow additional funds, dispose of
assets or pay cash dividends. See "Risks Associated with the Senior Credit
Facilities." Failure by Sun to comply with such covenants could result in an
event of default which, if not cured or waived, would have a material adverse
effect on Sun. The degree to which Sun is leveraged could also prevent it from
repurchasing all Notes tendered to it upon the occurrence of a Change of
Control. See "Description of the New Notes." In addition, the Company's future
capital requirements will depend on many factors, including the Company's
working capital needs, the costs associated with the Mergers, if consummated,
and in particular, the timing and extent to which the Company implements its
acquisition strategy. Accordingly, the Company expects that it may raise
additional equity or debt financing in the future. To the extent that additional
capital is raised
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through the sale of equity or equity-related securities, the issuance of such
securities could result in dilution to holders of Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Sun's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997.
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
Sun is a holding company and, accordingly, the New Notes will be effectively
subordinated to all existing and future liabilities of the non-Guarantor
subsidiaries. Sun's cash flow and, consequently, its ability to service debt,
including the New Notes, is dependent upon the earnings of its subsidiaries and
the payment of funds by those subsidiaries to Sun in the form of loans,
dividends or otherwise. The New Notes are guaranteed on a subordinated,
unsecured basis by the Guarantors, and as a result, should Sun fail to satisfy
any payment obligation under the New Notes, the holders would have a direct
claim therefor against the Guarantors. However, the Guarantors are obligors with
respect to substantial indebtedness, including in their capacity as guarantors
under the Senior Credit Facilities on a senior basis, and the capital stock of
the Guarantors is pledged to secure amounts borrowed thereunder. Accordingly,
there may be insufficient assets remaining after payment of senior and/or
secured claims to pay amounts due on the New Notes. Sun's non-Guarantor
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the New Notes or to
make funds available therefor, whether in the form of loans, dividends or
otherwise. The Indenture will permit Sun and its subsidiaries (including
non-Guarantor subsidiaries) to incur additional indebtedness (subject to certain
restrictions). See "Description of New Notes." Any right of Sun to participate
in any distribution of the assets of any of the non-Guarantor subsidiaries upon
the liquidation, reorganization or insolvency of such subsidiary (and the
consequent right of the holders of the New Notes to participate in the
distribution of those assets) will be subject to the claims of creditors
(including trade creditors) and preferred stockholders, if any, of such
non-Guarantor subsidiary, except to the extent that Sun has a claim against such
non-Guarantor subsidiary as a creditor of such non-Guarantor subsidiary.
Moreover, the payment of dividends and the making of loan advances to Sun by its
subsidiaries are subject to restrictive covenants in agreements entered into by
certain of such subsidiaries and may be restricted upon an event of default
thereunder.
SUBORDINATION
The New Notes will be unsecured senior subordinated obligations of Sun and,
as such, will be subordinated to all existing and future Senior Debt of Sun and
its subsidiaries, including borrowings under the Senior Credit Facilities. The
New Notes will also be effectively subordinated to all secured indebtedness of
either Sun or any of its subsidiaries to the extent of the assets secured by
such indebtedness. As of June 30, 1997, after giving effect to the Notes
Offering, Mergers and the consummation of the Senior Credit Facilities, the
aggregate amount of indebtedness (excluding intercompany indebtedness) that
would have effectively ranked senior to the New Notes and the Guarantees was
approximately $ million (assuming Sun acquires the remaining 35% of Contour
for Common Stock). As of June 30, 1997, after giving effect to the Notes
Offering, Mergers and the consummation of the Senior Credit Facilities,
approximately $ million of indebtedness ranking PARI PASSU in right of payment
with the Notes and/or the Guarantees and $ million of indebtedness ranking
subordinate in right of payment to the New Notes and/or the Guarantees was
outstanding (assuming Sun acquires the remaining 35% of Contour for Common
Stock). In addition, after giving pro forma effect to the Notes Offering, the
Mergers and the consummation of the Senior Credit Facilities, Sun would have had
the ability to borrow approximately an additional $ million under the Senior
Credit Facilities as of June 30, 1997 (assuming Sun acquires the remaining 35%
of Contour for Common Stock). See "Business -- Acquisitions" in Sun's Annual
Report on Form 10-K for the year ended December 31, 1996.
The Company may not pay principal of, premium, if any, or interest on or
other amounts owing in respect of the New Notes, make any deposit pursuant to
any defeasance provisions or repurchase, redeem or otherwise retire the New
Notes if certain Senior Debt is not paid when due or any other
16
<PAGE>
default on such Indebtedness occurs and the maturity of such Indebtedness is
accelerated in accordance with its terms unless, in either case, the default has
been cured or waived, any such acceleration has been rescinded or such
Indebtedness has been paid in full. Moreover, under certain circumstances, if
any non-payment default exists with respect to such Indebtedness, the Company
may not make any payments on the New Notes for a specified time, unless such
default is cured or waived, any acceleration of such indebtedness has been
rescinded or such indebtedness has been paid in full. See "Description of New
Notes -- Subordination."
LIMITATIONS ON REPURCHASE OF NEW NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, each holder of New Notes will have certain rights
to require Sun to repurchase all or a portion of such holder's New Notes. See
"Description of New Notes." If a Change of Control were to occur, there can be
no assurance that Sun would have sufficient funds to pay the repurchase price
for all New Notes tendered by the holders thereof. In addition, a change of
control would constitute a default under the Senior Credit Facilities and is
otherwise restricted by the Senior Credit Facilities and may be prohibited or
limited by, or create an event of default under, the terms of other agreements
relating to borrowings which the Company may enter into from time to time,
including other agreements relating to secured indebtedness. If Sun's
obligations under the Senior Credit Facilities were accelerated due to a default
thereunder, the lenders thereunder would have a priority claim on the proceeds
from the sale of the collateral securing the Senior Credit Facilities. See "--
Holding Company Structure; Effects of Asset Encumbrances" and "--
Subordination."
In addition, the Change of Control purchase feature of the New Notes may
make more difficult or discourage a takeover of Sun and, thus, the removal of
incumbent management. The Change of Control purchase feature resulted from
negotiations between Sun and the Initial Purchasers and is not the result of
management's knowledge of any specific effort to obtain control of Sun by means
of accumulating shares of common stock of Sun or by means of a merger, tender
offer, solicitation or otherwise or part of a plan by management to adopt a
series of anti-takeover provisions.
FRAUDULENT TRANSFER RISKS
The obligations of Sun under the New Notes may be subject to review under
state or Federal fraudulent transfer laws in the event of the bankruptcy or
other financial difficulty of Sun. Under those laws, if a court, in a lawsuit by
an unpaid creditor or representative of creditors of Sun, such as a trustee in
bankruptcy or Sun as debtor in possession were to find that at the time Sun
issued the Notes, it either (i) was insolvent, (ii) was rendered insolvent,
(iii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iv) intended to
incur or believed that it would incur debts beyond its ability to pay as such
debts matured, such court could avoid the Notes and Sun's obligations
thereunder, and direct the return of any amounts and thereunder to Sun or to a
fund for the benefit of its creditors. Moreover, regardless of the factors
identified in the foregoing clauses (i) through (iv), the court could avoid the
Notes and direct such repayment if it found that such Notes were issued with
actual intent to hinder, delay, or defraud Sun's creditors.
Sun's obligations under the Notes will be guaranteed by the Guarantors, and
the Guarantees may also be subject to review under Federal or state fraudulent
transfer law. If a court were to determine that at the time a Guarantor became
liable under its Guarantee, it satisfied any of clauses (i) through (iv) in the
foregoing paragraph, or if such Guarantee was incurred with actual intent to
hinder, delay or defraud such Guarantor's creditors, the court could avoid the
Guarantee and direct the repayment of amounts paid thereunder.
To the extent any Guarantees were avoided as a fraudulent conveyance or held
unenforceable for any other reason, holders of the New Notes would cease to have
any claim in respect of such Guarantor and would be creditors solely of Sun and
any Guarantor whose Guarantee was not avoided or held unenforceable. In such
event, the claims of the holders of the New Notes against the issuer of an
invalid Guarantee would be subject to the prior payment of all liabilities and
preferred stock claims of such Guarantor. There can be no assurance that, after
providing for all prior claims and preferred
17
<PAGE>
stock interests, if any, there would be sufficient assets to satisfy the claims
of the holders of the New Notes relating to any voided portions of any of the
Guarantees.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES
Prior to the Exchange Offer, there has been no public market for the New
Notes. If such a market were to develop, the New Notes could trade at prices
that may be higher or lower than their principal amount. Sun does not intend to
apply for listing of the New Notes on any securities exchange or for quotation
of the New Notes on The Nasdaq Stock Market's National Market or otherwise. Sun
has been advised by the Initial Purchasers that they currently intend to make a
market in the New Notes, as permitted by applicable laws and regulations, after
consummation of the New Notes Offering. The Initial Purchasers are not
obligated, however, to make a market in the Old Notes or the New Notes, and any
such market making activity may be discontinued at any time without notice at
the sole discretion of the Initial Purchasers. There can be no assurance as to
the liquidity of the public market for the New Notes or that any active public
market for the New Notes will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of the New Notes
may be adversely affected.
18
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to Sun from the issuance of the New
Notes pursuant to the Exchange Offer. The proceeds from the sale of the Old
Notes were used to repay borrowings under the Old Credit Facility.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company and its consolidated subsidiaries for the periods indicated. The
Company to date has not issued Preferred Stock; therefore, the ratios of
earnings to combined fixed charges and preferred stock dividends are unchanged
from the ratios presented here.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges............................. 1.92 3.34 1.76 1.15 1.64
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
-------------
1997
-------------
<S> <C>
Ratio of earnings to fixed charges............................. 2.00
</TABLE>
The computation of the ratio of earnings to fixed charges is based on
applicable amounts of Earnings of the Company and its consolidated subsidiaries
plus dividends received from less than fifty percent owned affiliates.
"Earnings" consist of income from continuing operations before income taxes and
fixed charges excluding capitalized interest. "Fixed charges" consist of
interest on indebtedness, including amounts capitalized, amortization of debt
discount and expense, an estimated amount of rental expense that it deemed to be
representative of the interest factor and other interest charges.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents: (i) selected consolidated historical financial
data for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 derived
from Sun's audited Consolidated Financial Statements; and (ii) selected
consolidated historical financial data for the six months ended June 30, 1996
and 1997 derived from Sun's unaudited Consolidated Financial Statements.
Semi-annual results may not be indicative of results for the full year. The data
for the periods presented are not necessarily comparable because of acquisitions
made throughout those periods. The financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Sun's Quarterly Report on Form 10-Q for the three
months ending June 30, 1997, and Sun's Consolidated Financial Statements and the
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- ---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues............... $ 135,733 $ 230,815 $ 673,354 $1,135,508 $1,316,308(1) $ 645,744 $ 846,181
Costs and expenses:
Operating...................... 107,490 178,712 509,036 855,766 1,016,155 488,568 634,115
Rent........................... 10,898 15,578 43,626 73,727 91,666 43,294 60,672
Corporate general and
administrative............... 7,425 10,675 31,633 51,468 62,085 29,177 39,446
Provision for losses on
accounts receivable.......... 1,010 1,265 27,632(2) 14,623(2) 14,970(2) 2,463 6,773
Interest, net.................. 925 341 10,548 21,829 25,899 12,911 25,486
Special charges................ -- -- 2,275(3) 18,567(4) 19,250(5) -- --
Impairment loss................ -- -- -- 59,000(6) -- -- --
Depreciation and
amortization................. 727 1,534 11,797 27,734 33,817 16,489 24,347
--------- --------- ---------- ---------- ---------- --------- ---------
Total costs and expenses..... 128,475 208,105 636,547 1,122,714 1,263,842 592,902 790,839
--------- --------- ---------- ---------- ---------- --------- ---------
Earnings before pro forma income
taxes and extraordinary loss... 7,258 22,710 36,807 12,794 52,466 52,842 55,342
Pro forma income taxes(7)........ 2,885 9,247 17,246 33,362 30,930 21,137 21,583
--------- --------- ---------- ---------- ---------- --------- ---------
Pro forma earnings (loss) before
extraordinary loss(7).......... 4,373 13,463 19,561 (20,568) 21,536 31,705 33,759
Extraordinary loss............... -- -- -- (3,413 (8) -- -- --
--------- --------- ---------- ---------- ---------- --------- ---------
Pro forma net earnings
(loss)(7)...................... $ 4,373 $ 13,463 $ 19,561 $ (23,981) $ 21,536 $ 31,705 $ 33,759
--------- --------- ---------- ---------- ---------- --------- ---------
--------- --------- ---------- ---------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------------- ----------
1992 1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 2,057 $ 45,451 $ 197,150 $ 237,147 $ 211,582 $ 211,050
Total assets..................... 27,760 110,488 1,054,223 1,042,503 1,229,426 1,604,187
Long-term debt, net of current
portion........................ 1,365 11,967 398,534 348,460 483,453 772,021
Stockholders' equity............. 8,232 70,361 550,449 569,042 572,137 608,376
</TABLE>
- ------------------------------
(1) In the fourth quarter of 1996, the Company recorded negative revenue
adjustments totaling approximately $23.0 million resulting from changes in
accounting estimates of amounts realizable from third party payors. These
changes in accounting estimates primarily arose out of the cost reporting
settlement process in that quarter, including the settlement of outstanding
Medicare cost reports and the results of Medicare and Medicaid cost report
audits. Approximately $19.4 million of the adjustments related to changes in
estimates of the settlement of prior years' cost reports (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Sun's Quarterly Report on Form 10-Q for the three months ending June 30,
1997, and Note 1(d) to Sun's Consolidated Financial Statements included
elsewhere herein).
(2) In 1994, the provision for losses on accounts receivable reflects the
write-off of $23.4 million of receivables of Mediplex that existed at the
time of its June 1994 acquisition by Sun. These receivables were impaired as
of the fourth quarter of 1994 or earlier. In 1995, an additional $7.6
million of Mediplex accounts receivable were written off, of which $3.5
million
20
<PAGE>
represented accounts receivable existing at the date of acquisition. In
1996, Sun recorded an additional provision for losses on accounts receivable
of $6.6 million related primarily to its Mediplex facilities (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Sun's Quarterly Report on Form 10-Q for the three months
ending June 30, 1997).
(3) Reflects a charge in connection with the payment of an inducement fee to
effect the conversion in August 1994 of $24.4 million of Sun's 6 1/2%
Convertible Subordinated Debentures.
(4) Includes (i) $5.8 million of transaction-related merger costs incurred in
connection with the mergers of Sun with CareerStaff and SunCare (see Note
(2) to Sun's Consolidated Financial Statements included elsewhere herein),
(ii) $4.0 million of costs related to averting a strike and negotiating new
contracts for certain unionized nursing homes in Connecticut, (iii) a charge
of $5.5 million related to monitoring and responding to the OIG
investigation and legal fees resulting from shareholder litigation related
to the announcement of the OIG investigation and (iv) a charge of $3.3
million in connection with the payment of an inducement fee to effect the
conversion in January 1995 of $39.4 million of Sun's 6 1/2% Convertible
Subordinated Debentures.
(5) Includes (i) a $24.0 million charge recognized by Sun to settle certain of
the lawsuits brought by shareholders, (ii) $9.0 million received from Sun's
director and officer insurance carrier in connection with such settlement
(see Note 14 to Sun's Consolidated Financial Statements included elsewhere
herein) and (iii) $4.3 million of additional expenses related to monitoring
and responding to the continuing OIG investigation and responding to the
remaining shareholder litigation related to the announcement of the OIG
investigation.
(6) The $59.0 million impairment loss recorded by Sun primarily relates to
goodwill associated with six of the forty facilities acquired in the
acquisition of Mediplex (see Note 1(g) to Sun's Consolidated Financial
Statements included elsewhere herein).
(7) There was no provision for Federal or state income taxes in Sun's
Consolidated Financial Statements for certain entities that subsequently
became subsidiaries of Sun that had elected S corporation status prior to
incorporation as C corporations. Net earnings (loss) for the years ended
December 31, 1992, 1993, 1994 and 1995 reflect pro forma Federal and state
income taxes that these entities would have been subject to and liable for
as C corporations prior to each of the entities' termination of their S
corporation status.
(8) Reflects an extraordinary charge of $3.4 million (net of related tax
benefit) in connection with the tender offer for Sun's 11 3/4% of Senior
Subordinated Notes (see Note 6 to Sun's Consolidated Financial Statements
included elsewhere herein).
21
<PAGE>
THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the Old Notes pursuant to a Purchase
Agreement dated as of July 1, 1997, between the Company and the Initial
Purchasers, the Initial Purchasers and its respective assignees became entitled
to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company and the Guarantors
will, at Sun's cost (i) within 90 days after the date of the original issuance
of the Notes (the "Issue Date") file a registration statement of which this
Prospectus is a part under the Securities Act (the "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer (the
"Exchange Offer") to exchange the Old Notes for New Notes, which will have terms
substantially identical in all material respects to the Notes (except that such
New Notes will not contain terms with respect to transfer restrictions and the
identity of the Guarantors may change in accordance with the terms of the
Indenture) and (ii) use reasonable best efforts to cause such Exchange Offer
Registration Statement to be declared effective under the Securities Act within
180 days after the Issue Date. Promptly after the Exchange Offer Registration
Statement is declared effective, Sun and the Guarantors will offer New Notes in
exchange for properly tendered Old Notes. Sun and the Guarantors will keep the
Exchange Offer open for not less than 20 business days (or longer if required by
applicable law) after the date notice of such Exchange Offer is mailed to the
Holders. The Exchange Offer being made hereby, if commenced and consummated
within the time periods described in this paragraph, will satisfy those
requirements under the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date will be accepted for exchange. New Notes of
the same class will be issued in exchange for an equal principal amount of
outstanding Old Notes accepted in the Exchange Offer. Old Notes may be tendered
only in integral multiples of $1,000. This Prospectus, together with the Letter
of Transmittal, is being sent to all registered holders as of November , 1997.
The Exchange Offer is not conditioned upon any minimum principal amount of Old
Notes being tendered for exchange. However, the obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth herein under "-- Conditions."
Old Notes shall be deemed to have been accepted as validly tendered when, as
and if the Trustee has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes and delivering New Notes to
such holders.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by the holders thereof without further compliance with the
registration and prospectus delivery provisions of the Securities Act. However,
any purchaser of Notes who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New Notes,
or any broker-dealer who purchased the Notes from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act, (i) will
not be entitled to rely on the interpretations of the staff of the Commission
set forth in the above-referenced no-action letters, (ii) will not be entitled
to tender its Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection
22
<PAGE>
with any sale or transfer of the Notes, unless such sale or transfer is made
pursuant to any exemption from such requirements.
Each Holder who wishes to exchange Old Notes for New Notes in the Exchange
Offer will be required to make certain representations, including that (i) any
New Notes to be received by it will be acquired in the ordinary course of its
business, (ii) it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of Sun, or if it is an affiliate of Sun, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. In addition, if the Holder is not a broker-dealer, it will be
required to represent that it is not engaged in, and does not intend to engage
in, the distribution of the New Notes. If the Holder is a broker-dealer (a
"Participating Broker-Dealer") that will receive New Notes for its own account
in exchange for Old Notes that were acquired as a result of market-making
activities or other trading activities, it will be required to acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to such New Notes
(other than a resale of an unsold allotment from the original sale of the Notes)
with the prospectus contained in the Exchange Offer Registration Statement.
Under the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such New Notes.
In the event that any change in law or in the applicable interpretations of
the staff of the Commission do not permit Sun and the Guarantors to effect the
Exchange Offer, or if for any other reason the Exchange Offer is not consummated
within 225 days of the Issue Date, Sun and the Guarantors will, at Sun's
expense, (a) within 60 days after such filing obligation arises, file a shelf
registration statement covering resales of the Notes (the "Shelf Registration
Statement"), (b) use reasonable best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act on or prior to 60
days after such filing occurs and (c) use reasonable best efforts to keep
effective the Shelf Registration Statement until the earlier of 24 months
following the Issue Date and such time as all of the Notes covered by the Shelf
Registration Statement have been sold thereunder, or otherwise cease to be
Transfer Restricted Securities (as defined in the Registration Rights
Agreement). Sun will, in the event a Shelf Registration Statement is required to
be filed, provide to each Holder copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder
who sells Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such Holder (including certain indemnification and contribution
rights and obligations). In addition, each holder of the Notes will be required
to deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding Liquidated Damages set forth in the following paragraph.
If (a) the Shelf Registration Statement that is required to be filed as
described above is not filed on or before the date specified for such filing,
(b) any registration statement filed in accordance with the above is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) an Exchange Offer
Registration Statement becomes effective, and Sun and the Guarantors fail to
consummate the Exchange Offer within 45 days of the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement, or (d) the Shelf
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Notes during the period
specified in the Registration Rights Agreement (each such
23
<PAGE>
event referred to in clauses (a) through (d) above a "Registration Default"),
then Sun will pay liquidated damages ("Liquidated Damages") to each Holder, with
respect to the first 90-day period immediately following the occurrence of such
Registration Default, in an amount equal to $.05 per week per $1,000 principal
amount of the Notes held by such Holder. Upon a Registration Default, Liquidated
Damages will accrue at the rate specified above until such Registration Default
is cured and the amount of Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $.25 per week per $1,000 principal
amount of Notes (regardless of whether one or more than one Registration Default
is outstanding). All accrued Liquidated Damages will be paid by Sun on each
Interest Payment Date to the Holders by wire transfer of immediately available
funds or by mailing checks to their registered addresses if such accounts have
not been specified.
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Notes who do not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to registration rights and will not be
able to offer or sell their Old Notes, unless such Old Notes are subsequently
registered under the Securities Act (which, subject to certain limited
exceptions, the Company will have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors -- Consequences of Failure
to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean November , 1997 (20 business days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated by February 18, 1998, the Company may be obligated to pay
Liquidated Damages. See "-- General."
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will notify the holders of
the Old Notes by means of a press release or other public announcement prior to
9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Notes not previously accepted if any of the conditions set
forth herein under "-- Conditions" shall have occurred and shall not have been
waived by the Company, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
Exchange Agent. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the applicable per annum rate from the
last date on which interest was paid on the Old Notes surrendered in exchange
therefor or, if no interest has been paid, from the Issue Date of such Old
Notes. Interest on the New Notes is payable on January 1 and July 1 of each year
commencing January 1, 1998.
24
<PAGE>
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal (or ATOP ticket if applicable), or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Delivery of all
documents must be made to the Exchange Agent at its address set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact such registered holder promptly and instruct such registered
holder to tender on his behalf. If such beneficial owner wishes to tender on his
own behalf, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by bond powers and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case as the name of
the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
25
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted, would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the absolute
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "-- Conditions," to terminate the Exchange Offer in accordance with the
terms of the Registration Rights Agreement and (ii) to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted, promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "-- Conditions" below. For purposes of the Exchange Offer, Old Notes
shall be deemed to have been accepted as validly tendered for exchange when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or ATOP ticket, if applicable) and all other required documents. If
any tendered Old Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Notes tendered by book-entry transfer procedures
described below, such nonexchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal (if ATOP is not used) or
facsimile thereof with any required signature guarantees and any other required
documents must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "-- Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must
26
<PAGE>
be complied with. ATOP is only available to members thereof who are not
tendering pursuant to guaranteed delivery procedures set forth in "-- Guaranteed
Delivery Procedures."
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within three NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "-- Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes) and (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange Agent,
then, prior to the release of such certificates, the withdrawing holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such holder is an Eligible Institution. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer described above,
any notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering" and "-- Book-Entry
Transfer" above at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Notes will not be
required to be accepted for exchange, nor will New Notes be issued in exchange
for any Old Notes, and the Company
27
<PAGE>
may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if because of any change in law, or applicable
interpretations thereof by the Commission, the Company determines that it is not
permitted to effect the Exchange Offer. The Company has no obligation to, and
will not knowingly, permit acceptance of tenders of Old Notes from affiliates of
the Company (within the meaning of Rule 405 under the Securities Act) or from
any other holder or holders who are not eligible to participate in the Exchange
Offer under applicable law or interpretations thereof by the Commission, or if
the New Notes to be received by such holder or holders of Old Notes in the
Exchange Offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Exchange Act and without material
restrictions under the "blue sky" or securities laws of substantially all of the
states of the United States.
EXCHANGE AGENT
First Trust National Association has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Hand:
First Trust National Association First Trust National Association
First Trust Center First Trust Center
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 Bond-Drop Window
St. Paul, Minnesota 55101
Attention: Therese Linscheid
Telephone: (612) 244-1234
Facsimile: (612) 244-1537
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Old Notes, and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
28
<PAGE>
DESCRIPTION OF NEW NOTES
The Old New Notes were issued, and the New Notes offered hereby will be
issued under an indenture dated as of July 8, 1997 (the "Indenture") between the
Company, as issuer, the Guarantors and First Trust National Association, as
trustee (the "Trustee"), a copy of the form of which is available from the
Trustee. The following summary of the material provisions of the Indenture does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Indenture, including the definitions of
certain terms contained therein. For definitions of certain capitalized terms
used in the following summary, see "Certain Definitions." Capitalized terms used
herein and not otherwise defined shall have the meanings assigned to them in the
Indenture or the Registration Rights Agreement, as appropriate.
GENERAL
The Notes will be senior subordinated, unsecured, general obligations of
Sun, limited in aggregate principal amount to $250 million, and will mature on
July 1, 2007. The Notes will rank PARI PASSU with all existing and future senior
subordinated Indebtedness of Sun and will rank senior to all other existing and
future Subordinated Indebtedness of Sun, and subordinate in right of payment
with all other existing and future Senior Debt of Sun. The Notes will be
guaranteed on a senior subordinated, unsecured, general basis by all existing
and future material Subsidiaries of Sun other than Sun Systems, Inc., the
CareerStaff Companies and the Foreign Companies. For information about the
financial condition and results of operations of the Guarantors and of the
Subsidiaries of Sun that are not Guarantors, see Note 15 to Sun's Consolidated
Financial Statements included herein for the year ended December 31, 1996. The
obligations of each Guarantor under its Guarantee, however, will be limited in a
manner intended to avoid it being deemed a fraudulent conveyance under
applicable law. See "-- Certain Bankruptcy Limitations" below. As of June 30,
1997, after giving effect to the Notes Offering, the Mergers and the
consummation of the Senior Credit Facilities, the aggregate amount of
Indebtedness (excluding intercompany Indebtedness) that effectively ranked
senior to the Notes and the Guarantees was approximately $ million (assuming
Sun acquires the remaining 35% of Contour for Common Stock). See "Business --
Acquisitions" in Sun's Annual Report on Form 10-K, for the year ended December
31, 1996. As of June 30, 1997, after giving effect to the Notes Offering, the
Mergers and the consummation of the Senior Credit Facilities, approximately $
million of Indebtedness ranking PARI PASSU in right of payment with the Notes
and/or the Guarantees and $ million of Subordinated Indebtedness was
outstanding (assuming Sun acquires the remaining 35% of Contour for Common
Stock).
Interest on the Notes will accrue at the rate per annum set forth on the
cover page of this Prospectus and will be payable in cash semi-annually in
arrears on January 1 and July 1 of each year, commencing on January 1, 1998, to
Holders of record on the immediately preceding December 15 and June 15,
respectively. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest on the Notes will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Notes will be payable at the office or agency of Sun maintained
for such purpose within the Borough of Manhattan, The City of New York or, at
the option of Sun, payment of interest may be made by check mailed to the
Holders at their respective addresses set forth in the register of Holders;
PROVIDED that all payments with respect to Notes, the Holders of which have
given wire transfer instructions to the paying agent at least five business days
prior to the relevant record date, will be required to be made by wire transfer
of immediately available funds to the accounts specified by such Holders. No
service charge will be made for any registration of transfer or exchange of
Notes, but Sun may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by Sun, Sun's office or agency in the Borough of Manhattan, The City of New York
will be the office of the Trustee maintained for such purpose. The Notes will be
issued in denominations of $1,000 and integral multiples thereof.
29
<PAGE>
SUBORDINATION
The Notes and the Guarantees will be general, unsecured obligations of Sun
and the Guarantors, respectively, subordinated in right of payment to all Senior
Debt of Sun and the Guarantors, as applicable.
The Indenture will provide that no payment (by set-off or otherwise) may be
made by or on behalf of Sun or a Guarantor, as applicable, on account of the
principal of, premium, if any, or interest on the Notes (including any
repurchases of Notes), or on account of the redemption provisions of the Notes,
for cash or property (other than Junior Securities), (i) upon the maturity of
any Senior Debt of Sun or such Guarantor by lapse of time, acceleration (unless
waived) or otherwise, unless and until all principal of, premium, if any, and
the interest on such Senior Debt are first paid in full in cash or Cash
Equivalents (or such payment is duly provided for) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents, or (ii) in the event of default in the payment of any
principal of, premium, if any, or interest on Senior Debt of Sun or such
Guarantor when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise (a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits the holders of Senior Debt to declare such Senior Debt to be due
and payable and (ii) written notice of such event of default given to Sun and
the Trustee by the Representative under the Credit Agreement or the holders of
an aggregate of at least $50 million principal amount outstanding of any other
Senior Debt or their representative (a "Payment Notice"), then, unless and until
such event of default has been cured or waived or otherwise has ceased to exist,
no payment (by set-off or otherwise) may be made by or on behalf of Sun or any
Guarantor which is an obligor under such Senior Debt on account of the principal
of, premium, if any, or interest on the Notes, (including any repurchases of any
of the Notes), or on account of the redemption provisions of the Notes, in any
such case, other than payments made with Junior Securities. Notwithstanding the
foregoing, unless the Senior Debt in respect of which such event of default
exists has been declared due and payable in its entirety within 179 days after
the Payment Notice is delivered as set forth above (the "Payment Blockage
Period") (and such declaration has not been rescinded or waived), at the end of
the Payment Blockage Period, Sun and the Guarantors shall be required to pay all
sums not paid to the Holders of the Notes during the Payment Blockage Period due
to the foregoing prohibitions and to resume all other payments as and when due
on the Notes. Any number of Payment Notices may be given; PROVIDED that (i) not
more than one Payment Notice shall be given within a period of any 360
consecutive days, and (ii) no default that existed upon the date of such Payment
Notice or the commencement of such Payment Blockage Period (whether or not such
event of default is on the same issue of Senior Debt) shall be made the basis
for the commencement of any other Payment Blockage Period unless such other
Payment Blockage Period is commenced by a Payment Notice from the Representative
under the Credit Agreement and such event of default shall have been cured or
waived for a period of at least 90 consecutive days.
Upon any distribution of assets of Sun or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of Sun
or a Guarantor, whether voluntary or involuntary, in bankruptcy, insolvency,
receivership or a similar proceeding or upon assignment for the benefit of
creditors or any marshalling of assets or liabilities, (i) the holders of all
Senior Debt of Sun or such Guarantor, as applicable, will first be entitled to
receive payment in full in cash or Cash Equivalents (or have such payment duly
provided for to the satisfaction of such holders) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents before the Holders are entitled to receive any payment on
account of principal of, premium, if any, and interest on the Notes (other than
Junior Securities) and (ii) any payment or distribution of assets of Sun or such
Guarantor of any kind or character from any source, whether in cash, property or
securities (other than Junior Securities) to which the Holders or the Trustee on
behalf of the Holders would be entitled (by set-off or otherwise), except for
the subordination provisions contained in the Indenture, will be paid by the
liquidating trustee or agent or other person making such a payment or
30
<PAGE>
distribution directly to the holders of such Senior Debt or their representative
to the extent necessary to make payment in full (or have such payment duly
provided for) on all such Senior Debt remaining unpaid, after giving effect to
any concurrent payment or distribution to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of Sun or any Guarantor (other than Junior Securities)
shall be received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of such
Senior Debt, and shall be paid or delivered by the Trustee or such Holders, as
the case may be, to the holders of such Senior Debt remaining unpaid or
unprovided for or to their representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Debt may have been issued, ratably according to the aggregate
principal amounts remaining unpaid on account of such Senior Debt held or
represented by each, for application to the payment of all such Senior Debt
remaining unpaid, to the extent necessary to pay or to provide for the payment
of all such Senior Debt in full in cash or Cash Equivalents or otherwise to the
extent holders accept satisfaction of amounts due by settlement in other than
cash or Cash Equivalents after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
The subordination provisions hereof shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Senior
Debt is rescinded or must otherwise be returned by any holder of such Senior
Debt upon the insolvency, bankruptcy or reorganization of Sun, any Guarantor or
otherwise, all as though such payment has not been made.
No provision contained in the Indenture or the Notes will affect the
obligation of Sun and the Guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest on the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any Default or Event of Default under the Indenture or limit the
rights of the Trustee or any Holder to pursue any other rights or remedies with
respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of Sun or a
marshalling of assets or liabilities of Sun, the Holders may receive ratably
less than other creditors.
Sun conducts substantially all of its operations through its subsidiaries.
See "Risk Factors -- Holding Company Structure; Effects of Asset Encumbrances."
Accordingly, Sun's ability to meet its cash obligations is dependent upon the
ability of its subsidiaries to make cash distributions to Sun. Furthermore, any
right of Sun to receive the assets of any such subsidiary which is not a
Guarantor upon such subsidiary's liquidation or reorganization (and the
consequent right of the Holders of the Notes to participate in the distribution
of the proceeds of those assets) effectively will be subordinated by operation
of law to the claims of such subsidiary's creditors (including trade creditors)
and holders of its preferred stock, except to the extent that Sun is itself
recognized as a creditor or preferred stockholder of such subsidiary, in which
case the claims of Sun would still be subordinate to any indebtedness or
preferred stock of such subsidiary senior in right of payment to that held by
Sun.
CERTAIN BANKRUPTCY LIMITATIONS
Sun is a holding company, conducting substantially all of its business
through subsidiaries, not all of which have guaranteed Sun's obligations with
respect to the Notes. See "Risk Factors -- Holding Company Structure; Effects of
Asset Encumbrances." Holders of the Notes will be direct creditors of each
Guarantor by virtue of its Guarantee. Nonetheless, in the event of the
bankruptcy or financial difficulty of a Guarantor, such Guarantor's obligations
under its Guarantee may be subject to review and avoidance under state and
federal fraudulent transfer laws. Among other things, such obligations may be
avoided if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair consideration at a time when the Guarantor
was insolvent, was rendered insolvent, or was left with inadequate capital to
conduct its business. A court would likely conclude
31
<PAGE>
that a Guarantor did not receive reasonably equivalent value or fair
consideration to the extent that the aggregate amount of its liability on its
Guarantee exceeds the economic benefits it receives in the New Notes Offering.
The obligations of each Guarantor under its Guarantee will be limited in a
manner intended to cause it not to be a fraudulent conveyance under applicable
law, although no assurance can be given that a court would give the holder the
benefit of such provision. See "Risk Factors -- Fraudulent Transfer Risks."
If the obligations of a Guarantor under its Guarantee were avoided, Holders
would have to look to the assets of any remaining Guarantors for payment. There
can be no assurance in that event that such assets would suffice to pay the
outstanding principal and interest on the Notes.
OPTIONAL REDEMPTION
Sun will not have the right to redeem any Notes prior to July 1, 2002. The
Notes will be redeemable for cash, at the option of Sun, in whole or in part, at
any time on or after July 1, 2002 upon not less than 30 days' nor more than 60
days' notice to each Holder, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing July 1 of the years indicated below, in each case (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. 104.7500%
2003............................................................................. 103.1667
2004............................................................................. 101.5833
2005 and thereafter.............................................................. 100.0000
</TABLE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the Redemption Date to the Holder of each
Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that upon surrender of such Note,
a new Note or Notes in a principal amount equal to the unredeemed portion
thereof will be issued. On and after the Redemption Date, interest will cease to
accrue on the Notes or portions thereof called for redemption unless Sun
defaults in its redemption obligation with respect thereto.
Sun will not be required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASES AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require Sun to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to an irrevocable and unconditional offer, as described below (the
"Change of Control Offer"), at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase (the "Change of
Control Payment") on a date (the "Change of Control Payment Date") that is not
more than 90 days after the occurrence of such Change of Control. Within 45 days
following any Change of Control, Sun will mail, or at Sun's request the Trustee
will mail, a notice to each Holder offering to repurchase the Notes held by such
Holder pursuant to the procedures specified in such notice. Sun will comply with
the requirements of Rule 14e-1 under the Exchange Act and any other
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securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On or before the Change of Control Payment Date, Sun will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
and not withdrawn pursuant to the Change of Control Offer, (2) deposit with the
paying agent an amount in cash equal to the Change of Control Payment in respect
of all Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof being purchased by Sun. The
paying agent will promptly mail to each Holder so tendered the Change of Control
Payment for such Notes, and the Trustee will promptly authenticate and mail (or
cause to be transferred by book entry) to each Holder a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered, if any,
PROVIDED that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. Any Notes improperly tendered or withdrawn will be
delivered promptly by Sun to the Holder thereof. Sun will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
A failure by Sun to comply with the provisions of the two preceding
paragraphs will constitute an Event of Default. Except as described above with
respect to a Change of Control, the Indenture will not contain provisions that
permit the Holders of the Notes to require that Sun repurchase or redeem the
Notes in the event of a takeover, recapitalization or similar transaction. See
"-- Events of Defaults and Remedies."
The terms of certain of Sun's Indebtedness require that Sun repay or
refinance such Indebtedness in the event of a "change of control," as defined in
such Indebtedness. Such change of control provisions may be triggered under such
Indebtedness prior to the occurrence of a Change of Control, thereby requiring
that the indebtedness under such Indebtedness be repaid or refinanced prior to
Sun repurchasing any Notes upon the occurrence of a Change of Control. As such,
Sun may not be able to satisfy its obligations to repurchase the Notes unless
Sun is able to refinance or obtain waivers with respect to such Indebtedness.
There can be no assurance that Sun will have the financial resources to
repurchase the Notes in the event of a Change of Control.
ASSET SALES
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, in one or a series of related transactions, consummate an Asset
Sale unless (i) Sun (or the Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as reasonably determined and evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by Sun or such Subsidiary is in
the form of cash or Cash Equivalents, PROVIDED that for purposes of this
provision, (x) the amount of (A) any liabilities (as shown on the most recent
balance sheet of Sun or such Subsidiary or in the notes thereto) of Sun or such
Subsidiary that are assumed by the transferee of any such assets (other than
liabilities that are by their terms PARI PASSU with or subordinated to the Notes
or the guarantee of the Guarantors, as applicable) and (B) any securities or
other obligations received by Sun or any such Subsidiary from such transferee
that are immediately converted by Sun or such Subsidiary into cash or Cash
Equivalents (or as to which Sun or such Subsidiary has received at or prior to
the consummation of the Asset Sale a commitment (which may be subject to
customary conditions) from a nationally recognized investment, merchant or
commercial bank to convert into cash or Cash Equivalents within 90 days of the
consummation of such Asset Sale and which are thereafter actually converted into
cash or Cash Equivalents within such 90-day period) will be deemed to be cash or
Cash Equivalents (and shall be deemed to be Net Proceeds for purposes of the
following provisions as and when reduced to cash or Cash Equivalents) to the
extent of the net cash or Cash Equivalents realized thereon and (y) the fair
market value of any Non-Cash Consideration received by Sun or a Subsidiary in
any Non-Qualified Asset Sale shall be deemed to be cash to the extent that the
aggregate fair market value (as reasonably determined and evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of all Non-Cash Consideration
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<PAGE>
(measured at the time received and without giving effect to any subsequent
changes in value) received by Sun or any of its Subsidiaries since the date of
the Indenture in all Non-Qualified Asset Sales does not exceed 5% of
Stockholders' Equity as of the date of such consummation. Notwithstanding the
foregoing, to the extent Sun or any of its Subsidiaries receives Non-Cash
Consideration as proceeds of an Asset Sale, such Non-Cash Consideration shall be
deemed to be Net Proceeds for purposes of (and shall be applied in accordance
with) the following provisions when Sun or such Subsidiary receives cash or Cash
Equivalents from a sale, repayment, exchange, redemption or retirement of or
extraordinary dividend or return of capital on such Non-Cash Consideration.
Pursuant to the Indenture, within 365 days after the receipt of any Net
Proceeds from an Asset Sale, Sun or such Subsidiary may apply such Net Proceeds
(i) to purchase one or more Nursing Facilities or Related Businesses and/or a
controlling interest in the Capital Stock of a Person owning one or more Nursing
Facilities and/or one or more Related Businesses (and no other material assets),
(ii) to make a capital expenditure or to acquire other tangible assets, in each
case, that are used or useful in any business in which Sun is permitted to be
engaged pursuant to the covenant described below under the caption "-- Certain
Covenants -- Line of Business," or (iii) to permanently reduce Senior Debt
(including, in the case of Senior Revolving Debt, to correspondingly reduce
commitments with respect thereto). Pending the final application of any such Net
Proceeds, Sun or such Subsidiary may temporarily reduce Senior Revolving Debt.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $25 million, Sun
will be required to make an offer to all Holders and holders of any other
Indebtedness of Sun ranking senior to or on a parity with the Notes from time to
time outstanding with similar provisions requiring Sun to make an offer to
purchase or to redeem such Indebtedness with the proceeds from any Asset Sales,
pro rata in proportion to the respective principal amounts of Notes and such
other Indebtedness then outstanding (collectively, an "Asset Sale Offer") to
purchase the maximum principal amount of the Notes and such other Indebtedness
that may be purchased out of the Excess Proceeds, at an offer price in cash
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the date of purchase (the "Asset Sale
Payment"), in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes and such other Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, Sun may use
any remaining Excess Proceeds for general corporate purposes not prohibited at
the time under the Indenture. If the aggregate principal amount of Notes and
such other Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Notes and such other Indebtedness will be purchased on a
pro rata basis. Upon completion of an Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any distribution on account of the Equity Interests of Sun or any of its
Subsidiaries (other than (x) dividends or distributions to the extent payable in
Qualified Equity Interests of Sun, (y) dividends or distributions to the extent
payable to Sun or any Subsidiary of Sun, and (z) dividends or distributions by
any Wholly Owned Subsidiary of Sun); (ii) purchase, redeem or otherwise acquire
or retire for value any Equity Interests of Sun, or any of its Subsidiaries;
(iii) make any principal payment on, or purchase, redeem, defease or otherwise
acquire or retire for value any Subordinated Indebtedness, except at the
original final stated maturity date thereof; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment (the amount of
any such Restricted Payment, if other than cash or Cash Equivalents, shall be
the fair market value (as reasonably determined and evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate
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<PAGE>
delivered to the Trustee prior to the making of such Restricted Payment) of the
asset(s) proposed to be transferred by Sun or such Subsidiary, as the case may
be, pursuant to such Restricted Payment):
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) Sun would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the Reference Period immediately preceding the date of such
Restricted Payment, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described below under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Sun and its Subsidiaries after March 31, 1997
(excluding Restricted Payments permitted by clauses (w), (x), (y) and (z) of
the next succeeding paragraph), is less than the sum (without duplication)
of (i) 50% of the Consolidated Net Income of Sun for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after March 31, 1997 to the end of Sun's most recently ended
fiscal quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by Sun from the issue or sale (other
than to a Subsidiary of Sun) since March 31, 1997 of (A) Qualified Equity
Interests of Sun or (B) debt securities of Sun or any of its Subsidiaries
that were issued after March 31, 1997 and have been converted into or
exchanged for Qualified Equity Interests of Sun, plus (iii) to the extent
that any Restricted Investment that was made after the Issue Date is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return to Sun and its Subsidiaries of capital with respect to such
Restricted Investment (net of taxes and the cost of disposition, if any) or
(B) the initial amount of such Restricted Investment.
The immediately preceding paragraph will not prohibit the following
Restricted Payments: (u) dividends or distributions paid by any Subsidiary of
Sun to stockholders of such Subsidiary other than Sun or another Subsidiary of
Sun, PROVIDED that such dividends and distributions are paid (1) on a PRO RATA
basis to each stockholder of such Subsidiary or (2) in the case of payment by a
CareerStaff Company, in accordance with the partnership agreement thereof; (v)
the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have otherwise
complied with the provisions of the Indenture; (w) the payment of up to an
aggregate of $8.0 million to the extent required in connection with tenders for
the outstanding 6 1/2% Convertible Subordinated Debentures due 2003 pursuant to
their terms as in effect on the date of the Indenture; (x) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of Sun
issued after the date of the Indenture in exchange for, or out of the net cash
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
Sun) of Qualified Equity Interests of Sun, PROVIDED that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (y) the defeasance, redemption or repurchase of
Subordinated Indebtedness issued after the date of the Indenture with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness or in
exchange for or out of the net cash proceeds from the substantially concurrent
sale (other than to a Subsidiary of Sun) of Qualified Equity Interests of Sun,
PROVIDED that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph; and (z) any purchase or
defeasance of Subordinated Indebtedness to the extent required upon a change of
control (as defined therein) by the indenture or other agreement or instrument
pursuant to which such Subordinated Indebtedness was issued, but only if Sun has
complied with its obligations under the provisions described under the covenant
described above under the caption "Repurchases at the Option of the Holders --
Change of Control," PROVIDED that in the case of each of clauses (u), (v), (w),
(x), (y) and (z) of this paragraph no
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Default or Event of Default shall have occurred or be continuing at the time of
such Restricted Payment or would occur as a consequence thereof.
Not later than the date of making any Restricted Payment, Sun shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that except as set forth below in this covenant,
Sun will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable, contingently or otherwise, with respect to (individually
and collectively, "incur") after the date of the Indenture any Indebtedness
(including Acquired Debt), and Sun will not permit any of its Subsidiaries to
issue any shares of Preferred Stock; PROVIDED that Sun and its Subsidiaries may
incur Indebtedness (including Acquired Debt) if (a) no Default or Event of
Default shall have occurred and be continuing at the time of, or would occur
after giving effect on a pro forma basis to, such incurrence of Indebtedness and
(b) the Fixed Charge Coverage Ratio for the Reference Period immediately
preceding the date on which such additional Indebtedness is incurred would have
been at least 2.0 to 1 for incurrences on or prior to June 30, 1998, 2.25 to 1
for incurrences after June 30, 1998 and on or prior to June 30, 1999 and 2.5 to
1 thereafter, in each case determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred at the beginning of such Reference Period.
Indebtedness consisting of reimbursement obligations in respect of a letter of
credit will be deemed to be incurred when the letter of credit is first issued.
The foregoing paragraph will not prevent:
(i) the incurrence by Sun or any of its Subsidiaries (other than the
Foreign Companies) of Senior Revolving Debt pursuant to the Credit Agreement
in an aggregate principal amount at any time outstanding (with letters of
credit being deemed to have a principal amount equal to the maximum
potential reimbursement obligation of Sun or any such Subsidiary with
respect thereto) not to exceed an amount equal to $550 million, less the
aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the commitments with respect to such Indebtedness pursuant to the
covenant described above under the caption "-- Repurchases at the Option of
Holders -- Asset Sales" after the Issue Date;
(ii) the incurrence by the Foreign Companies of Senior Revolving Debt
pursuant to the U.K. Credit Agreements in an aggregate principal amount at
any time outstanding (with letters of credit being deemed to have a
principal amount equal to the maximum potential reimbursement obligation of
the Foreign Companies with respect thereto) not to exceed an amount equal to
L75 million (or the equivalent amount thereof, at the time of incurrence, in
other foreign currencies), less the aggregate amount of all Net Proceeds of
Assets Sales applied to permanently reduce the commitments with respect to
such Indebtedness pursuant to the covenant described above under the caption
"-- Repurchases at the Option of Holders -- Asset Sales" after the Issue
Date;
(iii) the incurrence by Sun and the Guarantors of Indebtedness
represented by the Notes;
(iv) the incurrence by Sun or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness
that was permitted by the Indenture to be incurred (including, without
limitation, Existing Indebtedness);
(v) the incurrence by Sun or any of its Subsidiaries of intercompany
Indebtedness between or among Sun and/or any Subsidiaries; PROVIDED that in
the case of such Indebtedness of Sun or the Guarantors, such obligations
shall be unsecured and subordinated in all respects to Sun's and the
Guarantors' obligations pursuant to the Notes and the Guarantees;
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(vi) the incurrence by Sun or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the Indenture to be outstanding or any
receivable or liability the payment of which is determined by reference to a
foreign currency; PROVIDED that the notional principal amount of any such
Hedging Obligation does not exceed the principal amount of the Indebtedness
or the amount of such receivable or liability to which such Hedging
Obligation relates;
(vii) the incurrence by Sun or any of its Subsidiaries of Indebtedness
represented by performance bonds, warranty or contractual service
obligations, standby letters of credit or appeal bonds, in each case to the
extent incurred in the ordinary course of business of Sun or such Subsidiary
in accordance with customary industry practices, in amounts and for the
purposes customary in Sun's industry; and
(viii) the incurrence by Sun or any of the Guarantors or the Foreign
Companies of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount at any time
outstanding (including any Indebtedness issued to refinance, replace or
refund such Indebtedness) not to exceed $50 million (or the equivalent
amount thereof, at the time of incurrence, in other foreign currencies).
For purposes of determining any particular amount of Indebtedness under this
covenant and so as to avoid duplication, guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this covenant, (i) in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
permitted by the second paragraph of this covenant, Sun, such Guarantor or such
Subsidiary shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the categories of
permitted Indebtedness described above and (ii) the outstanding principal amount
on any date of any Indebtedness issued with original issue discount is the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness on such date.
LAYERING INDEBTEDNESS; REDEEMABLE STOCK; LIENS SECURING INDEBTEDNESS
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist (a) any (i) Redeemable Stock, or (ii) Indebtedness that is subordinate in
right of payment to any other Indebtedness of Sun or a Guarantor (other than
Existing Indebtedness and Indebtedness incurred in compliance with clause (v) of
the covenant described above under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock") unless, by its terms, such Redeemable Stock or
Indebtedness (A) has an original final stated maturity subsequent to the final
stated maturity of the Notes and a Weighted Average Life to Maturity longer than
that of the Notes and (B) is subordinate in right of payment to, or ranks PARI
PASSU with, the Notes or the Guarantee, as applicable, or (b) any Lien (except
Permitted Liens) on any asset now owned or hereafter acquired, or on any income
or profits therefrom or assign or convey any right to receive income therefrom
securing any Indebtedness of Sun or any of its Subsidiaries unless all payments
due under the Indenture, the Notes and the Guarantees (as applicable) are
secured on an equal and ratable basis with the Obligations so secured (or, if
the Obligations so secured constitute Subordinated Indebtedness, on a senior
basis) until such time as such Obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to Sun or any of its Subsidiaries (1) on its Capital Stock or (2)
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any Indebtedness owed to Sun or any
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of its Subsidiaries, (ii) make loans or advances to or on behalf of Sun or any
of its Subsidiaries or (iii) transfer any of its properties or assets to or on
behalf of Sun or any of its Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Indenture, (c) applicable law, (d)
any instrument governing Indebtedness or Capital Stock of a Person acquired by
Sun or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent incurred in connection with or in contemplation of such
acquisition or in violation of the covenant described above under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock"), which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, (e) customary non-assignment provisions in leases entered into in the
ordinary course of business, (f) purchase money obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above solely on the property so acquired, (g)
Permitted Refinancing Indebtedness, PROVIDED that the restrictions contained in
the agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in and do not apply to any other assets or
person than was covered by the agreements governing the Indebtedness being
refinanced, or (h) the Credit Agreement, the U.K. Credit Agreements and future
Foreign Company credit agreements, including related documentation as the same
is in effect on the date of the Indenture and as amended or replaced from time
to time, PROVIDED that no such future Foreign Company credit agreement and no
such amendment or replacement is more restrictive as to the matters enumerated
above than the Credit Agreement, the U.K. Credit Agreements (in the case of
amendments or replacements thereof) and related documentation as in effect on
the date of the Indenture. Nothing contained in this "Dividend and Other Payment
Restrictions Affecting Subsidiaries" covenant shall prevent Sun or any
Subsidiary of Sun from creating, incurring, assuming or suffering to exist any
Permitted Liens or entering into agreements in connection therewith that impose
restrictions on the transfer or disposition of the property or assets subject to
such Permitted Liens.
LINE OF BUSINESS
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, engage to any material extent in any business other than the
ownership, operation and management of Nursing Facilities and Related
Businesses.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that Sun may not consolidate or merge with or
into (whether or not Sun is the surviving corporation), or, directly or
indirectly, sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another Person or group of affiliated Persons or adopt a Plan
of Liquidation unless (i) Sun is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
Sun) or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made or (in the case of a Plan of Liquidation) the
Person which receives the greatest value from the Plan of Liquidation is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia; (ii) the entity or Person formed by or
surviving any such consolidation or merger (if other than Sun) or the entity or
Person to which such sale, assignment, transfer, conveyance or other disposition
shall have been made or (in the case of a Plan of Liquidation) the Person which
receives the greatest value from the Plan of Liquidation assumes all the
obligations of Sun under the Notes and the Indenture pursuant to a supplemental
Indenture in form reasonably satisfactory to the Trustee; (iii) immediately
after giving effect to such transaction on a pro forma basis, no Default or
Event of Default exists; and (iv) Sun or the entity or Person formed by or
surviving any such consolidation or merger (if other than Sun), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made or (in the case of a Plan of Liquidation) the Person which receives
the greatest value from the Plan of Liquidation (A) will have Consolidated Net
Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of Sun immediately preceding the transaction and (B)
will, at the time of such transaction and after giving pro forma effect thereto
as if such transaction had occurred at the
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beginning of the Reference Period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock."
Upon any consolidation or merger or any such sale, assignment, transfer,
conveyance or other disposition (but not lease) or consummation of a Plan of
Liquidation in accordance with the foregoing, the successor corporation formed
by such consolidation or into which Sun is merged or to which such transfer is
made or, in the case or a Plan of Liquidation, the entity which receives the
greatest value from such Plan of Liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, Sun under the
Indenture with the same effect as if such successor corporation had been named
therein as Sun, and Sun shall be released from the obligations under the Notes
and the Indenture except with respect to any obligations that arise from, or are
related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, Sun's interest in which constitutes all or substantially all
of the properties and assets of Sun shall be deemed to be the transfer of all or
substantially all of the properties and assets of Sun.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that neither Sun nor any of its Subsidiaries will
be permitted on or after the date of the Indenture to sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), or any series of
related Affiliate Transactions, unless (i) such Affiliate Transaction is on
terms that are no less favorable to Sun or the relevant Subsidiary than those
that could have been obtained in a comparable transaction by Sun or such
Subsidiary with an unrelated Person and (ii) Sun delivers to the Trustee (a)
with respect to an Affiliate Transaction, or any series of related Affiliate
Transactions, involving aggregate consideration in excess of $2.5 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to an
Affiliate Transaction, or any series of related Affiliate Transactions,
involving aggregate consideration in excess of $5 million, an opinion as to the
fairness to Sun or such Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing; PROVIDED that the following shall not be deemed to be Affiliate
Transactions: (w) transactions or payments pursuant to any employment
arrangements, director or officer indemnification agreements or employee or
director benefit plans entered into by Sun or any of its Subsidiaries in the
ordinary course of business of Sun or such Subsidiary, (x) transactions between
or among Sun and/or any of its Subsidiaries, (y) any transaction or series of
related transactions pursuant to terms entered into prior to the date of the
Indenture and (z) Restricted Payments by Sun which are permitted by the covenant
described above under the caption "Restricted Payments" and are made on a PRO
RATA basis to each stockholder of Sun.
SUBSIDIARY GUARANTORS
The Indenture will provide that all existing and future Subsidiaries of Sun,
except as provided below, jointly and severally will guarantee irrevocably and
unconditionally all principal, premium, if any, and interest on the Notes on a
senior subordinated, unsecured, general basis. Sun will covenant pursuant to the
Indenture to cause (a) each of its Subsidiaries (other than Sun Systems, Inc.)
which is neither a CareerStaff Company nor a Foreign Company and which is not a
Guarantor on the date of the Indenture (other than Subsidiaries having total
assets with a book value of less than $500,000 and that do not guarantee any
Senior Debt) and (b) Sun Systems, Inc. and each CareerStaff Company or Foreign
Company, if such person (i) guarantees or otherwise becomes liable for
Indebtedness of Sun or any Guarantor (other than, in the case of CareerStaff
Companies, Indebtedness under the Credit Agreement), or (ii) causes more than
two-thirds of its Equity Interests to be pledged to secure
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Indebtedness of Sun or any Guarantor (other than, in the case of CareerStaff
Companies, Indebtedness under the Credit Agreement), to execute and deliver to
the Trustee, promptly upon the execution by such Subsidiary of a guarantee of
Sun's obligations under any Indebtedness, a Guarantee pursuant to which such
Subsidiary will guarantee payment of the Notes and the performance of Sun's
other obligations under the Indenture to the extent set forth in the provisions
of the Indenture relating to Guarantors.
RELEASE OF GUARANTORS
The Indenture will provide that no Guarantor shall consolidate or merge with
or into (whether or not such Guarantor is the surviving person) another person
unless (i) subject to the provisions of the following paragraph and certain
other provisions of the Indenture, the person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
Guarantor's obligations under such Guarantor's Guarantee and, the Indenture on
the terms set forth in the Indenture; and (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, no
Default or Event of Default shall have occurred or be continuing.
The Indenture will provide that upon (i) the sale or disposition (whether by
merger, stock purchase, asset sale or otherwise) of a Guarantor (or all of its
assets) to an entity which is not a Subsidiary of Sun, or upon the dissolution
of any Guarantors which sale, disposition or dissolution is otherwise in
compliance with the Indenture, or (ii) the release of any Guarantor from its
obligations as a guarantor under the Credit Agreement, so long as (a) no Default
or Event of Default shall have occurred and be continuing at the time of, or
would occur after giving effect on a pro forma basis to, such release, (b) Sun
is permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock" on the date on which such release occurs, and (c)
the amount of Indebtedness outstanding under the Credit Agreement for at least
30 days prior to the time of such release is at least $250 million, such
Guarantor shall be deemed released from its obligations under its Guarantee of
the Notes; PROVIDED that any such termination shall occur only to the extent
that all obligations of such Guarantor under all of its guarantees of, and under
all of its pledges of assets or other security interests which secure any
Indebtedness of Sun shall also terminate upon such sale, disposition or
dissolution.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, Sun will
furnish to the Trustee and all Holders, within 15 days after it is or would have
been required to file such with the Commission, all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if Sun were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by Sun's certified independent accountants. In addition, whether
or not required by the rules and regulations of the Commission but only to the
extent permitted thereby, Sun will file a copy of all such information and
reports with the Commission for public availability and make such information
available to securities analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment, when due, of any installment
of interest on the Notes; (ii) default in payment when due (at maturity,
redemption, by acceleration or otherwise, including without limitation payment
of the Change of Control Payment or the Asset Sale Payment) of the principal of
or premium, if any, on the Notes; (iii) failure by Sun or any Guarantor for 30
days after notice to comply with the provisions described above under the
caption "Restricted Payments" or "Incurrence of
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Indebtedness and Issuance of Preferred Stock"; (iv) failure by Sun or any
Guarantor for 60 days after notice to comply with any of its other agreements in
the Indenture, the Notes or a Guarantee; (v) any default occurs under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by Sun or
any of its Subsidiaries (or the payment of which is guaranteed by Sun or any of
its Subsidiaries), whether such Indebtedness or guarantee exists on the date of
the Indenture or is thereafter created, which default (a) constitutes a Payment
Default or (b) results in the acceleration of such Indebtedness prior to its
final stated maturity and, in each case, the principal amount of any
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or that has been so accelerated,
aggregates in excess of $20 million; (vi) final unsatisfied judgments not
covered by insurance aggregating in excess of $20 million, at any one time
rendered against Sun or any of its Subsidiaries and not stayed, bonded or
discharged within 60 days; (vii) any Guarantee by a Guarantor which is a
Significant Subsidiary shall cease for any reason not permitted by the Indenture
to be in full force and effect or any such Guarantor, or any person acting on
behalf of any such Guarantor, shall deny or disaffirm its obligations under its
Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to
Sun or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; PROVIDED that so long
as at least $15 million of Senior Debt is outstanding under the Credit
Agreement, no acceleration of the maturity of the Notes shall be effective until
the earlier of (i) five days after notice of acceleration is received by the
Representative under the Credit Agreement (unless such Event of Default is cured
or waived prior thereto) and (ii) the date on which any Senior Debt under the
Credit Agreement is accelerated. Notwithstanding the foregoing, in the case of
an Event of Default arising from certain events of bankruptcy or insolvency with
respect to Sun or any of its Significant Subsidiaries, all outstanding Notes
will become due and payable without further action or notice. Holders of the
Notes may not enforce the Indenture, the Notes or the Guarantees except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in aggregate principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of the applicable percentage (specified in the first paragraph of this
covenant) in aggregate principal amount of the Notes then outstanding, by notice
to the Trustee on behalf of the Holders of all of the Notes, may waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of the principal
of, premium, if any, or interest on the Notes.
Sun is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and Sun is required upon becoming aware of any
Default or Event of Default, to deliver to the Trustee a statement specifying
such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture will provide that no director, officer, employee, incorporator
or stockholder of Sun, as such, shall have any liability for any obligations of
Sun under the Notes, the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each Holder by accepting a
Note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the Federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Sun may, at its option and at any time within one year of the final stated
maturity of the Notes, elect to have all of its obligations and the obligations
of the Guarantors discharged with respect to the
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outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that Sun
shall be deemed to have paid and discharged the entire indebtedness represented,
and the Indenture shall cease to be of further effect as to all outstanding
Notes and Guarantees, except as to (i) the rights of Holders of outstanding
Notes to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred to
below, (ii) Sun's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and Sun's obligations in connection therewith and
(iv) the Legal Defeasance provisions of the Indenture. In addition, Sun may, at
its option and at any time, elect to have its obligations and the obligations of
the Guarantors released with respect to certain covenants that are described in
the Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) Sun
must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Notes, cash, U.S. Government Obligations, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on such outstanding Notes on their redemption or
final stated maturity; (ii) in the case of Legal Defeasance, Sun shall have
delivered to the Trustee an opinion of counsel in the United States confirming
that (A) Sun has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there has been
a change in the applicable Federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the Holders
of such outstanding Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such Legal Defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, Sun shall have delivered to the Trustee an
opinion of counsel in the United States confirming that the Holders of such
outstanding Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of such Covenant Defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which Sun or any of its Subsidiaries is a party or by which
Sun or any of its Subsidiaries is bound (other than a breach, violation or
default resulting from the borrowing of funds to be applied to such deposit);
(vi) Sun must have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) Sun must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
Sun with the intent of preferring the Holders of such Notes over the other
creditors of Sun with the intent of defeating, hindering, delaying or defrauding
other creditors of Sun; and (viii) Sun must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the Officers' Certificate, (i) through
(vi) and, in the case of the opinion of counsel, clauses (i), (with respect to
the validity and perfection of the security interest) (ii), (iii) and (v) of
this paragraph, have been complied with.
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If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of premium, if any,
and interest on the Notes when due, then the obligations of Sun and the
Guarantors under the Indenture, the Notes and the Guarantees will be revived and
no such defeasance will be deemed to have occurred.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for such
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for such Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any
Note, (iii) reduce the rate of or extend the time for payment of interest on any
Note, (iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
thereof and a waiver of the Payment Default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders to receive payments of
principal of or premium, if any, or interest on the Notes, (vii) cause the Notes
or any Guarantee to become subordinate in right of payment to any Indebtedness
other than Senior Debt, or (viii) make any change in the foregoing amendment and
waiver provisions adverse to the Holders. Notwithstanding the foregoing, so long
as any Senior Debt is outstanding under the Credit Agreement, no modification,
supplement or waiver of any of the subordination and related provisions and
definitions of the Notes or the Indenture shall be effective unless expressly
agreed to in writing by the Representative under the Credit Agreement. So long
as any Senior Debt is outstanding under the Credit Agreement, the Trustee shall
deliver written notice of any modification or supplement to the Notes or the
Indenture to the Representative under the Credit Agreement no less than five
business days before the effective date of any such modification or supplement.
Without the consent of any Holder, Sun, the Guarantors and the Trustee may
amend or supplement the Indenture or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for additional Guarantors of the Notes or the
release, in accordance with the Indenture, of any Guarantor, to provide for the
assumption of Sun's or any Guarantor's obligations to Holders in the case of a
merger, consolidation or sale of assets, to make any change that would provide
any additional rights or benefits to the Holders or that does not adversely
affect the legal rights under the Indenture of any such Holder, to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act, to evidence and provide for the
acceptance of the appointment of a successor Trustee with respect to the
Securities, or in any other case, pursuant to the provisions of the Indenture,
where a supplemental indenture is required or permitted to be entered into
without the consent of any Holder.
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CONCERNING THE TRUSTEE
The Indenture will contain certain limitations on the rights of the Trustee,
should the Trustee become a creditor of Sun, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will not be under
any obligation to exercise any of its rights or powers under the Indenture at
the request of any Holder, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"APPROVED JURISDICTION" means the United States of America, Canada, the
United Kingdom and any other member nation of the Organization for Economic
Development and Cooperation.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets, including, without limitation, by way of a sale and leaseback or by
merger or consolidation (PROVIDED that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Sun and its
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "Repurchases at the Option of
Holders -- Change of Control" and/or the provisions described above under the
caption "Certain Covenants -- Merger, Consolidation or Sale of Assets" and not
by the provisions of the covenant described above under the caption "Repurchases
at the Option of Holders -- Asset Sales"), and (ii) the issuance or sale by Sun
or any of its Subsidiaries of Equity Interests of any of Sun's Subsidiaries, in
the case of either clause (i) or (ii), whether in a single transaction or a
series of related transactions (a) that have a fair market value in excess of $5
million or (b) for Net Proceeds in excess of $5 million. Notwithstanding the
foregoing: (a) a transfer of assets by Sun to a Subsidiary or by a Subsidiary to
Sun or to another Subsidiary, (b) an issuance of Equity Interests by a
Subsidiary to Sun or to another Subsidiary, and (c) a Nursing Facility Swap will
not be deemed to be an Asset Sale.
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"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CAREERSTAFF COMPANY" means (i) CareerStaff Unlimited, Inc., a Delaware
corporation and a Wholly Owned Subsidiary of Sun, and its direct and indirect
Wholly Owned Subsidiaries (collectively, "CareerStaff Unlimited") so long as
such persons conduct no material business except acquiring, holding or selling
equity or other interests in other CareerStaff Companies or (ii) any Subsidiary
of Sun (a) in which CareerStaff Unlimited is the general partner, (b) which is
no less than 5% and no more than 10% owned by persons that are not Affiliates of
Sun and (c) substantially of all of whose business consists of temporary therapy
staffing.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the government of an Approved
Jurisdiction or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (iii) certificates of deposit
with maturities of one year or less from the date of acquisition, bankers'
acceptances (or, with respect to foreign banks, similar instruments) with
maturities not exceeding one year and overnight bank deposits, in each case with
any domestic commercial bank organized under the laws of the United States of
America or any state thereof or the District of Columbia, or any United States
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $500 million, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having the highest rating obtainable from Moody's or S&P and in
each case maturing within one year after the date of acquisition, and (vi)
investments in money market funds which invest substantially all their assets in
securities of the types described in the foregoing clauses (i) through (v).
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of Sun and its
Subsidiaries taken as a whole to any Person or group (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than to a Person or
group who, prior to such transaction, held a majority of the voting power of the
voting stock of Sun, (ii) the acquisition by any Person or group (as defined
above) of a direct or indirect interest in more than 50% of the voting power of
the voting stock of Sun, by way of merger or consolidation or otherwise, or
(iii) the first day on which a majority of the members of the Board of Directors
of Sun are not Continuing Directors.
The phrase "all or substantially all" of the assets of Sun will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of Sun has occurred, in which case a Holder's ability to obtain the
benefit of a Change of Control Offer may be impaired. In addition, no assurances
can be given that Sun will be able to acquire Notes tendered upon the occurrence
of a Change of Control.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, the sum of (i) provision for taxes based on income or profits of
such Person and its Subsidiaries for such period, to the extent such provision
for taxes was included in computing such Consolidated Net Income, (ii) the Fixed
Charges of such Person and its Subsidiaries for such period, to the extent that
such Fixed Charges were deducted in computing such Consolidated Net Income,
(iii) depreciation and amortization (including amortization of goodwill and
other intangibles) of such Person and its Subsidiaries for such period to the
extent
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that such depreciation and amortization were deducted in computing such
Consolidated Net Income, and (iv) other non-cash items of such Person and its
Subsidiaries for such period to the extent such non-cash items were deducted in
computing such Consolidated Net Income, less the amount of all cash payments
made by such person or any of its Subsidiaries during such period to the extent
such payments relate to non-cash charges that were added back in determining
Consolidated Cash Flow for such period or any prior period, in each case on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, the depreciation
and amortization of, and the other non-cash items of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to Sun by such Subsidiary without
prior approval (that has not been obtained), pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Subsidiary or its
stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis; PROVIDED that (i) the Net Income, if positive,
of any Person that is not a Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a Wholly Owned
Subsidiary thereof, but in any case not in excess of such Person's pro rata
share of such Person's Net Income for such period, (ii) the Net Income, if
positive, of any Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) 1996 non-recurring charges in
the pre-tax amount of up to $26 million shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of Preferred Stock (other than Redeemable Stock), less all write-ups
(other than write-ups resulting from foreign currency translations and write-ups
of tangible assets of a going concern business made in accordance with GAAP as a
result of the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a consolidated
Subsidiary of such Person, and excluding the cumulative effect of a change in
accounting principles, all as determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of Sun who (i) was a member of such Board of Directors on
the date of the Indenture or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board at the time of such nomination or election.
"CREDIT AGREEMENT" means that certain Fourth Amended and Restated Credit
Agreement, dated as of October 29, 1996, by and among Sun, Mediplex and
NationsBank of Texas, N.A. and the other banks that are parties thereto,
providing for $490 million in aggregate principal amount of Senior Revolving
Debt, including any related notes, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
increased, modified, extended, renewed, refunded, replaced or refinanced, in
whole or in part, from time to time.
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"DEFAULT" means any event or condition that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of Sun and its Subsidiaries in
existence on the date of the Indenture, until such amounts are repaid.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that such
Person or any of its Subsidiaries incurs, assumes, guarantees, redeems or repays
any Indebtedness (other than revolving credit borrowings) or issues or redeems
Preferred Stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee, redemption or
repayment of Indebtedness, or such issuance or redemption of Preferred Stock, as
if the same had occurred at the beginning of the applicable Reference Period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by Sun or any of its Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the Reference Period or subsequent to such Reference Period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the Reference Period, and (ii) the Consolidated Cash Flow and Fixed
Charges attributable to operations or businesses disposed of prior to the
Calculation Date shall be excluded (but in the case of Fixed Charges, only to
the extent that the obligations giving rise to such Fixed Charges would no
longer be obligations contributing to such Person's Fixed Charges subsequent to
the Calculation Date).
"FIXED CHARGES" means, with respect to any Person for any period, the sum
(without duplication and determined in each case in accordance with GAAP) of (i)
the consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization of
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letters of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, (iii) interest under any guarantee by such
Person or any of its Subsidiaries of Indebtedness of any other Person in the
amount of interest attributable to the Indebtedness guaranteed and (iv) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) on any series of Preferred Stock of such
Person, times (b) a fraction, the numerator of which is one and the denominator
of which is one minus the then current combined federal, state and local
statutory tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP; PROVIDED that in the event any
cash dividend payment is deductible for federal, state and/or local tax
purposes, the amount of the tax deduction relating to such cash dividend payment
for such period shall be subtracted from the Fixed Charges for such Person for
such period.
"FOREIGN COMPANIES" means any Subsidiary of Sun which (i) is not organized
under the laws of the United States, any state thereof or the District of
Columbia and (ii) conducts substantially all of its business operations in a
country other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other
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statements by such other entity as have been approved by a significant segment
of the accounting profession, applied on a consistent basis and as in effect
from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange contracts
or currency swap agreements and (iii) other agreements or arrangements designed
to protect such Person against fluctuations in interest rates or currency
values.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (i)
any Redeemable Stock of such Person, (ii) any liabilities and obligations of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or bankers' acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, (iii) all liabilities and
obligations of any other Person secured by a Lien on any asset of such Person,
whether or not such indebtedness is assumed by such Person (the amount thereof
being deemed to equal such asset's fair market value), and (iv) to the extent
not otherwise included, the guarantee by such Person of any liabilities or
obligations of any other Person of the kind described in the preceding clauses
(i)-(iii).
"INVESTMENT" by any Person in any other Person means (without duplication)
(i) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (ii) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); and (iii) other than guarantees of Indebtedness of
Sun or any Subsidiary to the extent permitted by the covenant described above
under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock,"
the entering into by such Person of any guarantee of, or other credit support or
contingent obligation with respect to, Indebtedness or other liability of such
other Person; PROVIDED that Investments shall not be deemed to include
extensions of trade credit by such Person or any of its Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of such
Person or such Subsidiary, as the case may be.
"ISSUE DATE" means the date of the first issuance of the Notes under the
Indenture.
"JUNIOR SECURITY" means any Qualified Equity Interests and any Indebtedness
of Sun or a Guarantor, as applicable, that is subordinated in right of payment
to Senior Debt at least to the same extent as the Notes or the Guarantee, as
applicable, and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the final stated maturity of
the Notes.
"LIEN" means, with respect to any asset, mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset given to
secure Indebtedness, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a
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security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction with respect to any such lien, pledge, charge or security
interest).
"NET INCOME" means, with respect to any Person, the consolidated net income
(loss) of such Person, determined in accordance with GAAP, excluding, however,
the effect of any extraordinary or other material non-recurring gain or loss
outside the ordinary course of business (including without limitation any gain
from the sale or other disposition of assets outside of the ordinary course of
business or from the issuance or sale of any Equity Interests), together with
any related provision for taxes on such extraordinary or other material
nonrecurring gain or loss.
"NET PROCEEDS" means the aggregate cash or Cash Equivalent proceeds received
by Sun or any of its Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any other
expenses incurred or to be incurred by Sun or a Subsidiary as a direct result of
the sale of such assets (including, without limitation, severance, relocation,
lease termination and other similar expenses), taxes actually paid or due and
payable as a result thereof in the year of sale or the immediately following
year (after taking into account the application of deductions, net operating
losses and other tax attributes), amounts required to be applied to the
repayment of Indebtedness (other than Subordinated Indebtedness) secured by a
Lien on the asset or assets that were the subject of such Asset Sale, any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP and all distributions and other payments
required to be made and actually made to minority interests holders in
Subsidiaries as a result of such Asset Sale; PROVIDED that if the instrument or
agreement governing such Asset Sale requires the transferor to maintain a
portion of the purchase price in escrow (whether as a reserve for adjustment of
the purchase price or otherwise) or to provide for indemnification of the
transferee for specified liabilities in maximum specified amount, the portion of
the cash or Cash Equivalents that is actually placed in escrow or segregated and
set aside by the transferor for such indemnification obligations shall not be
deemed to be Net Proceeds until the escrow terminates or the transferor ceases
to segregated and set aside such funds, in whole or in part, and then only to
the extent of the proceeds released from escrow to the transferor or that are no
longer segregated and set aside by the transferor.
"NON-CASH CONSIDERATION" means any non-cash or non-Cash Equivalent
consideration received by Sun or a Subsidiary of Sun in connection with an Asset
Sale and any non-cash or non-Cash Equivalent consideration received by Sun or
any of its Subsidiaries upon disposition thereof.
"NON-QUALIFIED ASSET SALE" means an Asset Sale in which the Non-Cash
Consideration received by Sun and its Subsidiaries exceeds 20% of the total
consideration received in connection with such Asset Sale calculated in
accordance with clause (x), but not clause (y), of the proviso to the first
sentence under the covenant described above under the caption "-- Repurchase at
the Option of Holders -- Asset Sales."
"NURSING FACILITY" means a nursing facility, hospital, outpatient clinic,
assisted living center, hospice, long-term care facility, subacute care facility
or other facility that is used or useful in the provision of healthcare
services.
"NURSING FACILITY SWAP" means an exchange of assets by Sun or one or more
Subsidiaries of Sun or of the Equity Interests of a Subsidiary for one or more
Nursing Facilities and/or one or more Related Businesses or of the Equity
Interests of any Person owning one or more Nursing Facilities and/or one or more
Related Businesses.
"OBLIGATIONS" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"PAYMENT DEFAULT" means any failure to pay any scheduled installment of
principal on any Indebtedness within the grace period provided for such payment
in the documentation governing such Indebtedness.
"PERMITTED LIENS" means (i) Liens in favor of Sun; (ii) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
Sun or any Subsidiary of Sun or becomes a Subsidiary of Sun, PROVIDED that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not extend to any assets other than those of the Person
merged into or consolidated with Sun or that becomes a Subsidiary of Sun; (iii)
Liens on property existing at the time of acquisition thereof by Sun or any
Subsidiary of Sun, PROVIDED that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any property other than
that acquired; (iv) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (v) Liens securing Senior Debt
outstanding under the Credit Agreement, Liens securing Existing Indebtedness,
and Liens on the Equity Interests in or assets of Foreign Companies securing
Indebtedness outstanding under Foreign Company credit agreements; (vi) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (vii) Liens to secure Permitted Refinancing Indebtedness
incurred to refinance Indebtedness that was secured by a Lien permitted under
the Indenture and that was incurred in accordance with the provisions of the
Indenture, PROVIDED that such Liens do not extend to or cover any property or
assets of Sun or any of its Subsidiaries other than assets or property securing
the Indebtedness so refinanced; (viii) Purchase Money Liens; (ix) any interest
or title of a lessor under any Capital Lease Obligation otherwise permitted by
the Indenture; (x) Liens upon specific items of inventory or equipment and
proceeds of Sun or any Subsidiary securing its obligations in respect of
bankers' acceptances issued or created for its account (whether or not under the
Credit Agreement) to facilitate the purchase, shipment, or storage of such
inventory and equipment; (xi) Liens securing reimbursement obligations with
respect to letters of credit (whether or not issued under the Credit Agreement)
otherwise permitted under the Indenture and issued in connection with the
purchase of inventory or equipment by Sun or any Subsidiary in the ordinary
course of business; (xii) Liens to secure (or encumbering deposits securing)
obligations arising from warranty or contractual service obligations of Sun or
any Subsidiary, including rights of offset and setoff; (xiii) Liens securing
Acquired Debt otherwise permitted by the Indenture, PROVIDED that (A) the
Indebtedness secured shall not exceed the fair market value of the assets so
acquired (such fair market value to be determined in good faith by the Board of
Directors of Sun at the time of such acquisition) and (B) such Indebtedness
shall be incurred, and the Lien securing such Indebtedness shall be created,
within 12 months after such acquisition; (xiv) Liens securing Hedging
Obligations agreements relating to Indebtedness otherwise permitted under the
Indenture; (xv) other Liens on assets of Sun or any of its Subsidiaries securing
Indebtedness that is permitted by the terms of the Indenture to be outstanding
having an aggregate principal amount at any one time outstanding not to exceed
$5 million; (xvi) Liens on Medicare, Medicaid or other patient accounts
receivable of Sun or its Subsidiaries; (xvii) Liens on real estate and related
personal property (including, but not limited to, sale and leasebacks of and
mortgages on real estate and related personal property) not to exceed an
aggregate amount equal to $60 million per year; (xviii) Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary course of business; (xix) easements,
rights-of-way, zoning restrictions, reservations, encroachments and other
similar encumbrances in respect of real property; and (xx) Liens securing stay
and appeal bonds or judgment Liens in connection with any judgment not giving
rise to a Default under the Indenture.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Sun or any of
its Subsidiaries (a) issued in exchange for, or the net proceeds of which are
used solely to extend, refinance, renew, replace, defease or refund, in whole or
in part, or (b) constituting an amendment, modification or supplement to, or a
deferral or renewal of ((a) and (b) above are, collectively, a "Refinancing"),
other
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Indebtedness of Sun or any of its Subsidiaries; PROVIDED that: (i) the principal
amount of such Permitted Refinancing Indebtedness does not exceed the lesser of
(A) the principal amount of the Indebtedness so Refinanced and (B) if such
Indebtedness being Refinanced was issued with original issue discount, the
accreted value thereof (determined in accordance with GAAP) (plus, in each case,
the amount of any reasonable expenses incurred in connection therewith); (ii)
such Permitted Refinancing Indebtedness has a final stated maturity later than
the final stated maturity of, and has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the Indebtedness
being Refinanced; (iii) if the Indebtedness being Refinanced is Subordinated
Indebtedness, such Permitted Refinancing Indebtedness has a final stated
maturity later than the final stated maturity of, and is subordinated in right
of payment to, the Notes on terms at least as favorable to the Holders as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, deceased or refunded; and (iv) if the obligor on
the Indebtedness being Refinanced, is a Subsidiary that is not a Guarantor, such
Permitted Refinancing Indebtedness shall only be incurred by such Subsidiary.
"PLAN OF LIQUIDATION" means a plan that provides for, contemplates or the
effectuation of which is preceded or accompanied by (whether or not
substantially contemporaneously) (i) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Sun otherwise than as
an entirety or substantially as an entirety and (ii) the distribution of all or
substantially all of the proceeds of such sale, lease, conveyance or other
disposition and all or substantially all of the remaining assets of Sun to
holders of Capital Stock of Sun.
"PREFERRED STOCK" means an Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of a Person to any
seller or other Person incurred to finance the acquisition or construction
(including in the case of a Capital Lease Obligation, the lease) of any asset or
property which is incurred within 180 days of such acquisition or completion of
construction and is secured only by the assets so financed.
"PURCHASE MONEY LIEN" means a Lien granted on an asset or property to secure
Purchase Money Indebtedness permitted to be incurred under the Indenture and
incurred solely to finance the acquisition of construction of such asset or
property; provided that such Lien encumbers only such asset or property and is
granted within 180 days of such acquisition or completion of construction.
"QUALIFIED EQUITY INTERESTS" shall mean all Equity Interests of Sun other
than Redeemable Stock of Sun.
"REDEEMABLE STOCK" means any Equity Interest that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder), or upon the happening of any event,
matures or is mandatorily redeemable (other than redeemable only for Qualified
Equity Interests of the issuer), pursuant to a sinking fund obligation or
otherwise, or redeemable at the option of the holder thereof, in whole or in
part, on or prior to the date on which the Notes mature.
"REFERENCE PERIOD" with regard to any Person means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
for which internal financial statements are available ended immediately
preceding any date upon which any determination is to be made pursuant to the
terms of the Notes or the Indenture.
"RELATED BUSINESS" means the business conducted by Sun and its Subsidiaries
as of the date of the Indenture and any and all healthcare service businesses
that in good faith judgment of the Board of Directors of Sun are materially
related businesses. Without limiting the generality of the foregoing, Related
Business shall include the operation of Nursing Facilities, long-term and
specialty healthcare services, skilled nursing care, subacute care,
rehabilitation programs, pharmaceutical services, health maintenance
organizations, insurance companies, preferred provider organizations or any
other form
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of managed care business, health care information services business,
distribution of medical supplies, geriatric care and home healthcare or other
businesses which provide ancillary services to long-term and specialty
healthcare facilities.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than (i) Investments in Cash Equivalents, (ii) Investments
in a Subsidiary of Sun, (iii) Investments in any Person that as a consequence of
such Investment becomes a Subsidiary of Sun, (iv) Investments existing on the
date of the Indenture, (v) accounts receivable, advances, loans, extensions of
credit created or acquired in the ordinary course of business, (vi) Investments
made as a result of the receipt of Non-Cash Consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "Repurchases at the Option of the Holders -- Asset Sales,"
(vii) Investments made as the result of the guarantee by Sun or any of its
Subsidiaries of Indebtedness of a Person or Persons other than Sun or any
Subsidiary of Sun that is secured by Liens on assets sold or otherwise disposed
of by Sun or such Subsidiary to such Person or Persons, PROVIDED that such
Indebtedness was in existence prior to the contemplation of such sale or other
disposition and that the terms of such guarantee permit Sun or such Subsidiary
to foreclose on the pledged or mortgaged assets if Sun or such Subsidiary is
required to perform under such guarantee, and (viii) Investments in any Related
Business.
"SENIOR DEBT" of Sun or any Guarantor means Indebtedness (including any
monetary obligation in respect of the Credit Agreement, and interest, whether or
not allowable, accruing on Indebtedness incurred pursuant to the Credit
Agreement after the filing of a petition initiating any proceeding under any
bankruptcy, insolvency or similar law) of Sun or such Guarantor arising under
the Credit Agreement unless, by the terms of the instrument creating or
evidencing such indebtedness, it is expressly designated not to be senior in
right of payment to the Notes or the applicable Guarantee; PROVIDED that in no
event shall Senior Debt include (i) Indebtedness to any Subsidiary of Sun or any
officer, director or employee of Sun or any Subsidiary of Sun, (ii) Indebtedness
incurred in violation of the terms of the Indenture, (iii) Indebtedness to trade
creditors, (iv) Redeemable Stock and (v) any liability for taxes owed or owing
by Sun or such Guarantor.
"SENIOR REVOLVING DEBT" means revolving credit loans and letters of credit
outstanding from time to time under the Credit Agreement.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 or Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
"STOCKHOLDERS' EQUITY" means, with respect to any Person as of any date, the
stockholders' equity of such Person determined in accordance with GAAP as of the
date of the most recent available internal financial statements of such Person,
and calculated on a pro forma basis to give effect to any acquisition or
disposition by such person consummated or to be consummated since the date of
such financial statements and on or prior to the date of such calculation.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of Sun or a Guarantor that is
subordinated in right of payment to the Notes or such Subsidiary's Guarantee of
the Notes, as applicable.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"SUN SYSTEMS, INC." means Sun Systems, Inc., a Delaware corporation, in
which Sun expects to have the right to acquire a majority of the outstanding
Equity Interests.
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"U.K. CREDIT AGREEMENTS" means (i) that certain Facility Agreement, dated as
of August 30, 1996, between Ashbourne plc, Ashbourne Homes (Developments)
Limited, Ashbourne Homes plc, Larstrike Limited, Sedbury Park Limited
(collectively, the "Ashbourne Group"), The Governor and Company of the Bank of
Scotland, and the other banks and financial institutions that are parties
thereto, providing for L25,000,000 in aggregate principal amount of revolving
credit; (ii) that certain Facility Agreement, dated as of August 30, 1996,
between the Ashbourne Group, Midland Bank plc, and the other banks and financial
institutions that are parties thereto, providing for L25,000,000 in aggregate
principal amount of revolving credit and (iii) that certain Credit Facility
Agreement with Lloyds Bank plc in the aggregate principal amount of up to L14.0
million, including in (i), (ii) and (iii) above, any related notes, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, increased, modified, extended, renewed, refunded, replaced
or refinanced, in whole or in part, from time to time.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity, or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
EXCHANGE OF OLD NOTES FOR NEW NOTES
The following summary describes the principal U.S. federal income tax
consequences to Noteholders of the exchange of the Old Notes for New Notes. This
summary is intended to address the beneficial owners of Notes that are citizens
or residents of the United States, corporations, partnerships or other entities
created or organized in or under the laws of the United States or any State, or
estates or trusts the income of which is subject to U.S. federal income taxation
regardless of its source that will hold the New Notes as capital assets.
The exchange of Old Notes for New Notes (the "Exchange") pursuant to the
Exchange Offer will not be a taxable event for U.S. federal income tax purposes.
As a result, a holder of an Old Note whose Old Note is accepted in an Exchange
Offer will not recognize gain on the Exchange. A tendering holder's tax basis in
the New Notes will be the same as such holder's tax basis in its Old Notes. A
tendering holder's holding period for the New Notes received pursuant to the
Exchange Offer will include its holding period for the Old Notes surrendered
therefor.
ALL HOLDERS OF OLD NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND OF THE OWNERSHIP AND DISPOSITION OF NEW
NOTES RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 180 days after the
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Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until such date, all broker-dealers effecting transactions in the New
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Starting on the Expiration Date, the Company will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus to
any broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed to pay all expenses incident to the Exchange Offer (including
the expenses of one counsel for the Holders of the Notes) other than commissions
or concessions of any brokers or dealers and will indemnify the Holders of the
New Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters as to the validity of the New Notes and Guarantees
will be passed upon for the Company and the Guarantors by Robert F. Murphy,
Senior Vice-President, General Counsel of the Company.
EXPERTS
The audited consolidated financial statements and schedules of Sun
Healthcare Group, Inc. and subsidiaries included in this prospectus and
elsewhere in the registration statement, the audited consolidated financial
statements and schedules of Regency Health Services, Inc. and subsidiaries
included in this prospectus and elsewhere in this registration statement, and
the financial statements of Golden Care, Inc. for the year ended December 31,
1994 included in Sun's Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 28, 1997 and incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Combined Balance Sheet as of June 30, 1997............................................................... F-2
Combined Statement of Earnings for the Year Ended December 31, 1996...................................... F-3
Combined Statement of Earnings for the Six Months Ended June 30, 1997.................................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements............................................... F-6
CONSOLIDATED FINANCIAL STATEMENTS OF SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................................................. F-7
Consolidated Balance Sheets as of December 31, 1995 and 1996............................................. F-8
Consolidated Statements of Earnings (Loss) for the Years Ended December 31, 1994, 1995 and 1996.......... F-9
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996............... F-10
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996..... F-11
Notes to Consolidated Financial Statements............................................................... F-12
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)........................ F-44
Consolidated Statements of Earnings for the Three Months and the Six Months Ended June 30, 1996 and 1997
(unaudited)............................................................................................. F-45
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997 (unaudited)........ F-46
Notes to Consolidated Financial Statements (unaudited)................................................... F-48
CONSOLIDATED FINANCIAL STATEMENTS OF REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................................................. F-62
Consolidated Balance Sheets as of December 31, 1995 and 1996............................................. F-63
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996............... F-64
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996..... F-65
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996............... F-66
Notes to Consolidated Financial Statements............................................................... F-68
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited)........................ F-87
Consolidated Statements of Operations for the Three Months and the Six Months Ended June 30, 1996 and
1997 (unaudited)........................................................................................ F-89
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997 (unaudited)........ F-90
Notes to Consolidated Financial Statements (unaudited)................................................... F-92
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Combined Financial Information is presented to give
effect to (1) the sale by Sun on July 8, 1997 of $250,000,000 aggregate
principal amount of its 9 1/2% Senior Subordinated Notes due 2007 (more fully
described in the Notes to the Unaudited Pro Forma Financial Statements) as if it
occurred on June 30, 1997 for the Unaudited Pro Forma Combined Balance Sheet and
January 1, 1996 for the Unaudited Pro Forma Combined Statements of Earnings; and
(2) the acquisition of Regency Health Services, Inc. (more fully described in
the Notes to the Unaudited Pro Forma Financial Statements) accounted for as a
purchase as if it had occurred on June 30, 1997 for the Unaudited Pro Forma
Combined Balance Sheet and on January 1, 1996 for the Unaudited Pro Forma
Combined Statements of Earnings. The following Unaudited Pro Forma Combined
Financial Information is presented as follows:
- The Unaudited Pro Forma Combined Balance Sheet as of June 30, 1997 and the
Unaudited Pro Forma Combined Statements of Earnings for the year ended
December 31, 1996 and for the six-month period ended June 30, 1997
captioned "Sun Healthcare Group, Inc. and Subsidiaries, Regency Health
Services, Inc." are presented, giving effect to Sun and items (1) and (2).
The Unaudited Pro Forma Combined Financial Information is based on the
respective historical financial statements and the notes thereto of Sun and
Regency. Sun and Regency have a fiscal year end of December 31.
Sun intends to retire certain indebtedness of Regency soon after the
acquisition of Regency is completed. Sun expects to record an extraordinary
change of approximately $415,720,000 (net of income tax benefit) in connection
with the retirement of this Regency indebtedness. The Unaudited Combined Balance
Sheet does not reflect this transaction as it will occur subsequent to the
acquisition.
The Unaudited Pro Forma Combined Financial Statements are presented for
illustrative purposes only, and they are not necessarily indicative of the
future operating results or financial position of Sun and Regency. The Unaudited
Pro Forma Combined Statements of Earnings do not reflect the benefits or cost
savings anticipated to result from the acquisition of Regency.
THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION CONTAINED HEREIN IS
PRELIMINARY AND IS BASED ON A NUMBER OF ASSUMPTIONS, INCLUDING THE TENDER OF
100% OF REGENCY'S COMMON STOCK AND DEBT. ACCORDINGLY, THE COMPANY BELIEVES THAT
SUCH UNAUDITED PRO FORMA FINANCIAL INFORMATION IS SUBJECT TO CHANGE. REVISED
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION WILL BE FILED ON FORM 8-K IN
ACCORDANCE WITH THE RULES AND REGULATIONS THERETO.
F-2
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES AND
REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUN FINANCE ADJUSTED PRO FORMA PRO FORMA
SUN TRANSACTIONS(2) SUN REGENCY ADJUSTMENTS(1) COMBINED
---------- -------------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total net revenues....................... $1,316,308 $ -- $1,316,308 $ 558,050 $ -- $1,874,358
---------- -------------- ---------- --------- -------------- ----------
Costs and expenses:
Operating.............................. 1,107,821 -- 1,107,821 438,958 -- 1,546,779
Corporate general and administrative... 62,085 -- 62,085 60,531 -- 122,616
Provision for losses on A/R............ 14,970 -- 14,970 2,890 -- 17,860
Depreciation and amortization.......... 33,817 -- 33,817 15,317 10,495 53,905
(3,099)
(2,625)
Interest, net.......................... 25,899 (13,955) 36,434 18,060 38,884 93,223
24,490 (22,288)
22,133
Minority interest...................... -- -- -- -- -- --
Restructuring charge................... -- -- -- 11,283 -- 11,283
Investigation and litigation costs..... 19,250 -- 19,250 -- -- 19,250
---------- -------------- ---------- --------- -------------- ----------
Total costs and expenses............... 1,263,842 10,535 1,274,377 547,039 43,500 1,864,916
---------- -------------- ---------- --------- -------------- ----------
Earnings before income taxes............. 52,466 (10,535) 41,931 11,011 (43,500) 9,442
Income taxes............................. 30,930 (4,109) 26,821 4,612 (14,024) 17,409
---------- -------------- ---------- --------- -------------- ----------
Net earnings (loss).................... $ 21,536 $ (6,426) $ 15,110 $ 6,399 $ (29,476) $ (7,967)
---------- -------------- ---------- --------- -------------- ----------
---------- -------------- ---------- --------- -------------- ----------
Net earnings (loss) per common and common
equivalent share: $ 0.46 $ 0.32 $ (0.17)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common and
common equivalent shares outstanding: 46,840 46,840 46,840
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES AND
REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AT JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTED
SUN
SUN FINANCE FINANCE PRO FORMA PRO FORMA
SUN TRANSACTIONS TRANSACTION REGENCY ADJUSTMENTS(1) COMBINED
---------- ------------ ----------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 8,045 $ -- $ 8,045 $ 13,171 $ -- $ 21,216
Restricted cash........................ 1,666 -- 1,666 6,308 -- 7,974
Accounts receivable, net............... 348,086 -- 348,086 95,029 -- 443,115
Other receivables...................... 14,323 -- 14,323 15,211 -- 29,534
Prepaids and other assets.............. 25,906 -- 25,906 15,348 -- 41,254
Deferred tax asset..................... 8,717 -- 8,717 6,897 -- 15,614
---------- ------------ ----------- --------- -------------- ------------
Total current assets................... 406,743 -- 406,743 151,964 -- 558,707
---------- ------------ ----------- --------- -------------- ------------
Property and equipment, net.............. 544,211 -- 544,211 169,259 (3,300) 707,170
(3,000)
Goodwill, net............................ 520,741 -- 520,741 59,466 367,322 888,063
(59,466)
Other assets, net........................ 124,634 7,400 132,034 27,963 (13,500) 163,704
27,000
(3,251)
3,000
Deferred tax asset....................... 7,858 -- 7,858 -- 21,300 29,158
-- -- -- -- -- --
---------- ------------ ----------- --------- -------------- ------------
Total assets........................... $1,604,187 $ 7,400 $1,611,587 $ 408,652 $ 336,105 $2,356,344
---------- ------------ ----------- --------- -------------- ------------
---------- ------------ ----------- --------- -------------- ------------
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt...... $ 46,973 $ -- $ 46,973 $ 5,959 $ -- $ 52,932
Accrued transactional costs............ -- -- -- -- -- --
Accounts payable and accrued expenses.. 148,720 -- 148,720 75,411 (1,268) 222,863
---------- ------------ ----------- --------- -------------- ------------
Total current liabilities.............. 195,693 -- 195,693 81,370 (1,268) 275,795
---------- ------------ ----------- --------- -------------- ------------
Long-term debt, net of current portion... 772,021 250,000 779,421 222,927 426,000 1,428,348
(242,600)
Other long term liabilities.............. 13,568 -- 13,568 10,656 -- 24,224
Deferred income taxes.................... 12,143 -- 12,143 7,055 -- 19,198
---------- ------------ ----------- --------- -------------- ------------
Total liabilities...................... 993,425 7,400 1,000,825 322,008 424,732 1,747,565
---------- ------------ ----------- --------- -------------- ------------
Minority interest........................ 2,386 -- 2,386 -- -- 2,386
Redeemable preferred stock............... -- -- -- -- -- --
Stockholder's Equity:
Preferred stock........................ -- -- -- -- -- --
Common stock........................... 513 -- 513 169 (169) 513
Additional paid-in-capital............. 635,007 -- 635,007 51,050 (51,050) 635,007
Retained earnings...................... 56,072 -- 56,072 35,425 (35,425) 54,089
(1,983)
Cumulative translation adjustment...... 4,235 -- 4,235 -- -- 4,235
---------- ------------ ----------- --------- -------------- ------------
695,827 -- 695,827 86,644 (88,627) 693,844
---------- ------------ ----------- --------- -------------- ------------
Less:
Common stock held in treasury, at
cost.................................. 25,069 -- 25,069 -- -- 25,069
Employee benefit trust, at market...... 62,382 -- 62,382 -- -- 62,382
---------- ------------ ----------- --------- -------------- ------------
Total stockholders' equity............. 608,376 -- 608,376 86,644 (88,627) 606,393
---------- ------------ ----------- --------- -------------- ------------
Total liabilities and stockholders'
equity................................ $1,604,187 $ 7,400 $1,611,587 $ 408,652 $ 336,105 $2,356,344
---------- ------------ ----------- --------- -------------- ------------
---------- ------------ ----------- --------- -------------- ------------
</TABLE>
F-4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES AND
REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUN
FINANCE ADJUSTED PRO FORMA PRO FORMA
SUN TRANSACTIONS SUN REGENCY ADJUSTMENTS(1) COMBINED
--------- ------------- ----------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total net revenues....................... $ 846,181 $ -- $ 846,181 $ 322,638 $ -- $1,168,819
--------- ------------- ----------- --------- -------------- ------------
Costs and expenses:
Operating.............................. 694,787 -- 694,787 255,860 -- 950,647
Corporate general and administrative... 39,446 -- 39,446 34,892 -- 74,338
Provision for losses on A/R............ 6,773 -- 6,773 1,492 -- 8,265
Depreciation and amortization.......... 24,347 -- 24,347 9,442 5,247 35,749
(1,658)
(1,629)
Interest, net.......................... 25,486 (8,372) 29,359 10,170 19,037 57,937
-- 12,245 (15,870)
15,240
Minority interest...................... -- -- -- (163) -- (163)
Investigation and litigation costs..... -- -- -- -- -- --
--------- ------------- ----------- --------- -------------- ------------
Total costs and expenses............... 790,839 3,873 794,712 311,693 20,367 1,126,773
--------- ------------- ----------- --------- -------------- ------------
Earnings before income taxes............. 55,342 (3,873) 51,469 10,945 (20,367) 42,046
Income taxes............................. 21,583 (1,511) 20,072 4,268 (6,531) 17,810
--------- ------------- ----------- --------- -------------- ------------
Net earnings........................... $ 33,759 $ (2,362) $ 31,397 $ 6,677 $ (13,836) $ 24,236
--------- ------------- ----------- --------- -------------- ------------
--------- ------------- ----------- --------- -------------- ------------
Net Earnings per Common and Common
Equivalent Share:
Primary................................ $ 0.72 $ 0.67 $ 0.52
--------- ----------- ------------
--------- ----------- ------------
Fully Diluted.......................... $ 0.68 $ 0.60 $ 0.57
--------- ----------- ------------
--------- ----------- ------------
Weighted average number of Common and
Common equivalent shares outstanding:
Primary................................ $ 46,862 46,862 46,862
--------- ----------- ------------
--------- ----------- ------------
Fully Dilluted......................... 52,019 52,019 52,019
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
F-5
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES AND
REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. PROPOSED ACQUISITION OF REGENCY HEALTH SERVICES, INC. AND SUBSIDIARIES
On July 27, 1997, Sun announced the signing of a definitive agreement to
purchase Regency Health Services, Inc. ("Regency"). Sun will acquire all the
shares of Regency for approximately $369 million in cash and assume $220 million
of Regency's debt. Regency operates 116 inpatient facilities (including 46 with
subacute specialty units), 26 outpatient rehabilitation therapy clinics, and
eight institutional pharmacies. The fair value of assets to be acquired,
including goodwill of approximately $310 million, is approximately $729 million
and liabilities assumed are expected to total approximately $360 million.
This transaction will be accounted for as a purchase. On October 8, 1997,
Sun announced that it had completed the acquisition of Regency.
Sun has obtained a new $1.2 billion long-term financing commitment for this
acquisition. This new commitment contains a $500 million revolving credit
facility and a term loan facility with three tranches: Tranche A has a borrowing
maximum of $200 million; Tranche B has a borrowing maximum of $250 million; and
Tranche C has a borrowing maximum of $250 million. Borrowings assumed to be
outstanding under this new credit facility were assumed to incur interest at the
rates stated below for the periods identified:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
------------------- ---------------
<S> <C> <C>
Revolving credit facility................................... 8.02% 7.83%
Tranche A................................................... 8.02% 7.83%
Tranche B................................................... 8.27% 8.08%
Tranche C................................................... 8.52% 8.33%
</TABLE>
Several members of Regency's management have entered an agreement with Sun
to purchase certain Regency neurological facilities for a note of $3 million.
This transaction is reflected in the Unaudited Pro Forma Combined Balance Sheet.
The Unaudited Pro Forma Combined Balance Sheet also recognizes the accrual of
approximately $30 million of transaction costs associated with the Regency
acquisition and the write-down to fair market value of certain of Regency's long
lived assets which Sun does not intend to utilize once the acquisition is
completed. The Unaudited Pro Forma Combined Statements of Earnings includes
adjustments for additional goodwill amortization due to the acquisition and
additional interest expense due to the borrowings incurred to fund the purchase
price.
NOTE 2. DEBT OFFERING
On July 8, 1997, Sun issued $250,000,000 of Senior Subordinated Notes due
2007 (the "Notes") in a private placement. The Notes bear interest at a rate of
9 1/2% per annum. The net proceeds after deducting offering expenses and
underwriting discounts and commissions were approximately $242.6 million. Sun
used the proceeds from the sale of the Notes to repay an equivalent amount of
indebtedness outstanding under its old revolving credit facility. The weighted
average interest rate for all borrowings under Sun's old revolving credit
facility for the year ended December 31, 1996 was 6.8% and for the six months
ended June 30, 1997 was 6.9%. The incremental interest charge associated with
the Notes is reflected in the Unaudited Pro Forma Combined Financial Statements.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Sun Healthcare Group, Inc.:
We have audited the accompanying consolidated balance sheets of Sun
Healthcare Group, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1996, and the related consolidated statements of earnings (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide 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 Sun Healthcare Group, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
February 27, 1997 (except with
respect to the matter discussed in Note 15,
as to which the date is October 9, 1997)
F-7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 23,102 $ 14,880
Restricted cash..................................................................... 1,914 2,236
Accounts receivable, net of allowance for doubtful accounts of $11,035 and $16,877
in 1995 and 1996, respectively..................................................... 236,797 282,268
Other receivables................................................................... 29,976 33,430
Prepaids and other assets........................................................... 18,300 17,618
Deferred tax asset.................................................................. 27,098 12,716
------------ ------------
Total current assets.............................................................. 337,187 363,148
------------ ------------
Property and equipment, net........................................................... 201,132 305,720
Restricted cash....................................................................... 8,132 --
Goodwill, net......................................................................... 421,660 432,505
Other assets, net..................................................................... 62,856 115,056
Deferred tax asset.................................................................... 11,536 12,997
------------ ------------
Total assets...................................................................... $ 1,042,503 $ 1,229,426
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 10,417 $ 28,982
Accounts payable.................................................................... 33,000 39,180
Accrued compensation and benefits................................................... 23,742 32,612
Workers' compensation accrual....................................................... 6,339 7,863
Payable to APTA shareholders........................................................ -- 23,545
Other accrued liabilities........................................................... 26,542 19,384
------------ ------------
Total current liabilities......................................................... 100,040 151,566
------------ ------------
Long-term debt, net of current portion................................................ 348,460 483,453
Other long-term liabilities........................................................... 17,052 14,813
Deferred income taxes................................................................. 2,634 4,760
------------ ------------
Total liabilities................................................................. 468,186 654,592
------------ ------------
Minority interest..................................................................... 5,275 2,697
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
51,142,729 shares issued and outstanding at December 31, 1995 and 1996,
respectively....................................................................... 479 511
Additional paid-in capital.......................................................... 568,054 611,434
Retained earnings................................................................... 777 22,313
Cumulative translation adjustment................................................... (268) 3,718
------------ ------------
569,042 637,976
------------ ------------
Less:
Common stock held in treasury, at cost, 2,030,116 shares as of December 31,
1996............................................................................. -- 25,069
Grantor stock trust, at market, 3,019,993 shares at December 31, 1996............. -- 40,770
------------ ------------
Total stockholders' equity...................................................... 569,042 572,137
------------ ------------
Total liabilities and stockholders' equity...................................... $ 1,042,503 $ 1,229,426
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Total net revenues...................................................... $ 673,354 $ 1,135,508 $ 1,316,308
Cost and expenses:
Operating............................................................. 552,662 929,493 1,107,821
Corporate general and administrative.................................. 31,633 51,468 62,085
Provision for losses on accounts receivable........................... 27,632 14,623 14,970
Depreciation and amortization......................................... 11,797 27,734 33,817
Interest, net......................................................... 10,548 21,829 25,899
Conversion expense.................................................... 2,275 3,256 --
Merger expenses....................................................... -- 5,800 --
Strike costs.......................................................... -- 4,006 --
Investigation and litigation costs.................................... -- 5,505 19,250
Impairment loss....................................................... -- 59,000 --
---------- ------------ ------------
Total costs and expenses............................................ 636,547 1,122,714 1,263,842
---------- ------------ ------------
Earnings before income taxes and extraordinary loss..................... 36,807 12,794 52,466
Income taxes............................................................ 14,688 33,132 30,930
---------- ------------ ------------
Net earnings (loss) before extraordinary loss......................... 22,119 (20,338) 21,536
Extraordinary loss from early extinguishment of debt, net of income tax
benefit of $2,372...................................................... -- (3,413) --
---------- ------------ ------------
Net earnings (loss)..................................................... $ 22,119 ($ 23,751) $ 21,536
---------- ------------ ------------
---------- ------------ ------------
Pro forma data:
Historical earnings before income taxes and extraordinary loss........ $ 36,807 $ 12,794
Pro forma income taxes................................................ 17,246 33,362
---------- ------------
Pro forma net earnings (loss) before extraordinary loss............... 19,561 (20,568)
Extraordinary loss.................................................... -- (3,413)
---------- ------------
Pro forma net earnings (loss)......................................... $ 19,561 ($ 23,981)
---------- ------------
---------- ------------
Net earnings (loss) per common and common equivalent share:
Net earnings (loss) before extraordinary loss......................... $ 0.61 ($ 0.43) $ 0.46
Extraordinary loss.................................................... -- (0.07) --
---------- ------------ ------------
Net earnings (loss)................................................... $ 0.61 ($ 0.50) $ 0.46
---------- ------------ ------------
---------- ------------ ------------
Weighted average number of common and common equivalent shares
outstanding............................................................ 31,830 47,419 46,840
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)...................................................... $ 22,119 $ (23,751) $ 21,536
Adjustments to reconcile net earnings (loss) to net cash provided by
(used for) operating activities --
Extraordinary loss..................................................... -- 5,785 --
Conversion expense..................................................... 2,275 3,256 --
Litigation settlement.................................................. -- -- (4,750)
Depreciation and amortization.......................................... 11,797 27,734 33,817
Provision for losses on accounts receivable............................ 27,632 14,623 14,970
Impairment loss........................................................ -- 59,000 --
Other, net............................................................. (908) (2,220) (2,032)
Changes in operating assets and liabilities:
Accounts receivable.................................................. (76,929) (90,887) (57,059)
Other current assets................................................. (4,521) 970 (6,696)
Other current liabilities............................................ (10,029) (6,334) 3,262
Income taxes payable................................................. (7,758) 18,610 23,764
----------- ---------- -----------
Net cash provided by (used for) operating activities................... (36,322) 6,786 26,812
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................................................ (37,862) (73,497) (76,223)
Transfer of restricted cash.............................................. 16,054 -- --
Acquisitions, net of cash acquired....................................... (128,378) (48,167) (65,405)
Purchase of minority interest in Ashbourne PLC........................... -- (25,874) (10,174)
Purchase of minority interest in OmniCell Technologies, Inc.............. -- -- (25,332)
Net proceeds from sale of SunSurgery Corporation......................... -- -- 24,828
Proceeds from operations and sale of assets held for sale................ (2,186) 36,878 (3,810)
Proceeds from sale and leaseback of property and equipment............... -- 105,534 34,603
Other assets expenditures................................................ (3,507) (22,648) (20,676)
----------- ---------- -----------
Net cash used for investing activities................................. (155,879) (27,774) (142,189)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings................................................ 145,055 185,299 137,155
Long-term debt repayments................................................ (88,163) (115,730) (4,273)
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.................................................................... (10,681) (16,859) --
Net proceeds from issuance of common stock............................... 216,608 2,976 1,582
Purchases of treasury stock.............................................. -- -- (25,069)
Other financing activities............................................... -- (1,429) (1,776)
Distribution of prior S corporation earnings............................. (8,889) (333) --
----------- ---------- -----------
Net cash provided by (used for) financing activities................... 254,597 (35,446) 107,619
----------- ---------- -----------
Effect of exchange rate on cash and cash equivalents....................... -- 798 (464)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents....................... 62,396 (55,636) (8,222)
Cash and cash equivalents at beginning of year............................. 16,342 78,738 23,102
----------- ---------- -----------
Cash and cash equivalents at end of year................................... $ 78,738 $ 23,102 $ 14,880
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE GRANTOR
---------------------- PAID-IN RETAINED TRANSLATION TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK TRUST
--------- ----------- ----------- ----------- ------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993........... 21,066 $ 210 $ 57,697 $ 12,454 $ -- $ -- $ --
Distribution of prior S corporation
earnings.............................. -- -- 218 (5,954) -- -- --
Reclassification of retained earnings
as additional paid-in capital to
reflect change in tax status of
CareerStaff........................... -- -- 454 (454) -- -- --
Common stock offerings................. 10,662 107 205,402 -- -- -- --
Common stock issued pursuant to the
acquisition of Mediplex and related
transactions.......................... 11,250 112 213,629 -- -- -- --
Common stock issued in connection with
other acquisitions.................... 14 -- 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
acquisition........................... -- -- 14,473 -- -- -- --
Issuance of common stock for employee
benefits.............................. 1,051 11 11,088 -- -- -- --
Conversion of 6 1/2% Convertible
Subordinated Debentures due 2003...... 978 10 18,503 -- -- -- --
Foreign currency translation
adjustment............................ -- -- -- -- 220 -- --
Net earnings........................... -- -- -- 22,119 -- -- --
--------- ----- ----------- ----------- ------------- --------- ---------
Balance at December 31, 1994........... 45,021 450 521,614 28,165 220 -- --
--------- ----- ----------- ----------- ------------- --------- ---------
Distribution of prior S corporation
earnings.............................. -- -- -- (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 7 174 604 -- -- --
Common stock issued in connection with
other acquisitions.................... 339 3 8,231 -- -- -- --
Additional consideration recorded for
the fair value of warrants issued in
connection with the Columbia
acquisition........................... -- -- 1,095 -- -- -- --
Issuance of common stock for employee
benefits.............................. 283 3 2,973 -- -- -- --
Conversion of 6 1/2% Convertible
Subordinated Debentures due 2003...... 1,583 16 30,059 -- -- -- --
Foreign currency translation
adjustment............................ -- -- -- -- (488) -- --
Net loss............................... -- -- -- (23,751) -- -- --
--------- ----- ----------- ----------- ------------- --------- ---------
Balance at December 31, 1995........... 47,916 479 568,054 777 (268) -- --
--------- ----- ----------- ----------- ------------- --------- ---------
Purchase of treasury stock............. -- -- -- -- -- (25,069) --
Common stock issued in connection with
acquisitions.......................... 71 1 960 -- -- -- --
Issuance of common stock in connection
with establishment of the Grantor
Stock Trust........................... 3,050 30 37,670 -- -- -- (37,700)
Issuance of common stock from the
Grantor Stock Trust................... -- -- -- -- -- -- 375
Adjustment to market value of common
stock held by the Grantor Stock
Trust................................. -- -- 3,445 -- -- -- (3,445)
Issuance of common stock for employee
benefits.............................. 106 1 1,206 -- -- -- --
Tax benefit of stock options
exercised............................. -- -- 99 -- -- -- --
Foreign currency translation
adjustment............................ -- -- -- -- 3,986 -- --
Net earnings........................... -- -- -- 21,536 -- -- --
--------- ----- ----------- ----------- ------------- --------- ---------
Balance at December 31, 1996........... 51,143 $ 511 $ 611,434 $ 22,313 $ 3,718 $ (25,069) $ (40,770)
--------- ----- ----------- ----------- ------------- --------- ---------
--------- ----- ----------- ----------- ------------- --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Balance at December 31, 1993........... $ 70,361
Distribution of prior S corporation
earnings.............................. (5,736)
Reclassification of retained earnings
as additional paid-in capital to
reflect change in tax status of
CareerStaff........................... --
Common stock offerings................. 205,509
Common stock issued pursuant to the
acquisition of Mediplex and related
transactions.......................... 213,741
Common stock issued in connection with
other acquisitions.................... 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
acquisition........................... 14,473
Issuance of common stock for employee
benefits.............................. 11,099
Conversion of 6 1/2% Convertible
Subordinated Debentures due 2003...... 18,513
Foreign currency translation
adjustment............................ 220
Net earnings........................... 22,119
---------
Balance at December 31, 1994........... 550,449
---------
Distribution of prior S corporation
earnings.............................. (333)
Reclassification of retained earnings
as additional paid-in capital to
reflect the change in tax status of
Golden Care, Inc...................... --
Common stock issued in connection with
immaterial poolings................... 785
Common stock issued in connection with
other acquisitions.................... 8,234
Additional consideration recorded for
the fair value of warrants issued in
connection with the Columbia
acquisition........................... 1,095
Issuance of common stock for employee
benefits.............................. 2,976
Conversion of 6 1/2% Convertible
Subordinated Debentures due 2003...... 30,075
Foreign currency translation
adjustment............................ (488)
Net loss............................... (23,751)
---------
Balance at December 31, 1995........... 569,042
---------
Purchase of treasury stock............. (25,069)
Common stock issued in connection with
acquisitions.......................... 961
Issuance of common stock in connection
with establishment of the Grantor
Stock Trust........................... --
Issuance of common stock from the
Grantor Stock Trust................... 375
Adjustment to market value of common
stock held by the Grantor Stock
Trust................................. --
Issuance of common stock for employee
benefits.............................. 1,207
Tax benefit of stock options
exercised............................. 99
Foreign currency translation
adjustment............................ 3,986
Net earnings........................... 21,536
---------
Balance at December 31, 1996........... $ 572,137
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(a) NATURE OF BUSINESS
Sun Healthcare Group, Inc., through its direct and indirect subsidiaries
("Sun" or the "Company"), is a provider of long-term, subacute and related
specialty healthcare services including rehabilitation and respiratory therapy
services and pharmaceutical services. Long-term and subacute care and outpatient
therapy services are provided through Company-operated facilities. Therapy
services and pharmaceutical services are provided both in Company-operated and
in other nonaffiliated facilities located in the United States. The Company also
provides long-term care and pharmaceutical 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. Investments in affiliates, 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, therapy services revenues,
temporary therapy staffing services revenues and 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 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 $103,000, $8,862,000 and $12,268,000 for the years ended December 31, 1994,
1995 and 1996 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 of $11,115,000
and $19,119,000 at December 31, 1995 and 1996, respectively. Amounts realizable
are subject to final settlement of the respective cost reports. Differences
between the net amounts accrued and subsequent settlements are recorded in
operations at the time of settlement.
F-12
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
(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, healthcare
providers and individuals. The following table summarizes the percent of
accounts receivable by payor category as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Government...................................................................... 51% 44%
Private and other............................................................... 49 56
--- ---
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. In certain instances, however, the
collection of amounts from healthcare providers for therapy services has slowed
because payment is primarily dependent upon such facilities' receipt of payment
from fiscal intermediaries which, in some instances, have been delayed because
fiscal intermediaries are conducting reviews of such facilities' request for
reimbursement.
(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
20 years.
The Company capitalizes certain costs associated with developing and
acquiring healthcare 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.
(g) 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 and $28,889,000 as of December 31, 1995 and 1996,
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
F-13
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
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 in 1995 primarily relates to the goodwill associated with six of the
forty facilities acquired in the Mediplex acquisition. 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 during 1995, 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 financial
condition or results of operations. 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.
(h) 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). Other assets also includes equity and cost-based investments (see
Note 2).
(i) 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.
(j) INVESTIGATION AND LITIGATION COSTS
In 1996, the Company reached an agreement in principle to settle certain
class-action lawsuits brought by shareholders for $24,000,000 and recognized, as
a reduction of the settlement cost, a $9,000,000 claim from its directors and
officers liability insurance carrier for its claim submitted in connection with
the settlement. In addition, in 1996 the Company recorded additional charges and
expenses of $4,250,000 related to monitoring and responding to the continuing
investigation by the U.S. Department of Health and Human Services' Office of
Inspector General ("OIG") and responding to the remaining shareholder litigation
filed after the announcement of the OIG investigation. In 1995, the Company
recorded charges and expenses of $5,505,000 related to monitoring and responding
to the continuing OIG investigation and legal fees resulting from shareholder
litigation (see Note 14). The 1995 charges also included costs incurred by the
Company in connection with financing
F-14
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
activities which were not concluded due to negative publicity resulting from the
OIG investigation. The charges do not contain any estimated amounts for
settlement of the OIG investigation or remaining shareholder litigation matters.
(k) STRIKE COSTS
During 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.
(l) INCOME TAXES
Income tax expense 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, 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 9).
(m) 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 cumulative foreign currency translation adjustment account in stockholders'
equity.
(n) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. Financial Accounting Standards
Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
was issued in 1995 and the Company has adopted the disclosure requirements of
SFAS 123 (see Note 12).
(o) NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common and common equivalent share 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 the number of incremental shares of common stock contingently
issuable upon exercise of stock options.
Fully diluted net earnings per share in periods of earnings, if dilutive, 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. In periods of loss, fully diluted net earnings per share is based
upon the weighted average number of common shares outstanding during the period.
F-15
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
(p) 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 1995 consolidated financial statements and
notes have been reclassified to conform to the 1996 presentation.
(2) MERGERS AND ACQUISITIONS
On December 15, 1996, a wholly owned subsidiary of the Company acquired all
of the capital stock of APTA Healthcare PLC ("APTA"), which as of the date of
acquisition provided healthcare services to patients through 32 nursing
facilities in the United Kingdom. Pursuant to the acquisition, the Company will
pay L13,733,000 ($23,545,000 as of December 31, 1996) which is the consideration
due to former stockholders of APTA. The acquisition was accounted for as a
purchase and became unconditional according to United Kingdom law on December
15, 1996 and, therefore, the results of APTA's operations have been included in
the Company's consolidated financial statements from the date of acquisition on
December 15, 1996. The fair market value of assets acquired, including goodwill
of $17,900,000, was $72,700,000 and liabilities assumed totaled $49,200,000. The
acquisition of APTA is immaterial to the results of the Company and, therefore,
pro forma information is not provided. Also in 1996, the Company purchased a
9.9% investment in OmniCell Technologies, Inc. ("OmniCell") for $25,332,000.
In 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. In
1996, the Company acquired an additional minority interest of 9% in Ashbourne
PLC for $10,174,000. Subsequent to December 31, 1996, the Company acquired the
remaining shares of Ashbourne PLC for approximately L67,300,000 ($110,100,000),
excluding acquisition expenses and the cost of purchasing Ashbourne management
options.
On June 21, 1995, a wholly owned subsidiary of the Company merged with and
into CareerStaff Unlimited, Inc. ("CareerStaff"). CareerStaff provides temporary
staffing of physical, occupational and speech therapists to the healthcare
industry. Under the terms of the merger agreement, the Company issued 6,080,600
shares of its 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, Inc. ("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.
F-16
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) MERGERS AND ACQUISITIONS (CONTINUED)
Separate results of the combining entities for periods prior to combination
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995(1)
----------- -------------
(UNAUDITED)
<S> <C> <C>
Net Revenues:
Sun............................................................. $ 603,337 $ 1,086,985
CareerStaff..................................................... 55,258 45,116
Golden Care..................................................... 14,759 4,022
Less: Intercompany revenues..................................... -- (615)
----------- -------------
$ 673,354 $ 1,135,508
----------- -------------
----------- -------------
Net Earnings (Loss):
Sun............................................................. $ 13,859 $ (26,644)
CareerStaff..................................................... 3,881 2,319
Golden Care..................................................... 4,379 574
----------- -------------
$ 22,119 $ (23,751)
----------- -------------
----------- -------------
Pro Forma Net Earnings (Loss) (see Note 9):
Sun............................................................. $ 13,859 $ (26,644)
CareerStaff..................................................... 3,094 2,319
Golden Care..................................................... 2,608 344
----------- -------------
$ 19,561 $ (23,981)
----------- -------------
----------- -------------
</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.
In November 1995, the Company acquired 75% of the common stock of Columbia
Health Care Inc. ("Columbia") 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 former owners of Columbia
to purchase 500,000 shares of the Company's common stock with an exercise price
of $15.375 per share which had a value of $1,095,000 at the date of acquisition.
As of December 31, 1996, the warrants were exercisable and, if unexercised,
would 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
all of the outstanding capital stock of Mediplex, which as of June 23, 1994
provided long-term and subacute healthcare services to patients through 36
inpatient facilities, six ambulatory surgery centers and related outpatient
programs. Pursuant to the acquisition, 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 acquisition 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.
F-17
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) MERGERS AND ACQUISITIONS (CONTINUED)
Concurrent with the execution of the acquisition agreement between the
Company and Mediplex, the Company entered into a restructuring agreement (the
"Meditrust Restructuring") with Meditrust, a healthcare real estate investment
trust that is Mediplex's principal landlord and lender, to obtain the consent of
Meditrust to the Mediplex acquisition 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 and leaseback transactions.
Also, concurrent with the acquisition of Mediplex, 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 acquisition of Mediplex.
As a result of the Mediplex acquisition, 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 5). Prior to the Mediplex acquisition, these
facilities had experienced declines in revenues and occupancy rates. In
addition, certain of these facilities were 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 acquisition of Mediplex,
these assets were 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.
In September 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
operator of long-term care nursing homes 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 of $474,000 which was paid in 1995 and $1,066,000 which was paid in
1996.
(3) DISPOSITION
In June 1996, the Company completed the sale of all of the outstanding stock
of SunSurgery Corporation, its ambulatory surgery subsidiary, for approximately
$27,900,000 in cash and the assumption of $5,600,000 in debt by the buyer. As of
the date of sale, SunSurgery Corporation had approximately $3,100,000 in cash
which was retained by the buyer. The sale resulted in no material gain or loss
to the Company.
F-18
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Land................................................................ $ 12,358 $ 21,983
Buildings and improvements.......................................... 79,868 148,530
Leasehold improvements.............................................. 33,433 52,630
Equipment........................................................... 55,031 76,812
Construction in progress............................................ 37,353 34,097
----------- -----------
Total........................................................... 218,043 334,052
Less accumulated depreciation and amortization...................... (16,911) (28,332)
----------- -----------
Property and equipment, net..................................... $ 201,132 $ 305,720
----------- -----------
----------- -----------
</TABLE>
In 1996, the Company sold three of its long-term and subacute care
facilities for $11,934,000 including the assumption of debt totaling $3,168,000
and leased them back under fifteen year leases. Also in 1996, the Company,
through its United Kingdom subsidiary, sold ten of its long-term care facilities
for $25,837,000 and leased them back under twelve year leases. These
transactions produced no material gain or loss.
In 1995, 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, the
Company, through its United Kingdom subsidiary, sold fifteen of its long-term
care facilities for $35,546,000 and leased them back under twelve year leases.
These transactions produced no material gain or loss.
(5) ASSETS HELD FOR SALE
As discussed in Note 2, as a result of the acquisition of Mediplex, the
Company acquired certain facilities providing psychiatric, substance abuse and
transitional living services. On September 30, 1995, the Company sold five of
the operating psychiatric care and substance abuse treatment facilities, all of
the related outpatient facilities and a transitional living facility for a sales
price of $39,900,000 consisting of cash and the assumption of indebtedness
secured by one of the facilities. The sale of the transitional living facility
was completed in 1996 at a net cost to the Company of $3,810,000. 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, 1996,
$12,500,000 had been advanced on the working capital line of credit. In 1995,
the Company subleased two 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. Also in 1995, the Company completed
the sale of two of the closed facilities for $2,000,000 and $2,500,000,
respectively. As of December 31, 1996, the Company continues to own an interest
in a substance abuse facility which was closed in 1992.
F-19
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) 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,
1994 THROUGH YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Net revenues........................................... $ 38,281 $ 63,236
-------- --------
Loss from operations before income taxes............... 1,936 3,527
Income tax benefit..................................... 762 1,425
-------- --------
Loss from assets held for sale......................... $ 1,174 $ 2,102
-------- --------
-------- --------
</TABLE>
(6) LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Revolving Line of Credit (see below).................................................... $ 177,600 $ 279,300
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 $2,728 as of December 31, 1995 and 1996,
respectively........................................................................... 25,566 25,137
Senior Subordinated Notes due 2002, interest at 11 3/4% per annum, includes unamortized
premium of $131 and $126 as of December 31, 1995 and 1996, respectively................ 6,292 6,287
Mortgage notes payable due at various dates through 2005, interest at rates from 10% to
14%, collateralized by various facilities.............................................. 35,375 34,939
Mortgage notes payable in pound sterling and due at various dates through 2017, interest
at 1% to 4% plus the FHBR rate ("Finance House Base Rate"), collateralized by various
facilities in the United Kingdom....................................................... 10,332 31,543
Revolving line of credit with a bank due 1997, payable in pound sterling with interest
at a rate of 1.75% plus the FHBR rate, collateralized by the assets of various
facilities............................................................................. 4,582 20,309
Industrial Revenue Bonds due 2016, interest at 10.25%, collateralized by a
rehabilitation hospital................................................................ 4,060 4,000
Notes payable to a bank due 1998, interest at prime rate less .25%, collateralized by
the assets of the ambulatory surgery centers........................................... 5,096 --
Obligations under capital lease agreements, imputed interest at rates ranging from 5.4%
to 12.47%; due through 1999, collateralized by the assets of various facilities and
leased equipment....................................................................... 2,937 24,270
Other long-term debt.................................................................... 3,737 3,350
----------- -----------
Total long-term debt.................................................................... 358,877 512,435
Less current portion.................................................................... (10,417) (28,982)
----------- -----------
Long-term debt, net of current portion.................................................. $ 348,460 $ 483,453
----------- -----------
----------- -----------
</TABLE>
F-20
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT (CONTINUED)
Annual maturities for the next five years at December 31, 1996, are as
follows (in thousands):
<TABLE>
<S> <C>
1997............................................................. $ 28,982
1998............................................................. 8,805
1999............................................................. 5,526
2000............................................................. 5,293
2001............................................................. 225,156
Thereafter....................................................... 238,673
---------
$ 512,435
---------
---------
</TABLE>
In October 1996, the Company entered into a Fourth Amended and Restated
Credit Agreement (the "Credit Facility") with certain banks, including
NationsBank of Texas, N.A. as administrative lender. The Credit Facility
provides up to $490,000,000 in a revolving line of credit and letters of credit.
The Credit Facility expires on October 28, 2001 and is collateralized by a
pledge of the stock of the majority 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 coverage 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)
prohibits the payment of dividends, the acquisition of treasury stock and the
prepayment or modification of certain debts of the Company. The Company had
$279,300,000 of outstanding borrowings and $18,272,000 of outstanding standby
letters of credit under the Credit Facility at December 31, 1996.
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 for the
acquisition of Mediplex. 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
acquisition 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
acquisition of Mediplex. 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 $22,409,000 of outstanding 6 1/2% Debentures would require the
issuance of an additional 899,170 shares of the Company's common stock and a
payment of $7,727,000 in cash pursuant to the conversion terms under the
indenture relating to the 6 1/2% Debentures.
F-21
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT (CONTINUED)
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 $32,712,000 of mortgages with Meditrust as of December 31,
1996, which contain less restrictive covenants than 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 $3,921,000 as of December 31, 1996, to guarantee
outstanding debt obligations of $3,850,000 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 acquisition of Mediplex, 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.
(7) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company has various noncancelable operating leases for facilities with
initial lease terms generally ranging from 5 to 23 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 noncancelable operating leases at
December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................. $ 90,078
1998............................................................. 89,654
1999............................................................. 90,604
2000............................................................. 91,182
2001............................................................. 86,978
Thereafter....................................................... 463,344
---------
$ 911,840
---------
---------
</TABLE>
Several leases contain contingent rental provisions based on operating
results. Rent expense totaled $43,626,000, $73,727,000 and $91,666,000 in 1994,
1995 and 1996, respectively, including contingent rentals of approximately
$254,000, $182,000 and $131,000 during 1994, 1995 and 1996, respectively.
F-22
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases or subleases 58 facilities from affiliates of two
directors of the Company as of December 31, 1996, which is included in the
information above. The aggregate lease expense for these facilities was
approximately $12,800,000, $13,800,000 and $16,703,000 in 1994, 1995 and 1996,
respectively. Future minimum lease commitments related to these facilities total
approximately $175,000,000 at December 31, 1996. 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, 1996,
under various contracts, including approximately $10,400,000 in the United
States and L7,300,000 ($12,500,000 as of December 31, 1996) in the United
Kingdom. These include contractual commitments to improve existing facilities
and to develop and construct one and seven new long-term and subacute care
facilities in the United States and United Kingdom, respectively.
(c) FINANCING COMMITMENTS
The Company has agreed to lend $47,000,000, through a revolving subordinated
credit agreement ("Revolving Credit Agreement") to a developer of assisted
living facilities for the development, construction and operation of assisted
living facilities. The advances are subject to certain conditions including
availability of mortgage financing for 50% of the cost of each project and
approval of each project by the Company. At December 31, 1996, five assisted
living facilities were under development which would require funding by the
Company totaling approximately $24,300,000, of which $9,000,000 had been
advanced. The developer is in the process of obtaining mortgage financing. If
mortgage financing is not obtained, the Company will be obligated to fund 100%
of these five projects for approximately $51,700,000. The Company's advances
under the Revolving Credit Agreement will be subordinate to the mortgage
financing. A subsidiary of the Company has an option to purchase each assisted
living facility after it becomes operational.
(d) 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 condition results
of operations of the Company (see Notes 1(j) and 14).
(e) OTHER
The Company recently learned that a fiscal intermediary and a Medicaid
agency in one of the states in which the Company operates may be examining cost
reports filed by a predecessor operator of several facilities acquired in the
Mediplex acquisition. If, as a result of any such examination, it is concluded
that overpayments to the predecessor operator were made, the Company, as the
current operator of such facilities, may be held financially responsible for any
such overpayments. However, at this time the Company is unable to predict the
outcome of any such examination.
F-23
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
Income tax expense (benefit) on earnings before extraordinary loss consists
of the following for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 16,829 $ (212) $ 12,790
State.................................................... 3,362 (102) 4,835
--------- --------- ---------
20,191 (314) 17,625
--------- --------- ---------
Deferred:
Federal.................................................. (4,894) 27,744 11,037
State.................................................... (609) 5,702 2,268
--------- --------- ---------
(5,503) 33,446 13,305
--------- --------- ---------
Total.................................................. $ 14,688 $ 33,132 $ 30,930
--------- --------- ---------
--------- --------- ---------
</TABLE>
Actual tax expense differs from the "expected" tax expense on earnings
before extraordinary loss, computed by applying the U.S. Federal corporate
income tax rate of 35% to pretax net earnings before extraordinary loss of the
Company as follows for the year ended December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense............................ $ 12,882 $ 4,478 $ 18,363
Adjustments in income taxes resulting from:
Amortization of goodwill................................. 1,492 3,235 3,045
Impairment loss.......................................... -- 15,452 --
Increase in valuation allowance.......................... -- 3,038 7,615
Conversion fee........................................... 796 1,139 --
Merger expenses.......................................... -- 1,199 --
S corporation earnings not taxable to the Company (at
Federal rates).......................................... (2,251) (230) --
State income tax expense, net of Federal income tax
benefit................................................. 1,730 3,332 4,617
Loss on sale of subsidiary stock......................... -- -- (2,458)
Recognition of deferred income taxes for former S
corporations............................................ -- 1,487 --
Other.................................................... 39 2 (252)
--------- --------- ---------
$ 14,688 $ 33,132 $ 30,930
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) were comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Provision for losses on accounts receivable.............................................. $ 14,851 $ 8,045
Accrued liabilities...................................................................... 8,788 3,629
Property and equipment................................................................... 10,650 3,270
Intangible assets........................................................................ 8,190 8,154
Carryforward of deductions limited by Internal Revenue Code Section 382.................. 6,380 9,222
Write-down of assets held for sale and reserve for estimated costs of disposal and future
operating losses........................................................................ 7,989 5,714
Deferred income.......................................................................... 2,771 2,275
Alternative minimum tax credit........................................................... 899 425
Shareholder settlement................................................................... -- 7,571
Capital loss carryforward................................................................ -- 1,573
State net operating loss carryforwards................................................... -- 5,156
Other.................................................................................... 263 523
--------- ---------
60,781 55,557
--------- ---------
Less valuation allowance:
Federal.................................................................................. (18,526) (24,843)
State.................................................................................... (2,512) (3,810)
--------- ---------
(21,038) (28,653)
--------- ---------
Total deferred tax asset................................................................... 39,743 26,904
--------- ---------
Deferred tax liabilities:
Changes in certain subsidiaries' methods of accounting for income taxes from cash to
accrual basis........................................................................... (1,109) (1,191)
Property and equipment attributable to United Kingdom operations......................... (2,634) (4,760)
--------- ---------
(3,743) (5,951)
--------- ---------
Deferred tax asset, net.................................................................... $ 36,000 $ 20,953
--------- ---------
--------- ---------
</TABLE>
Various subsidiaries have state net operating loss ("NOL") carryforwards
totaling $94,292,000 with expiration dates through the year 2011. In addition,
the Company has a capital loss carryforward of approximately $4,000,000 which
will expire in 2001. Because there is a risk that certain of these NOL and
capital loss carryforwards may expire unutilized, a valuation allowance has been
established against them.
In connection with the deferred tax assets acquired in the acquisition of
Mediplex, the Company recorded an $18,000,000 valuation allowance. Accordingly,
any tax benefits recognized in future periods attributable to this portion of
the valuation allowance will be allocated to reduce goodwill. The $7,615,000
increase in the valuation allowance in 1996 relates to realization of tax
deductible shareholder settlement costs and capital loss carryforwards.
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.
F-25
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) 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 CareerStaff for the period from January 1, 1994
through June 22, 1994, and Golden Care for the period January 1, 1995 through
May 5, 1995 and for the year ended December 31, 1994 on the basis that is
required upon their change in tax status from S corporation to C corporation.
These amounts ($2,558,000 and $230,000 in 1994 and 1995, 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 $8,889,000 and $333,000 in 1994 and 1995, respectively, of prior S
corporation earnings to stockholders for certain of these tax obligations.
(10) 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>
1994 1995 1996
----------- --------- ------------
<S> <C> <C> <C>
Cash paid during the year ended December 31 for:
Interest, net of $3,705, $2,839 and $2,472 capitalized during 1996, 1995
and 1994, respectively.................................................. $ 10,942 $ 26,951 $ 26,821
Income taxes............................................................. 22,446 12,150 7,608
</TABLE>
The Company's acquisitions during 1995 and 1996, the Company's acquisition
of Mediplex on June 23, 1994, the related transactions and other acquisitions
during 1994 and other related transactions and acquisitions involved the
following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----------- --------- ------------
<S> <C> <C> <C>
Fair value of assets acquired.............................................. $ 785,694 $ 66,575 $ 145,652
Liabilities assumed........................................................ (443,575) (9,079) (55,741)
Payable to APTA shareholders............................................... -- -- (23,545)
Fair value of stock and warrants issued.................................... (213,741) (9,329) (961)
----------- --------- ------------
Cash payments made, net of cash received from others....................... $ 128,378 $ 48,167 $ 65,405
----------- --------- ------------
----------- --------- ------------
</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 6).
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................. $ 23,102 $ 23,102 $ 14,880 $ 14,880
Long-term debt, including current portion................. (358,877) (352,843) (512,435) (510,400)
</TABLE>
F-26
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
(12) CAPITAL STOCK
(a) SALE OF COMMON SHARES
SUN
In connection with the Company's acquisition of Mediplex in June 1994, 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.
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.
(b) COMMON STOCK REPURCHASE
In the first quarter of 1996, the Company repurchased 2,030,116 shares of
its outstanding common stock at a cost, including commissions, of $25,069,000.
(c) STOCK OPTION PLANS
STOCK INCENTIVE PLANS
The Company has stock option plans for certain employees, officers, and
consultants of the Company which provide for the grant of nonqualified and
incentive stock options. The Board of Directors or a committee appointed by the
Board of Directors determines the vesting schedule and the option price which is
generally not to be less than the fair market value per share of the Company's
common stock at the date of grant. Options granted prior to March 1996 generally
vest at the end of three years and expire ten years from the date of grant.
Options granted during and after March 1996 generally vest ratably over three
years and expire ten years from the date of grant. At December 31, 1996, options
for 2,829,099 shares were outstanding, options for 350,500 shares were vested
and 2,845,000 shares were available for future grants under the stock option
plans for officers, certain employees, and consultants. Exercise prices of
outstanding options to purchase shares of the Company's common stock range from
$9.50 to $24.00.
DIRECTOR STOCK OPTION PLANS
The Company has stock option plans for nonemployee directors, which provide
for the grant of nonqualified options. 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 for each of three years thereafter of options for 7,500
shares. Each grant had an exercise price equal to the initial public offering
price of $11.00 per share, a vesting period of one year and an expiration date
ten years after the date of grant. Nonemployee directors who began serving after
the Company's initial public offering receive an initial grant of options for
5,000 shares and annual grants of options for 1,000 shares for each year
thereafter at a price not less than the fair market value of the Company's
common stock at the date of grant. Beginning in 1997, all nonemployee directors
will receive an annual grant of options for 1,000 shares at a price not less
than fair market value of the Company's common stock at the date of grant. The
grants of options for 1,000 and 5,000 shares vest ratably over four years
beginning after the first anniversary of the date of grant
F-27
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CAPITAL STOCK (CONTINUED)
and expire ten years after the date of grant. At December 31, 1996, options for
80,500 shares were outstanding, options for 61,250 shares were vested and
177,000 shares were available for future grant under the stock option plans for
nonemployee directors. Exercise prices of outstanding options to purchase shares
of common stock range from $9.50 to $15.75.
1997 STOCK INCENTIVE PLAN
In the first quarter of 1997, the Board of Directors adopted the 1997 Stock
Incentive Plan (the "Plan"). Awards made under the Plan may be in the form of
stock options, stock appreciation rights, stock awards, performance share
awards, or other stock-based awards. The Plan is intended to replace the
existing stock option plans for executives, and awards currently outstanding
under those plans were not affected. The Plan reserves 4,500,000 shares for
awards. Subsequent to December 31, 1996, the Company awarded an aggregate of
776,000 shares of restricted stock to nine senior executives, which will be
expensed over the vesting period. Approximately 105,000 of the restricted shares
vested immediately. The remaining restricted stock awards vest ratably over the
remaining four to five years. These restricted stock awards are subject to
defeasance if the Plan is not approved by the shareholders.
MEDIPLEX OPTION PLANS
In connection with the acquisition of Mediplex, 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, 1996,
options to purchase 355,228 shares of common stock, of which 301,478 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 acquisition and the exercise price of the assumed options was
accounted for as additional consideration in the acquisition. 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
acquisition.
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, 1996, all of the outstanding options to purchase a total of 82,802
shares of the Company's common stock were exercisable at exercise prices ranging
from $12.96 to $22.47.
F-28
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CAPITAL STOCK (CONTINUED)
The following is a summary of the status of the Company's Stock Incentive
Plans, the Director Stock Option Plans and the assumed Mediplex and CareerStaff
Option Plans as of December 31, 1994, 1995 and 1996, and changes during the
years ending on those dates is presented below (shares in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 737 $ 12.27 3,007 $ 15.79 3,648 $ 16.12
Granted:
Price equals fair value........................ 1,863 20.13 1,508 16.82 441 13.74
Price is less than fair value.................. 23 11.00 23 11.00 15 11.00
Options assumed in connection with the
acquisition of Mediplex......................... 1,705 10.42 -- -- -- --
Exercised........................................ (1,051) 10.41 (283) 12.78 (106) 11.09
Cancelled........................................ (270) 15.46 (607) 17.07 (650) 16.54
--------- --------- ---------
Outstanding at year-end.......................... 3,007 15.79 3,648 16.12 3,348 15.91
--------- --------- ---------
--------- --------- ---------
Options exercisable at year-end.................. 337 10.93 628 11.62 796 11.53
--------- --------- ---------
--------- --------- ---------
Options available for future grant............... 1,148 330 3,022
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of options granted
during the year................................. $ 7.04 $ 5.41
--------- ---------
--------- ---------
</TABLE>
The fair value of each option granted in 1995 and 1996 is estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: (i) zero dividend yield; (ii) expected volatility
of 41%; (iii) risk-free interest rates of 5.37% and 6.22% for the years ended
December 31, 1995 and 1996, respectively, and (iv) expected life of four years.
Had compensation cost for the Company's 1995 and 1996 options grants been
determined consistent with SFAS 123 (see Note 1(n)) which establishes fair value
as the measurement basis for stock-based awards, the Company's net earnings and
net earnings per share for 1995 and 1996 would approximate the pro forma amounts
below (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
----------------------- ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings (loss)........................................... $ (23,981) $ (25,229) $ 21,536 $ 19,548
Net earnings (loss) per share................................. $ (0.50) $ (0.53) $ 0.46 $ 0.42
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to options granted prior
to 1995, and additional option grants in future years are anticipated.
F-29
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CAPITAL STOCK (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING CONTRACTUAL EXERCISE OUTSTANDING AT EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/96 LIFE PRICE 12/31/96 PRICE
- ------------------------------------- ------------- --------------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$ 7.75 - $10.13...................... 745 5.5 $ 9.68 294 $ 9.90
11.00 - 15.84...................... 897 7.7 12.88 462 12.06
16.07 - 19.00...................... 979 7.8 18.30 34 16.69
20.50 - 24.00...................... 727 7.9 22.81 6 22.50
----- ---
3,348 7.3 15.91 796 11.53
----- ---
----- ---
</TABLE>
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.
(d) GRANTOR STOCK TRUST
In the first quarter of 1996, the Company sold 3,050,000 newly issued shares
of the Company's common stock to a newly established Grantor Stock Trust
("Trust") for approximately $37,700,000. The Trust was created to fund future
obligations under certain of the Company's benefit plans. The sale of the shares
was recorded as an increase in stockholders' equity with a corresponding
reduction for the value of the shares held by the Trust. As employee benefits
are satisfied, the number and value of shares held by the Trust is reduced and
stockholders' equity correspondingly increases. As of December 31, 1996, the
Trust held 3,019,993 shares of the Company's common stock.
The Trust delivered a promissory note for approximately $37,700,000 to the
Company. The cash portion of the purchase price of approximately $31,000
represents the par value of the shares of the Company's common stock sold to the
Trust. Amounts owed by the Trust will be repaid periodically with cash received
from the Company or will be forgiven by the Company thereby enabling the release
of shares from the Trust to satisfy the Company's obligations for certain
employee benefit plans.
(13) 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.
F-30
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) PREFERRED STOCK PURCHASE RIGHTS (CONTINUED)
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 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.
(14) OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
The Company is the subject of a pending Federal investigation by the OIG and
the United States Department of Justice. At this time, the Company understands
that the investigation includes a review of whether the Company's rehabilitation
therapy subsidiary properly provided and/or billed for concurrent therapy
services and whether it provided unnecessary or unordered services to residents
of skilled nursing facilities. The Company understands that the investigation
also includes a review of whether its long-term care subsidiary properly
disclosed its relationship with the Company's rehabilitation therapy subsidiary
and properly sought reimbursement for services provided by that subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its precise scope might be. If there have been improper
practices or the investigation is broader in scope than the Company currently
understands it to be, 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. Based on its current understanding of the investigation,
however, the Company does not believe that the outcome of the investigation will
have a material adverse effect on the Company's financial condition or results
of operations.
(b) LITIGATION
Prior to the Company's acquisition of CareerStaff, a holder of CareerStaff's
common stock 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. The CareerStaff Litigation was
voluntarily dismissed without prejudice on May 8, 1996.
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 purchased shares of the Company's common stock between October 26,
1994 and June 27, 1995, or who exchanged their shares of common stock of
CareerStaff for shares of the Company's common stock pursuant to a merger
agreement between CareerStaff and the Company. The Complaints allege 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.
F-31
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) OTHER EVENTS (CONTINUED)
In October 1996, the Company reached an agreement in principle to settle
these class action lawsuits which resulted in the Company recording a
$24,000,000 pretax charge relating to the settlement. The settlement is subject
to the execution of definitive documentation and court approval. The Company
will receive $9,000,000 from its director and officers liability insurance
carrier for its claims submitted in connection with the settlement.
On or about January 23, 1996, two former stockholders of Golden Care 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 former Golden Care
stockholders. Plaintiffs purport to seek recission, unspecified compensatory
damages, punitive damages and other relief. By Order dated October 11, 1996, the
court granted in part and denied in part defendants' motion to dismiss. The
Company believes it has meritorious defenses to the Complaint. There can be no
assurance that the Golden Care Litigation will not have an impact on the
Company's accounting for the merger.
The Company believes the Golden Care Litigation will not have a material
adverse impact on its financial condition or results of operations, although the
unfavorable resolution of any of these actions in any reporting period could
have a material adverse impact on the Company's results of operations for that
period.
(15) SUMMARIZED CONSOLIDATING INFORMATION
In connection with the offering by the Company of $250,000,000 aggregate
principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") in
July 1997, all direct and indirect subsidiaries of the Company other than the
Company's direct and indirect foreign subsidiaries, CareerStaff and its direct
and indirect subsidiaries, and certain other immaterial subsidiaries of the
Company (the "Guarantors") have, jointly and severally, unconditionally
guaranteed the Notes. These guarantees are subordinated to all existing and
future senior debt and guarantees of the Guarantors and are unsecured.
The Company conducts all of its business through and derives virtually all
of its income from its subsidiaries. Therefore, the Company's ability to make
required payments with respect to its indebtedness (including the Notes) and
other obligations depends on the financial results and condition of its
subsidiaries and its ability to receive funds from its subsidiaries. There are
no restrictions on the ability of any of the Company's subsidiaries to transfer
funds to the Company, except as provided by appropriate law.
Pursuant to Rule 3-10 of Regulation S-X, the following summarized
consolidating information is for the Company, the Guarantors, and the Company's
non-Guarantor subsidiaries with respect to the Notes. This summarized financial
information has been prepared from the books and records maintained by the
Company, the Guarantors and the non-Guarantor subsidiaries. The summarized
financial information may not necessarily be indicative of results of operations
or financial position had the Guarantors or non-Guarantor subsidiaries operated
as independent entities.
F-32
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------- -------------- ------------ -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 2,226 $ 10,870 $ 1,784 $ -- $ 14,880
Restricted cash........................ -- 2,236 -- -- 2,236
Accounts receivable, net............... -- 254,659 28,376 (767) 282,268
Other receivables...................... 28,343 4,263 824 -- 33,430
Prepaids and other assets.............. 691 15,276 1,651 -- 17,618
Deferred tax asset..................... 12,716 -- -- -- 12,716
------------ ----------- -------------- ------------ -------------
Total current assets................. 43,976 287,304 32,635 (767) 363,148
------------ ----------- -------------- ------------ -------------
Property and equipment, net............ 48,072 145,157 112,491 -- 305,720
Goodwill, net.......................... -- 363,934 68,571 -- 432,505
Other assets, net...................... 56,048 54,164 4,844 -- 115,056
Investment in subsidiaries............. 426,898 -- -- (426,898) --
Deferred tax asset..................... 12,997 -- -- -- 12,997
------------ ----------- -------------- ------------ -------------
Total assets......................... $ 587,991 $ 850,559 $ 218,541 $ (427,665) $ 1,229,426
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
Current liabilities:
Current portion of long-term debt...... $ 289 $ 2,727 $ 25,966 $ -- $ 28,982
Accounts payable....................... 26,407 3,822 9,718 (767) 39,180
Accrued compensation and benefits...... 9,639 19,376 3,597 -- 32,612
Payable to APTA shareholders........... -- -- 23,545 -- 23,545
Workers' compensation accrual.......... 357 7,669 (163) -- 7,863
Other accrued liabilities.............. 9,183 8,338 1,863 -- 19,384
------------ ----------- -------------- ------------ -------------
Total current liabilities............ 45,875 41,932 64,526 (767) 151,566
------------ ----------- -------------- ------------ -------------
Long-term debt, net of current portion... 362,880 72,155 48,418 -- 483,453
Other long-term liabilities.............. -- 13,716 1,097 -- 14,813
Deferred income taxes.................... -- -- 4,760 -- 4,760
------------ ----------- -------------- ------------ -------------
Total liabilities.................... 408,755 127,803 118,801 (767) 654,592
------------ ----------- -------------- ------------ -------------
Intercompany payables/ (receivables)..... (392,901) 372,771 20,130 -- --
Minority interest........................ -- -- 2,697 -- 2,697
Total stockholders' equity............... 572,137 349,985 76,913 (426,898) 572,137
------------ ----------- -------------- ------------ -------------
Total liabilities and stockholders'
equity.............................. $ 587,991 $ 850,559 $ 218,541 $ (427,665) $ 1,229,426
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
</TABLE>
F-33
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------- -------------- ------------ -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ (6,647) $ 27,591 $ 2,158 $ -- $ 23,102
Restricted cash........................ -- 1,914 -- -- 1,914
Accounts receivable, net............... -- 220,551 16,634 (388) 236,797
Other receivables...................... 24,524 4,173 1,279 -- 29,976
Prepaids and other assets.............. 530 16,659 1,111 -- 18,300
Deferred tax asset..................... 27,098 -- -- -- 27,098
------------ ----------- -------------- ------------ -------------
Total current assets................. 45,505 270,888 21,182 (388) 337,187
------------ ----------- -------------- ------------ -------------
Property and equipment, net............ 40,057 123,739 37,336 -- 201,132
Restricted cash........................ -- 8,132 -- -- 8,132
Goodwill, net.......................... -- 385,105 36,555 -- 421,660
Other assets, net...................... 43,927 15,969 2,960 -- 62,856
Investment in subsidiaries............. 410,471 -- -- (410,471) --
Deferred tax asset..................... 11,536 -- -- -- 11,536
------------ ----------- -------------- ------------ -------------
Total assets......................... $ 551,496 $ 803,833 $ 98,033 $ (410,859) $ 1,042,503
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
Current liabilities:
Current portion of long-term debt...... $ 260 $ 2,899 $ 7,258 $ -- $ 10,417
Accounts payable....................... 25,064 5,655 2,669 (388) 33,000
Accrued compensation and benefits...... 1,509 18,824 3,409 -- 23,742
Workers' compensation accrual.......... (255) 6,594 -- -- 6,339
Other accrued liabilities.............. 9,829 15,434 1,279 -- 26,542
------------ ----------- -------------- ------------ -------------
Total current liabilities............ 36,407 49,406 14,615 (388) 100,040
------------ ----------- -------------- ------------ -------------
Long-term debt, net of current portion... 261,495 78,169 8,796 -- 348,460
Other long-term liabilities.............. -- 15,578 1,474 -- 17,052
Deferred income taxes.................... -- -- 2,634 -- 2,634
------------ ----------- -------------- ------------ -------------
Total liabilities.................... 297,902 143,153 27,519 (388) 468,186
------------ ----------- -------------- ------------ -------------
Intercompany payables/ (receivables)..... (315,448) 311,766 3,682 -- --
Minority interest........................ -- 1,703 3,572 -- 5,275
Total stockholders' equity............... 569,042 347,211 63,260 (410,471) 569,042
------------ ----------- -------------- ------------ -------------
Total liabilities and stockholders'
equity.................................. $ 551,496 $ 803,833 $ 98,033 $ (410,859) $ 1,042,503
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
</TABLE>
F-34
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ------------- -------------- ----------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Total net revenues...................... $ 2,373 $ 1,140,879 $ 178,906 $ (5,850) $ 1,316,308
------------ ------------- -------------- ----------- -------------
Costs and expenses:
Operating............................. -- 957,831 155,840 (5,850) 1,107,821
Corporate general and
administrative....................... 40,769 14,224 7,092 -- 62,085
Provision for losses on accounts
receivable........................... -- 14,699 271 -- 14,970
Depreciation and amortization......... 3,614 25,911 4,292 -- 33,817
Investigation and litigation costs.... 19,250 -- -- -- 19,250
Interest, net......................... 20,770 4,160 969 -- 25,899
Equity interest in (earnings) loss of
subsidiaries......................... (6,757) -- -- 6,757 --
------------ ------------- -------------- ----------- -------------
Total costs and expenses............ 77,646 1,016,825 168,464 907 1,263,842
------------ ------------- -------------- ----------- -------------
Earnings (loss) before income taxes and
intercompany charges................... (75,273) 124,054 10,442 (6,757) 52,466
Intercompany charges(1)................. (115,085) 113,361 1,724 -- --
------------ ------------- -------------- ----------- -------------
Earnings (loss) before income taxes..... 39,812 10,693 8,718 (6,757) 52,466
Income taxes............................ 18,276 8,338 4,316 -- 30,930
------------ ------------- -------------- ----------- -------------
Net earnings (loss)..................... $ 21,536 $ 2,355 $ 4,402 $ (6,757) $ 21,536
------------ ------------- -------------- ----------- -------------
------------ ------------- -------------- ----------- -------------
</TABLE>
F-35
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ------------- -------------- ----------- -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Total net revenues....................... $ 1,032 $ 1,010,904 $ 126,235 $ (2,663) $ 1,135,508
---------- ------------- -------------- ----------- -------------
Costs and expenses:
Operating.............................. -- 826,538 105,618 (2,663) 929,493
Corporate general and administrative... 32,807 13,388 5,273 -- 51,468
Provision for losses on accounts
receivable............................ -- 14,632 (9) -- 14,623
Depreciation and amortization.......... 1,646 23,545 2,543 -- 27,734
Interest, net.......................... 8,138 11,075 2,616 -- 21,829
Conversion expense..................... -- 3,256 -- -- 3,256
Merger expenses........................ 5,800 -- -- -- 5,800
Strike costs........................... -- 4,006 -- -- 4,006
Investigation and litigation costs..... 5,505 -- -- -- 5,505
Impairment loss........................ -- 59,000 -- -- 59,000
Equity interest in (earnings) loss of
subsidiaries.......................... 39,465 -- -- (39,465) --
---------- ------------- -------------- ----------- -------------
Total costs and expenses............. 93,361 955,440 116,041 (42,128) 1,122,714
---------- ------------- -------------- ----------- -------------
Earnings (loss) before extraordinary
loss, income taxes and intercompany
charges................................. (92,329) 55,464 10,194 39,465 12,794
Intercompany charges(1).................. (74,103) 74,103 -- -- --
---------- ------------- -------------- ----------- -------------
Earnings (loss) before extraordinary loss
and income taxes........................ (18,226) (18,639) 10,194 39,465 12,794
Income taxes(2).......................... 5,525 22,973 4,634 -- 33,132
---------- ------------- -------------- ----------- -------------
Earnings (loss) before extraordinary
loss.................................... (23,751) (41,612) 5,560 39,465 (20,338)
Extraordinary loss from early
extinguishment of debt.................. -- (3,413) -- -- (3,413)
---------- ------------- -------------- ----------- -------------
Net earnings (loss)...................... $ (23,751) $ (45,025) $ 5,560 $ 39,465 $ (23,751)
---------- ------------- -------------- ----------- -------------
---------- ------------- -------------- ----------- -------------
</TABLE>
F-36
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ----------- -------------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Total net revenues.......................... $ 895 $ 611,005 $ 61,454 $ -- $ 673,354
---------- ----------- -------------- ----------- ------------
Costs and expenses:
Operating................................. -- 507,150 45,512 -- 552,662
Corporate general and administrative...... 18,534 3,759 9,340 -- 31,633
Provision for losses on accounts
receivable............................... -- 27,654 (22) -- 27,632
Depreciation and amortization............. 877 10,142 778 -- 11,797
Interest, net............................. 4,326 5,383 839 -- 10,548
Conversion expense........................ -- 2,275 -- -- 2,275
Equity interest in (earnings) loss of
subsidiaries............................. (26,594) -- -- 26,594 --
---------- ----------- -------------- ----------- ------------
Total costs and expenses................ (2,857) 556,363 56,447 26,594 636,547
---------- ----------- -------------- ----------- ------------
Earnings (loss) before income taxes and
intercompany charges....................... 3,752 54,642 5,007 (26,594) 36,807
Intercompany charges(1)..................... (15,747) 15,747 -- -- --
---------- ----------- -------------- ----------- ------------
Earnings (loss) before income taxes......... 19,499 38,895 5,007 (26,594) 36,807
Income taxes(2)............................. (2,620) 16,227 1,081 -- 14,688
---------- ----------- -------------- ----------- ------------
Net earnings (loss)......................... $ 22,119 $ 22,668 $ 3,926 $ (26,594) $ 22,119
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
- ------------------------
(1) Through various intercompany agreements entered into by the Company, the
Guarantors and certain of the non-Guarantor subsidiaries, Sun provides
management services, and acts on behalf of the Guarantors and certain of the
non-Guarantor subsidiaries to make financing available for their operations.
The Company charged the Guarantors for management services totaling
$15,747,000, $58,326,000 and $82,734,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The Company charged the non-Guarantor
subsidiaries for management services totaling $1,169,000 for the year ended
December 31, 1996. Intercompany interest charged to the Guarantors for the
years ended December 31, 1995 and 1996 for advances from the Company were
$15,777,000 and $30,627,000, respectively. Intercompany interest charged to
the non-Guarantor subsidiaries for the year ended December 31, 1996, for
advances from the Company was $555,000.
(2) For financial reporting purposes, a pro forma provision for income taxes has
been calculated to present taxes on the results of operations of
CareerStaff, a non-Guarantor, for the period from January 1, 1994 through
June 22, 1994, and Golden Care, a Guarantor, for the period January 1, 1995
through May 5, 1995 and for the year ended December 31, 1994 on the basis
that is required upon their change in tax status from S corporation to C
corporation. These amounts ($230,000 and $1,771,000 in 1995 and 1994,
respectively relating to Golden Care and $787,000 in 1994 relating to
CareerStaff) 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.
F-37
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................... $ 21,536 $ 2,355 $ 4,402 $ (6,757) $ 21,536
Adjustments to reconcile net earnings (loss) to
net cash provided by (used for) operating
activities --
Equity in earnings of subsidiaries.............. (6,757) -- -- 6,757 --
Depreciation and amortization................... 3,614 25,911 4,292 -- 33,817
Provision for losses on accounts receivable..... -- 14,699 271 -- 14,970
Litigation settlement........................... (4,750) -- -- -- (4,750)
Other, net...................................... 668 (2,927) 227 -- (2,032)
Changes in operating assets and liabilities:
Accounts receivable........................... -- (50,266) (6,793) -- (57,059)
Other current assets.......................... (5,964) (1,782) 1,050 -- (6,696)
Other current liabilities..................... 8,824 (6,344) 782 -- 3,262
Income taxes payable.......................... 22,422 (620) 1,962 -- 23,764
---------- ----------- -------------- ----------- ------------
Net cash provided by (used for) operating
activities...................................... 39,593 (18,974) 6,193 -- 26,812
---------- ----------- -------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net......................... (11,292) (23,410) (41,521) -- (76,223)
Acquisitions, net of cash acquired................ -- (28,779) (36,626) -- (65,405)
Purchase of minority interest in Ashbourne PLC.... -- -- (10,174) -- (10,174)
Investment in OmniCell Technologies, Inc.......... (25,332) -- -- -- (25,332)
Net proceeds from sale of SunSurgery
Corporation..................................... -- 24,828 -- -- 24,828
Proceeds from operations and sale of assets held
for sale........................................ -- (3,810) -- -- (3,810)
Proceeds from the sale and leaseback of property
and equipment................................... -- 8,766 25,837 -- 34,603
Other assets expenditures......................... (11,614) (4,155) (4,907) -- (20,676)
---------- ----------- -------------- ----------- ------------
Net cash used for investing activities.......... (48,238) (26,560) (67,391) -- (142,189)
---------- ----------- -------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings......................... 101,678 955 34,522 -- 137,155
Long-term debt repayments......................... (255) (2,110) (1,908) -- (4,273)
Net proceeds from issuance of common stock........ 1,582 -- -- -- 1,582
Purchases of treasury stock....................... (25,069) -- -- -- (25,069)
Other financing activities........................ (1,835) 11 48 -- (1,776)
Intercompany advances............................. (58,583) 29,957 28,626 -- --
---------- ----------- -------------- ----------- ------------
Net cash provided by (used for) financing
activities.................................... 17,518 28,813 61,288 -- 107,619
---------- ----------- -------------- ----------- ------------
Effect of exchange rate on cash and cash
equivalents....................................... -- -- (464) -- (464)
---------- ----------- -------------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents....................................... 8,873 (16,721) (374) -- (8,222)
Cash and cash equivalents at beginning of period.... (6,647) 27,591 2,158 -- 23,102
---------- ----------- -------------- ----------- ------------
Cash and cash equivalents at end of period.......... $ 2,226 $ 10,870 $ 1,784 $ -- $ 14,880
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-38
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................... $ (23,751) $ (45,025) $ 5,560 $ 39,465 $ (23,751)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used for) operating
activities --
Equity in loss of subsidiaries.................. 39,465 -- -- (39,465) --
Extraordinary loss.............................. -- 5,785 -- -- 5,785
Conversion expense.............................. -- 3,256 -- -- 3,256
Depreciation and amortization................... 1,646 23,545 2,543 -- 27,734
Provision for losses on accounts receivable..... -- 14,632 (9) -- 14,623
Impairment loss................................. -- 59,000 -- -- 59,000
Other, net...................................... -- (2,220) -- -- (2,220)
Changes in operating assets and liabilities:
Accounts receivable........................... -- (85,381) (5,506) -- (90,887)
Other current assets.......................... (1,651) 2,511 110 -- 970
Other current liabilities..................... 4,543 (14,672) 3,795 -- (6,334)
Income taxes payable.......................... 8,396 9,530 684 -- 18,610
--------- ----------- -------------- ----------- ------------
Net cash provided by (used for) operating
activities.................................... 28,648 (29,039) 7,177 -- 6,786
--------- ----------- -------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net......................... (22,811) (15,393) (35,293) -- (73,497)
Acquisitions, net of cash acquired................ (9,638) 1,513 (40,042) -- (48,167)
Purchase of minority interest of Ashbourne plc.... -- -- (25,874) -- (25,874)
Proceeds from operations and sale of assets held
for sale........................................ -- 36,878 -- -- 36,878
Proceeds from the sale and leaseback of property
and equipment................................... -- 69,988 35,546 -- 105,534
Other assets expenditures......................... (16,574) (7,498) 1,424 -- (22,648)
--------- ----------- -------------- ----------- ------------
Net cash provided by (used for) investing
activities.................................... (49,023) 85,488 (64,239) -- (27,774)
--------- ----------- -------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings......................... 177,029 3,634 4,636 -- 185,299
Long-term debt repayments......................... (537) (94,017) (21,176) -- (115,730)
Repurchase of 11 3/4% Senior Subordinated Notes
due 2002........................................ -- (89,370) -- -- (89,370)
Conversion of Mediplex 6 1/2% Convertible
Subordinated Debentures due 2003................ -- (16,859) -- -- (16,859)
Net proceeds from issuance of common stock........ 2,976 -- -- -- 2,976
Other financing activities........................ (1,179) (139) (111) -- (1,429)
Intercompany advances............................. (213,653) 145,351 68,302 -- --
Distribution of prior S corporation earnings...... -- (333) -- -- (333)
--------- ----------- -------------- ----------- ------------
Net cash provided by (used for) financing
activities.................................... (35,364) (51,733) 51,651 -- (35,446)
--------- ----------- -------------- ----------- ------------
Effect of exchange rate on cash and cash
equivalents........................................ -- -- 798 -- 798
--------- ----------- -------------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents........................................ (55,739) 4,716 (4,613) -- (55,636)
Cash and cash equivalents at beginning of period.... 49,092 22,875 6,771 -- 78,738
--------- ----------- -------------- ----------- ------------
Cash and cash equivalents at end of period.......... $ (6,647) $ 27,591 $ 2,158 $ -- $ 23,102
--------- ----------- -------------- ----------- ------------
--------- ----------- -------------- ----------- ------------
</TABLE>
F-39
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
---------- ----------- -------------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).............................. $ 22,119 $ 22,668 $ 3,926 $ (26,594) $ 22,119
Adjustments to reconcile net earnings (loss) to
net cash provided by (used for) operating
activities --
Equity in earnings loss of subsidiaries........ (26,594) -- -- 26,594 --
Conversion expense............................. -- 2,275 -- -- 2,275
Depreciation and amortization.................. 877 10,142 778 -- 11,797
Provision for losses on accounts receivable.... -- 27,654 (22) -- 27,632
Other, net..................................... -- (978) 70 -- (908)
Changes in operating assets and liabilities:
Accounts receivable.......................... -- (73,493) (3,436) -- (76,929)
Other current assets......................... (1,208) (3,164) (149) -- (4,521)
Other current liabilities.................... 14,098 (25,115) 988 -- (10,029)
Income taxes payable......................... (2,134) (5,624) -- -- (7,758)
---------- ----------- -------------- ----------- ------------
Net cash provided by (used for) operating
activities................................... 7,158 (45,635) 2,155 -- (36,322)
---------- ----------- -------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net........................ (19,040) (17,397) (1,425) -- (37,862)
Transfer of restricted cash...................... -- 16,054 -- -- 16,054
Acquisitions, net of cash acquired............... -- (115,507) (12,871) -- (128,378)
Operations of assets held for sale............... -- (2,186) -- -- (2,186)
Other assets expenditures........................ (3,529) 713 (691) -- (3,507)
---------- ----------- -------------- ----------- ------------
Net cash used for investing activities......... (22,569) (118,323) (14,987) -- (155,879)
---------- ----------- -------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings........................ 134,198 8,739 2,118 -- 145,055
Long-term debt repayments........................ (64,187) (20,613) (3,363) -- (88,163)
Transfer of restricted cash...................... -- 667 -- -- 667
Conversion of Mediplex 6 1/2% Convertible
Subordinated Debentures due 2003............... -- (10,681) -- -- (10,681)
Net proceeds from issuance of common stock....... 216,608 -- -- -- 216,608
Intercompany advances............................ (225,855) 202,893 22,962 -- --
Distribution of prior S corporation earnings..... -- (6,596) (2,293) -- (8,889)
---------- ----------- -------------- ----------- ------------
Net cash provided by financing activities...... 60,764 174,409 19,424 -- 254,597
---------- ----------- -------------- ----------- ------------
Net increase in cash and cash equivalents.......... 45,353 10,451 6,592 -- 62,396
Cash and cash equivalents at beginning of
period............................................ 3,739 12,424 179 -- 16,342
---------- ----------- -------------- ----------- ------------
Cash and cash equivalents at end of period......... $ 49,092 $ 22,875 $ 6,771 $ -- $ 78,738
---------- ----------- -------------- ----------- ------------
---------- ----------- -------------- ----------- ------------
</TABLE>
F-40
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) 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 2 and 6). Summarized financial
information of Mediplex is provided below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Current assets...................................................... $ 130,794 $ 103,629
Noncurrent assets................................................... 461,592 429,555
Current liabilities................................................. 34,823 11,910
Noncurrent liabilities.............................................. 91,150 83,370
Due to parent....................................................... 168,222 205,306
</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>
PREDECESSOR
JANUARY 1, COMPANY COMPANY COMPANY
1994 TO JUNE JUNE 24, 1994 TO YEAR ENDED YEAR ENDED
23, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------- ----------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues............................. $ 221,640 $ 205,300 $ 448,254 $ 457,748
------------- ----------------- ----------------- -----------------
Costs and expenses....................... 208,455 217,572 436,930 438,799
Impairment loss.......................... -- -- 52,621 --
------------- ----------------- ----------------- -----------------
Earnings (loss) before intercompany
charges, income taxes and extraordinary
loss.................................... 13,185 (12,272) (41,297) 18,949
Intercompany charges(1).................. -- -- 35,005 50,133
------------- ----------------- ----------------- -----------------
Earnings (loss) before income taxes and
extraordinary loss...................... 13,185 (12,272) (76,302) (31,184)
Income taxes (benefit)................... 3,645 (8,909) (7,432) (9,757)
------------- ----------------- ----------------- -----------------
Net earnings (loss) before extraordinary
loss.................................... 9,540 (3,363) (68,870) (21,427)
Extraordinary loss, net of income tax
benefit................................. -- -- (3,413) --
------------- ----------------- ----------------- -----------------
Net earnings (loss)...................... $ 9,540 $ (3,363) $ (72,283) $ (21,427)
------------- ----------------- ----------------- -----------------
------------- ----------------- ----------------- -----------------
</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 and
$29,003,000 for the years ended December 31, 1995 and 1996, respectively. 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 years ended December 31, 1995 and 1996, for the
use of Sun trademarks were $4,725,000 and $6,681,000, respectively.
Intercompany interest charged to Mediplex for the years ended December 31,
1995 and 1996, for advances from Sun was $9,802,000 and $14,449,000,
respectively. During 1994, Sun did not charge Mediplex for these same
services.
F-41
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) 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(3) QUARTER(4) QUARTER QUARTER(5)
----------- ----------- ----------- -----------
<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)(2):
Net earnings (loss) per share before extraordinary
loss(1)(2)............................................... $ 0.21 $ 0.18 $ 0.33 ($ 1.18)
Extraordinary loss........................................ (0.06) -- -- --
----------- ----------- ----------- -----------
Net earnings (loss)(1)(2)................................. $ 0.15 $ 0.18 $ 0.33 ($ 1.18)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER(6) QUARTER(7)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues............................................ $ 320,291 $ 325,452 $ 340,508 $ 330,057
Earnings (loss) before income taxes........................... 25,565 27,276 4,231 (4,606)
Net earnings (loss)........................................... 15,339 16,366 (5,562) (4,607)
Net earnings (loss) per share
Fully diluted(2)............................................ $ 0.31 $ 0.34 $ (0.12) $ (0.10)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 9).
(2) Earnings per share are computed independently for each of the quarters
presented (See Note 1(o)).
(3) The first quarter of 1995 includes a charge of $3,256,000 in connection with
a payment of an inducement fee to effect the conversion in January 1995 of
$39,449,000 of the 6 1/2 Debentures. This quarter also includes an
extraordinary charge of $3,413,000, net of the related tax benefit, in
connection with the tender offer of the 11 3/4% Notes (See Note 6).
(4) The second quarter of 1995 includes $5,800,000 of transaction related merger
costs incurred in connection with the merger of the Company with CareerStaff
and Golden Care (See Note 2).
(5) The fourth quarter of 1995 includes a $59,000,000 impairment loss recorded
by the Company which primarily relates to goodwill associated with six of
the forty facilities acquired in the acquisition of Mediplex (see Note
1(g)). The quarter also includes a charge of $4,006,000 relating to averting
a strike and negotiating new contracts for certain unionized homes in
Connecticut and a charge of $5,505,000 relating to monitoring and responding
to the investigation by the OIG and legal fees resulting from the
shareholder litigation (See Notes 1(j) and 1(k)).
(6) The third quarter of 1996 includes a $24,000,000 charge to settle certain of
the lawsuits brought by shareholders (See Note 14).
(7) The fourth quarter of 1996 includes a net $4,750,000 benefit which consists
of $9,000,000 the Company will receive from its director and officers
liability insurance carrier and a $4,250,000 charge related to continuing
litigations and investigation costs (See Note 14).
F-42
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) GEOGRAPHIC SEGMENT INFORMATION
The Company operates predominantly in the long-term care segment of the
healthcare industry. The Company is a provider of long-term, subacute and
related ancillary care services to nursing home patients.
In addition to the services provided in the United States, the Company
provides services in the United Kingdom and Canada.
A summary of the Company's operations by geographic area is presented below
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
UNITED
UNITED STATES KINGDOM CANADA CONSOLIDATED
------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 1,108,436 $ 26,240 $ 832 $ 1,135,508
Operating profits.......................................... 30,430 3,561 (181) 33,810
Equity in earnings of Ashbourne............................ 813
Interest expense, net...................................... 21,829
-------------
Consolidated earnings before income taxes.................. 12,794
-------------
-------------
Total assets............................................... 952,191 76,607 13,705 1,042,503
Capital expenditures....................................... 61,901 11,565 31 73,497
Depreciation and amortization.............................. 25,771 1,854 109 27,734
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
UNITED
UNITED STATES KINGDOM CANADA CONSOLIDATED
------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 1,255,323 $ 42,156 $ 18,829 $ 1,316,308
Operating profits.......................................... 74,894 2,179 (382) 76,691
Equity in earnings of Ashbourne............................ 1,674
Interest expense, net...................................... 25,899
-------------
Consolidated earnings before income taxes.................. 52,466
-------------
-------------
Total assets............................................... 1,033,804 168,578 27,044 1,229,426
Capital expenditures....................................... 56,962 18,699 562 76,223
Depreciation and amortization.............................. 30,436 1,851 1,530 33,817
</TABLE>
Revenues from foreign operations and identifiable assets of foreign
operations were immaterial to the Company in 1994.
(19) SUBSEQUENT EVENTS
On February 18, 1997, the Company signed definitive agreements with each of
Retirement Care Associates, Inc. ("Retirement Care") and Contour Medical, Inc.
("Contour"), under which the Company agreed to acquire Retirement Care and its
approximately 65% owned subsidiary, Contour. The agreements call for the Company
to issue 0.6625 shares of common stock in exchange for each outstanding share of
Retirement Care common stock (subject to adjustment as provided in the
agreement) and for the Company to pay $8.50 per share in cash, stock or a
combination of cash and stock (at the election of the Company) for the remaining
35% of Contour not presently owned by Retirement Care. The acquisition of
Retirement Care is expected to be accounted for as a pooling of interests and
the acquisition of Contour is expected to be accounted for as a purchase.
F-43
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 14,880 $ 8,045
Restricted cash.................................................................. 2,236 1,666
Accounts receivable, net of allowance for doubtful accounts of $16,877 and
$19,509 in 1996 and 1997, respectively.......................................... 282,268 348,086
Other receivables................................................................ 33,430 14,323
Prepaids and other assets........................................................ 17,618 25,906
Deferred tax asset............................................................... 12,716 8,717
------------ ------------
Total current assets........................................................... 363,148 406,743
------------ ------------
Property and equipment, net.......................................................... 305,720 544,211
Goodwill, net........................................................................ 432,505 520,741
Other assets, net.................................................................... 115,056 124,634
Deferred tax asset................................................................... 12,997 7,858
------------ ------------
Total assets................................................................... $1,229,426 $1,604,187
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 28,982 $ 46,973
Accounts payable................................................................. 39,180 43,506
Accrued compensation and benefits................................................ 32,612 45,840
Workers' compensation accrual.................................................... 7,863 9,435
Payable to APTA shareholders..................................................... 23,545 --
Other accrued liabilities........................................................ 19,384 41,801
Income taxes payable............................................................. -- 8,138
------------ ------------
Total current liabilities...................................................... 151,566 195,693
------------ ------------
Long-term debt, net of current portion............................................... 483,453 772,021
Other long-term liabilities.......................................................... 14,813 13,568
Deferred income taxes................................................................ 4,760 12,143
------------ ------------
Total liabilities.............................................................. 654,592 993,425
------------ ------------
Minority interest.................................................................... 2,697 2,386
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, 51,142,729 and
51,271,837 shares issued and outstanding at December 31, 1996 and June 30, 1997,
respectively.................................................................... 511 513
Additional paid-in capital....................................................... 611,434 635,007
Retained earnings................................................................ 22,313 56,072
Cumulative translation adjustment................................................ 3,718 4,235
------------ ------------
637,976 695,827
------------ ------------
Less:
Common stock held in treasury, at cost, 2,030,116 shares as of December 31, 1996
and June 30, 1997 25,069 25,069
Grantor stock trust, at market, 3,019,993 and 2,997,319 shares as of December 31,
1996 and June 30, 1997, respectively............................................ 40,770 62,382
------------ ------------
Total stockholders' equity..................................................... 572,137 608,376
------------ ------------
Total liabilities and stockholders' equity..................................... $1,229,426 $1,604,187
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE SIX MONTHS ENDED JUNE
30, 30,
------------------------ ------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total net revenues............................................ $ 325,452 $ 447,545 $ 645,744 $ 846,181
----------- ----------- ----------- -----------
Costs and expenses:
Operating................................................. 267,233 366,885 531,862 694,787
Corporate general and administrative...................... 14,978 20,999 29,177 39,446
Provision for losses on accounts receivable............... 1,243 3,579 2,463 6,773
Depreciation and amortization............................. 8,237 12,706 16,489 24,347
Interest, net............................................. 6,485 14,162 12,911 25,486
----------- ----------- ----------- -----------
Total costs and expenses................................ 298,176 418,331 592,902 790,839
----------- ----------- ----------- -----------
Earnings before income taxes.................................. 27,276 29,214 52,842 55,342
Income taxes.................................................. 10,910 11,393 21,137 21,583
----------- ----------- ----------- -----------
Net earnings.............................................. $ 16,366 $ 17,821 $ 31,705 $ 33,759
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings per common and common equivalent share:
Primary................................................... $ 0.35 $ 0.38 $ 0.67 $ 0.72
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully Diluted............................................. $ 0.34 $ 0.36 $ 0.64 $ 0.68
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and common equivalent shares
outstanding:
Primary................................................... 46,618 46,939 47,187 46,862
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully Diluted............................................. 51,332 52,051 51,954 52,019
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1997
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings........................................................................... $ 31,705 $ 33,759
Adjustments to reconcile net earnings to net cash
provided by (used for) operating activities --
Depreciation and amortization......................................................... 16,489 24,347
Provision for losses on accounts receivable.......................................... 2,463 6,773
Other, net........................................................................... (1,091) (438)
Changes in operating assets and liabilities:
Accounts receivable................................................................ (36,329) (70,784)
Other current assets............................................................... 256 7,934
Other current liabilities.......................................................... (3,018) 25,636
Income taxes payable............................................................... 28,055 27,185
---------- -----------
Net cash provided by operating activities.......................................... 38,530 54,412
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.............................................................. (19,954) (30,090)
Acquisitions, net of cash acquired..................................................... (43,933) (180,932)
Purchase of minority interest in OmniCell Technologies, Inc............................ (25,332) --
Net proceeds from sale of SunSurgery Corporation....................................... 24,827 --
Proceeds from sale and leaseback of property and equipment............................. 9,809 43,768
Other assets expenditures.............................................................. (9,065) (48,677)
---------- -----------
Net cash used for investing activities............................................. (63,648) (215,931)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings.............................................................. 39,567 160,284
Long-term debt repayments.............................................................. (3,602) (4,427)
Net proceeds from issuance of common stock............................................. 718 1,677
Purchases of treasury stock............................................................ (25,069) --
Other financing activities............................................................. (98) (1,071)
---------- -----------
Net cash provided by financing activities.......................................... 11,516 156,463
---------- -----------
Effect of exchange rate on cash and cash equivalents..................................... (85) (1,779)
---------- -----------
Net increase (decrease) in cash and cash equivalents..................................... (13,687) (6,835)
---------- -----------
Cash and cash equivalents at beginning of period......................................... 23,102 14,880
---------- -----------
Cash and cash equivalents at end of period............................................... $ 9,415 $ 8,045
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
-----------------------
1996 1997
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest net of $407 and $964 capitalized during the six months ending June 30, 1996
and 1997, respectively.............................................................. $ 13,866 $ 28,996
--------- ------------
--------- ------------
Income taxes......................................................................... $ (6,918) $ (5,602)
--------- ------------
--------- ------------
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company's acquisitions during the six months ended June 30, 1996 and 1997, involved
the following:
Fair value of assets acquired........................................................ $ 49,905 $ 341,357
Liabilities assumed.................................................................. (5,011) (178,052)
Cash payments made to former APTA shareholders....................................... -- 17,817
Fair value of stock and warrants issued.............................................. (961) (190)
--------- ------------
Cash payments made, net of cash received from others................................. $ 43,933 $ 180,932
--------- ------------
--------- ------------
</TABLE>
F-47
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management of Sun Healthcare Group, Inc. (the "Company" or
"Sun"), the accompanying interim consolidated financial statements present
fairly the Company's financial position at December 31, 1996 and June 30, 1997,
the consolidated results of its operations for the three and six month periods
ended June 30, 1996 and 1997, and the consolidated statements of cash flows for
the six month periods ended June 30, 1996 and 1997. All adjustments are of a
normal and recurring nature. These statements are presented in accordance with
the rules and regulations of the United States Securities and Exchange
Commission ("SEC"). Accordingly, they are unaudited, and certain information and
footnote disclosures normally included in the Company's annual consolidated
financial statements have been condensed or omitted, as permitted under the
applicable rules and regulations. Readers of these statements should refer to
the Company's audited consolidated financial statements and notes thereto for
the year ended December 31, 1996, which are included in the Company's Annual
Report on Form 10-K as amended on Form 10-K/A-1 for the year ended December 31,
1996. The results of operations presented in the accompanying financial
statements are not necessarily representative of operations for an entire year.
NEWLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which is
effective for both interim and annual reporting periods ending after December
15, 1997. This standard requires restatement of prior interim and annual
earnings per share calculations. SFAS No. 128 replaces fully diluted EPS with
diluted EPS and replaces primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings by weighted average shares outstanding. Diluted EPS
is computed the same way as fully diluted EPS, except that the calculation now
uses the average share price for the reporting period to compute dilution from
options and warrants under the treasury stock method. The Company will adopt the
new standard in its reporting for the quarter and the year ended December 31,
1997. Management does not believe that adoption of this standard will have a
significant impact on earnings per share.
The FASB has also issued SFAS No. 130, "Reporting Comprehensive Income"
which is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier financial statements for comparative purposes.
SFAS No. 130 requires that items meeting the criteria of a component of
comprehensive income, including foreign currency items and unrealized gains and
losses on certain investments in debt and equity securities, be shown in the
financial statements. SFAS No. 130 does not require a specific format for
disclosure of comprehensive income and its components in the financial
statements. Management has not yet determined the effect of SFAS No. 130 on the
consolidated financial statements.
The FASB has also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires that
all public business enterprises report information about the revenues derived
from the enterprise's products or services (or groups of similar products and
services), about the countries in which the enterprise earns revenues and holds
assets, and about major customers regardless of whether that information is used
in making operating decisions. However, this Statement does not require an
enterprise to report information that is not prepared for internal use if
reporting it would be impractical. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for
F-48
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(1) BASIS OF PRESENTATION (CONTINUED)
earlier years is required to be restated. Comparative information for interim
periods is not required until the second year of application. Management has not
yet determined the effect, if any, of SFAS No. 131 on the consolidated financial
statements.
(2) ACQUISITIONS
On February 18, 1997, the Company signed definitive agreements with each of
Retirement Care Associates, Inc. ("Retirement Care"), an operator of skilled
nursing facilities and assisted living centers, and Contour Medical, Inc.
("Contour"), a national provider of medical/surgical supplies, under which the
Company agreed to acquire Retirement Care and its approximately 65% owned
subsidiary, Contour. The agreements, as amended, call for the Company to issue
0.68265 shares of common stock in exchange for each outstanding share of
Retirement Care common stock (subject to adjustment as provided in the
agreement) and for the Company to pay $8.50 per share in cash, stock or a
combination of cash and stock (at the election of the Company) for the remaining
35% of Contour not presently owned by Retirement Care. The acquisition of
Retirement Care is expected to be accounted for as a pooling of interests and
the acquisition of Contour is expected to be accounted for as a purchase. These
transactions are expected to close in the second half of 1997.
Costs to be incurred in connection with the mergers of Retirement Care and
Contour are expected to be significant and would be charged against earnings of
the combined company. The charge is currently estimated to be approximately
$31.1 million, of which approximately $20 million would be for transaction costs
and integration expenses, including elimination of redundant corporation
functions, severance costs related to headcount reductions and the write-off of
certain intangibles and property and equipment. In addition, the Company
currently expects that the charge would include approximately $10.1 million of
adjustments to Retirement Care's balance sheet, which are based on the Company's
ongoing review of Retirement Care's financial statements and the underlying
assumptions used to prepare such financial statements, the Company's current
understanding of Retirement Care's operations and the Company's evaluation of
Retirement Care's internal control structure during the due diligence process.
The balance sheet adjustments relate primarily to additional accruals for
expected liabilities as well as to an increase in Retirement Care's provision
for losses on accounts receivable. It is possible that a substantial portion of
the foregoing approximate $10.1 million charge would be recorded by Retirement
Care as an adjustment to Retirement Care's historical financial statements to
reflect these adjustments. In that event, there would be a commensurate
reduction in the merger charge. The Company is continuing to review an discuss
these matters with Retirement Care. Approximately $25.5 million of the estimated
charges are expected to be charged to operations in the fiscal quarter in which
the Retirement Care merger is consummated. The remaining approximately $5
million of the estimated charges are expected to be expensed as incurred as
these costs are expected to benefit future combined operations. These amounts
are preliminary estimates only and are therefore subject to change. In addition,
there can be no assurance that the Company will not incur additional charges in
subsequent quarters to reflect costs associated with the mergers.
On January 10, 1997, the Company loaned Retirement Care $9,750,000 in order
to enable Retirement Care to cause the repayment of certain indebtedness
incurred by Contour in connection with Contour's acquisition of Atlantic Medical
Supply Company, Inc. ("Atlantic") on August 6, 1996. On July 10, 1997, the
Company and Retirement Care amended the terms of the loan to: (i) increase the
applicable interest rate by 2.0%; (ii) extend the maturity date to 120 days
after the termination of the Retirement Care Merger Agreement; and (iii) replace
the collateral securing the loan with a second lien on all of Retirement Care's
accounts receivable. Consistent with Retirement Care's bank line of credit, the
loan is unconditionally and irrevocably guaranteed by certain officers of
Retirement Care.
F-49
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(2) ACQUISITIONS (CONTINUED)
On July 10, 1997, the Company also agreed to loan Retirement Care an additional
$5,000,000, which loan is also secured by a second lien on all of Retirement
Care's accounts receivable and is unconditionally and irrevocably guaranteed by
certain officers of Retirement Care.
On January 30, 1997, a wholly owned subsidiary of the Company acquired all
of the capital stock not previously owned by the Company of Ashbourne PLC
("Ashbourne"), which as of the date of acquisition provided healthcare services
to patients through 49 nursing facilities in the United Kingdom. Pursuant to the
acquisition, the Company paid approximately L67,300,000 ($110,100,000) for the
portion of Ashbourne totaling 70.8% not previously owned by the Company. The
acquisition was accounted for as a purchase and the results of operations have
been included in the Company's financial statements from the date of acquisition
on January 30, 1997. The total fair value of 100% of Ashbourne's assets
acquired, including goodwill of approximately $45,800,000, was approximately
$337,500,000 and liabilities assumed totaled approximately $147,800,000 The
allocation of the purchase price is preliminary and will be finalized upon the
completion of asset valuations. In addition, the Company is still evaluating
certain obligations of Ashbourne prior to the merger and further adjustments may
result. The acquisition of Ashbourne is immaterial to the results of the Company
and, therefore, pro forma information is not provided.
On December 15, 1996 a wholly owned subsidiary of the Company acquired all
of the capital stock of APTA Healthcare PLC ("APTA"), which, as of the date of
acquisitions, provided healthcare services to patients through 32 nursing
facilities in the United Kingdom. During the six months ended June 30, 1997, the
Company paid cash totaling approximately L11,200,000 ($17,817,000) to former
stockholders of APTA and issued notes with a maturity not to exceed five years,
totaling approximately L2,500,000 ($4,100,000 as of June 30, 1997) to the
remaining stockholders of APTA who elected not to receive cash as consideration.
In April 1997, the Company acquired the operations of thirteen long-term
care facilities which had previously been managed by the Company since the third
quarter of 1996, for a purchase price of $12,572,000, including the assumption
of $10,722,000 in long-term debt. In addition, the Company has extended
financing of approximately $14,800,000 to the former operators of these
facilities.
In addition, during the six months ended June 30, 1997, the Company acquired
the operations of nine long-term care and assisted living facilities for
$12,000,000 plus the assumption of all of the facilities' leases. In connection
with the acquisition, the Company agreed to provide financing of $5,800,000 to
the owner of the nine facilities for expansion of certain of the facilities.
In total, during the six months ended June 30, 1997, the Company acquired
the net ownership of or leasehold rights to or the management of 58 long-term
care facilities in the United Kingdom and 10 long-term care facilities in the
United States. Also during the six months ended June 30, 1997, the Company
acquired seven pharmacies in the United States and six pharmacies in the United
Kingdom. The pro forma impact of these acquisitions is immaterial.
(3) DISPOSITIONS
In May 1997, the Company announced its intent to sell and divest itself of
its outpatient rehabilitation clinics in the United States, as well as Columbia
Health Care Inc., the Company's Canadian outpatient rehabilitation therapy
subsidiary. The sale of these operations is expected to close during the second
half of 1997 and to result in no material gain or loss. The results of
operations of these businesses are immaterial.
(4) PROPERTY AND EQUIPMENT
During the six months ended June 30, 1997, the Company sold five of its
long-term and subacute care facilities in the United States for approximately
$30,700,000 in cash and approximately
F-50
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(4) PROPERTY AND EQUIPMENT (CONTINUED)
$5,600,000 in assumption of debt and leased them back under fourteen year
leases. Also, during the six months ended June 30, 1997, the Company, through
its United Kingdom subsidiary, sold four of its long-term care facilities for
approximately $13,100,000 and leased them back under twelve year leases. These
transactions produced no material gain or loss.
(5) COMMITMENTS
(a) CONSTRUCTION COMMITMENTS
As of June 30, 1997, the Company had capital commitments of approximately
$28,100,000, including a corporate office building and various contracts related
to improvements to existing facilities in the United States, and capital
commitments of approximately L17,200,000 ($28,600,000 as of June 30, 1997),
including various contracts related to the development, construction and
completion of nine new long-term care facilities in the United Kingdom.
(b) FINANCING COMMITMENTS
The Company has agreed to lend up to $47,000,000 under a revolving
subordinated credit agreement ("Financing Facility") to a developer of assisted
living facilities for the development, construction and operation of assisted
living facilities. Any advances under the Financing Facility are expected to be
funded by borrowings under the Company's revolving credit facility and will be
subject to certain conditions, including the approval of each project by the
Company. The developer has obtained a commitment for mortgage financing to fund
50% of the cost of each project. The Company's advances under the Financing
Facility are subordinate to the mortgage financing. The Financing Facility with
respect to each facility bears interest at 9% or 13% depending on the percentage
of completion of the facility under construction. All amounts advanced are due
in full on November 1, 2001. The advances to the developer totalled
approximately $9,000,000 and $23,500,000 at December 31, 1996 and June 30, 1997.
As of June 30, 1997, five assisted living facilities were under development. In
addition, the Company has entered into a purchase option agreement with the
developer whereby the Company will pay the developer $50,000 for each option to
purchase any of the facilities. The option will grant the Company the right to
purchase the facility, after a specified time period, at the greater of the
estimated fair market value of the property or the total amount invested by the
developer.
(6) STOCK INCENTIVE PLANS
(a) 1997 STOCK INCENTIVE PLAN
In January 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the "Plan"). Awards made under the Plan may be in the form of stock
options, stock appreciation rights, stock awards, performance share awards, or
other stock-based awards. The Plan is intended to replace the existing stock
option plan for executives, and awards currently outstanding under that plan
will not be affected. The Plan reserves 4,500,000 shares for awards. In the six
months ended June 30, 1997, the Company awarded an aggregate of 776,000 shares
of restricted stock to nine senior executives, which will be expensed over the
vesting period. Approximately 105,000 of the restricted shares vested
immediately. The remaining restricted stock awards vest ratably over the
remaining four to five years. These restricted stock awards are subject to a
substantial risk of forfeiture and are subject to defeasance if the Plan is not
approved by the stockholders.
(b) 1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
In April 1997, the Board of Directors adopted the 1997 Non-Employee
Directors' Stock Plan (the "Director Plan") which is subject to stockholder
approval. Awards made under the Director Plan may be in the form of stock
options or stock awards. The Director Plan is intended to replace the existing
F-51
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(6) STOCK INCENTIVE PLANS (CONTINUED)
stock option plan for non-employee directors, and awards currently outstanding
under that plan will not be affected. The Directors Plan reserves 400,000 shares
for awards. There have been no grants awarded as of June 30, 1997.
(7) NET EARNINGS PER SHARE
Net earnings per common and common equivalent share is based upon the
weighted average number of common shares outstanding during the period plus the
effect of incremental shares of common stock contingently issuable upon exercise
of stock options.
Fully diluted net earnings is determined on the assumption that the 6%
Debentures and the 6 1/2% Debentures were converted as of January 1, 1996. 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.
(8) OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
The Company is the subject of a pending Federal investigation by the United
States Department of Health and Human Services' Office of Inspector General
("OIG") and the United States Department of Justice. In July 1997, the Criminal
Division of the United States Department of Justice informed the Company that it
had completed its investigation of the Company, and that it would not initiate
any actions against the Company or any individuals. The investigation by the
Civil Division of the Department of Justice and the OIG is still proceeding. At
this time, the Company understands that the investigation includes a review of
whether the Company's rehabilitation therapy subsidiary properly provided and/or
billed for concurrent therapy services and whether it provided unnecessary or
unordered services to residents of skilled nursing facilities. The Company
understands that the investigation also includes a review of whether its
long-term care subsidiary properly disclosed its relationship with the Company's
rehabilitation therapy subsidiary and properly sought reimbursement for services
provided by that subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its precise scope might be. If there have been improper
practices or the investigation is broader in scope than the Company currently
understands it to be, depending on the nature and extent of such impropriety,
the investigation may have a negative impact on the Company. Based on its
current understanding of the investigation, however, the Company does not
believe that the outcome of the investigation will have a material adverse
effect on the Company's financial condition or results of operations.
(b) LITIGATION
In May 1997, the Company received court approval of the $24,000,000
settlement of certain class-action shareholder lawsuits which amount was
previously paid in the fourth quarter of 1996. The Company received $9,000,000
during March 1997, from its director and officer liability insurance carrier for
its claim submitted in connection with the settlement.
On or about January 23, 1996, two former stockholders of SunCare, John
Brennan and Susan Bird, filed a lawsuit (the "SunCare 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
investigation by the OIG and that the Company's financial results were
misstated. The complaints purport to state claims, INTER ALIA, under Federal and
state securities laws and for breach of contract, including a breach of a
registration rights agreement pursuant to which the Company agreed to register
the
F-52
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(8) OTHER EVENTS (CONTINUED)
shares of the Company's common stock issued to such former stockholders of
SunCare in the acquisition. Plaintiffs purport to seek recision, unspecified
compensatory damages, punitive damages and other relief. By Order dated October
11, 1996, the court granted in part and denied in part defendants' motion to
dismiss.
On September 8, 1995, a 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 was filed and subsequently served
on the defendants. On August 5, 1996, the District Court dismissed this action
without prejudice for failure to serve the defendants within the required time
period. The plaintiffs filed a new complaint, alleging the same claims, on
August 19, 1996. Defendants have moved to dismiss the new complaint.
The Company believes the SunCare Litigation and the derivative action will
not have a material adverse impact on its financial condition or results of
operations, although the unfavorable resolution of any of these actions in any
reporting period could have a material adverse impact on the Company's results
of operations for that period.
(9) SUMMARIZED CONSOLIDATING INFORMATION
In connection with the offering by the Company of $250,000,000 aggregate
principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") in
July 1997, all direct and indirect subsidiaries of the Company other than the
Company's direct and indirect foreign subsidiaries, CareerStaff and its direct
and indirect subsidiaries and certain other immaterial subsidiaries of the
Company (the "Guarantors") have, jointly and severally, unconditionally
guaranteed the Notes. These guarantees are subordinated to all existing and
future senior debt and guarantees of the Guarantors and are unsecured.
The Company conducts all of its business through and derives virtually all
of its income from its subsidiaries. Therefore, the Company's ability to make
required payments with respect to its indebtedness (including the Notes) and
other obligations depends on the financial results and condition of its
subsidiaries and its ability to receive funds from its subsidiaries. There are
no restrictions on the ability of any of the Company's subsidiaries to transfer
funds to the Company, except as provided by appropriate law.
Pursuant to Rule 3-10 of Regulation S-X, the following summarized
consolidating information is for the Company, the Guarantors, and the Company's
non-Guarantor subsidiaries with respect to the Notes. This summarized financial
information has been prepared from the books and records maintained by the
Company, the Guarantors and the non-Guarantor subsidiaries. The summarized
financial information may not necessarily be indicative of results of operations
or financial position had the Guarantors or non-Guarantor subsidiaries operated
as independent entities.
F-53
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(9) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
SUN HEALTHCARE GROUP, INC.
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------- -------------- ------------ -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ (3,213) $ 9,868 $ 1,390 $ -- $ 8,045
Restricted cash........................ 1,666 -- -- 1,666
Accounts receivable, net............... 311,624 36,462 -- 348,086
Other receivables...................... 5,525 7,411 1,387 -- 14,323
Prepaids and other assets.............. 618 20,522 4,766 -- 25,906
Deferred tax asset..................... 8,717 -- -- -- 8,717
------------ ----------- -------------- ------------ -------------
Total current assets................. 11,647 351,091 44,005 -- 406,743
------------ ----------- -------------- ------------ -------------
Property and equipment, net............ 43,383 121,124 379,704 -- 544,211
Goodwill, net.......................... -- 408,890 111,851 -- 520,741
Other assets, net...................... 591,718 38,885 1,886 (507,855) 124,634
Deferred tax asset..................... 7,858 -- -- 7,858
---
------------ ----------- -------------- -------------
------------
Total assets......................... $ 654,606 $ 919,990 $ 537,446 $ (507,855) $ 1,604,187
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
Current Liabilities:
Current portion of long-term debt...... 524 11,692 34,757 -- 46,973
Accounts payable....................... 29,089 6,780 7,637 -- 43,506
Accrued compensation and benefits...... 10,398 31,277 4,165 -- 45,840
Workers' compensation accrual.......... 100 9,415 (80) -- 9,435
Income tax payable..................... 3,740 -- 4,398 -- 8,138
Other accrued liabilities.............. 10,888 11,515 19,398 -- 41,801
------------ ----------- -------------- ------------ -------------
Total current liabilities............ 54,739 70,679 70,275 -- 195,693
------------ ----------- -------------- ------------ -------------
Long-term debt, net of current
portion............................... 514,408 70,009 187,604 -- 772,021
Other long-term liabilities............ -- 12,711 857 -- 13,568
Deferred income taxes.................. -- -- 12,143 -- 12,143
------------ ----------- -------------- ------------ -------------
Total liabilities.................... 569,147 153,399 270,879 -- 993,425
------------ ----------- -------------- ------------ -------------
Intercompany payables/ (receivables)... (510,129) 409,727 113,102 (12,700) --
Minority interest...................... -- -- 2,386 -- 2,386
Total stockholders' equity............. 595,588 356,864 151,079 (495,155) 608,376
------------ ----------- -------------- ------------ -------------
Total liabilities and stockholders'
equity.............................. $ 654,606 $ 919,990 $ 537,446 $ (507,855) $ 1,604,187
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
</TABLE>
F-54
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(9) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
SUN HEALTHCARE GROUP, INC.
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------------ ----------- -------------- ------------ -------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 2,226 $ 10,870 $ 1,784 $ -- $ 14,880
Restricted cash........................ -- 2,236 -- -- 2,236
Accounts receivable, net............... -- 254,659 28,376 (767) 282,268
Other receivables...................... 28,343 4,263 824 -- 33,430
Prepaids and other assets.............. 691 15,276 1,651 -- 17,618
Deferred tax asset..................... 12,716 -- -- -- 12,716
------------ ----------- -------------- ------------ -------------
Total current assets................. 43,976 287,304 32,635 (767) 363,148
------------ ----------- -------------- ------------ -------------
Property and equipment, net............ 48,072 145,157 112,491 -- 305,720
Goodwill, net.......................... -- 363,934 68,571 -- 432,505
Other assets, net...................... 56,048 54,164 4,844 -- 115,056
Investment in subsidaries.............. 426,898 -- -- (426,898) --
Deferred tax asset..................... 12,997 -- -- -- 12,997
------------ ----------- -------------- ------------ -------------
Total assets......................... $ 587,991 $ 850,559 $ 218,541 $ (427,665) $ 1,229,426
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
Current liabilities:
Current portion of long-term debt...... $ 289 $ 2,727 $ 25,966 $ -- $ 28,982
Accounts payable....................... 26,407 3,822 9,718 (767) 39,180
Accrued compensation and benefits...... 9,639 19,376 3,597 -- 32,612
Payable to APTA shareholders........... -- -- 23,545 -- 23,545
Workers' compensation accrual.......... 357 7,669 (163) -- 7,863
Other accrued liabilities.............. 9,183 8,338 1,863 -- 19,384
------------ ----------- -------------- ------------ -------------
Total current liabilities............ 45,875 41,932 64,526 (767) 151,566
------------ ----------- -------------- ------------ -------------
Long-term debt, net of current portion... 362,880 72,155 48,418 -- 483,453
Other long-term liabilities.............. -- 13,716 1,097 -- 14,813
Deferred income taxes.................... -- -- 4,760 -- 4,760
------------ ----------- -------------- ------------ -------------
Total liabilities.................... 408,755 127,803 118,801 (767) 654,592
------------ ----------- -------------- ------------ -------------
Intercompany payables/(receivables)...... (392,901) 372,771 20,130 -- --
Minority interest........................ -- -- 2,697 -- 2,697
Total stockholders' equity............... 572,137 349,985 76,913 (426,898) 572,137
------------ ----------- -------------- ------------ -------------
Total liabilities and stockholders'
equity.............................. $ 587,991 $ 850,559 $ 218,541 $ (427,665) $ 1,229,426
------------ ----------- -------------- ------------ -------------
------------ ----------- -------------- ------------ -------------
</TABLE>
F-55
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(9) SUMMARIZED CONSOLIDATING INFORMATION
SUN HEALTHCARE GROUP, INC.
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
----------- ----------- -------------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Total net revenues........................... $ 1,356 $ 698,065 $ 150,380 $ (3,620) $ 846,181
----------- ----------- -------------- ----------- ------------
Costs and expenses:
Operating.................................. -- 571,537 126,870 (3,620) 694,787
Corporate general and administrative....... 24,891 7,802 6,753 -- 39,446
Provision for losses on accounts
receivable............................... -- 6,388 385 -- 6,773
Depreciation and amortization.............. 2,116 14,609 7,622 -- 24,347
Interest, net.............................. 16,612 1,467 7,407 -- 25,486
Equity interest in (earnings) loss of
subsidiaries............................. (6,394) -- -- 6,394 --
----------- ----------- -------------- ----------- ------------
Total costs and expenses................. 37,225 601,803 149,037 2,774 790,839
----------- ----------- -------------- ----------- ------------
Earnings (loss) before income taxes and
intercompany charges........................ (35,869) 96,262 1,343 (6,394) 55,342
Intercompany charges(1)...................... (85,499) 83,619 1,880 -- --
----------- ----------- -------------- ----------- ------------
Earnings (loss) before income taxes.......... 49,630 12,643 (537) (6,394) 55,342
Income taxes................................. 15,871 5,347 365 -- 21,583
----------- ----------- -------------- ----------- ------------
Net earnings (loss).......................... $ 33,759 $ 7,296 $ (902) $ (6,394) $ 33,759
----------- ----------- -------------- ----------- ------------
----------- ----------- -------------- ----------- ------------
</TABLE>
F-56
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(9) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
SUN HEALTHCARE GROUP, INC.
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
----------- ----------- --------------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Total net revenues........................... $ 627 $ 564,841 $ 82,130 $ (1,854) $ 645,744
----------- ----------- --------------- ----------- ------------
Costs and expenses:
Operating.................................. -- 462,593 71,123 (1,854) 531,862
Corporate general and administrative....... 18,688 7,726 2,763 -- 29,177
Provision for losses on accounts
receivable............................... -- 2,437 26 -- 2,463
Depreciation and amortization.............. 1,698 12,862 1,929 -- 16,489
Interest, net.............................. 10,153 2,275 483 -- 12,911
Equity interest in (earnings) loss of
subsidiaries............................. (14,706) -- -- 14,706 --
----------- ----------- --------------- ----------- ------------
Total costs and expenses................. 15,833 487,893 76,324 12,852 592,902
----------- ----------- --------------- ----------- ------------
Earnings (loss) before income taxes and
intercompany charges........................ (15,206) 76,948 5,806 (14,706) 52,842
Intercompany charges(1)...................... (56,600) 55,008 1,592 -- --
----------- ----------- --------------- ----------- ------------
Earnings before income taxes................. 41,394 21,940 4,214 (14,706) 52,842
Income taxes................................. 9,689 9,279 2,169 -- 21,137
----------- ----------- --------------- ----------- ------------
Net earnings................................. $ 31,705 $ 12,661 $ 2,045 $ (14,706) $ 31,705
----------- ----------- --------------- ----------- ------------
----------- ----------- --------------- ----------- ------------
</TABLE>
- ------------------------------
(1) Through various intercompany agreements entered into by the Company, the
Guarantors and certain of the non-Guarantor subsidiaries, Sun provides
management services and acts on behalf of the Guarantors and certain of the
non-Guarantor subsidiaries to make financing available for their operations.
The Company charged the Guarantors for management services totaling
$39,653,000 and $50,398,000 for the six months ended June 30, 1996 and 1997,
respectively. The Company charged the non-Guarantor subsidiaries for
management services totaling $563,000 and $642,000 for the six months ended
June 30, 1996 and 1997, respectively. Intercompany interest charged to the
Guarantors for the six months ended June 30, 1996 and 1997 for advances from
the Company was $15,363,000 and $33,220,000, respectively. Intercompany
interest charged to the non-Guarantor subsidiaries for the six months ended
June 30, 1996 and 1997, for advances from the Company was $1,029,000 and
$1,237,000, respectively.
F-57
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(9) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
SUN HEALTHCARE GROUP, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
--------- ----------- -------------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................ $ 33,759 $ 7,296 $ (902) $ (6,394) $ 33,759
Adjustments to reconcile net earnings
(loss) to net cash provided by (used for)
operating activities --
Equity in earnings of subsidiaries....... (6,394) -- -- 6,394 --
Depreciation and amortization............ 2,116 14,609 7,622 -- 24,347
Provision for losses on accounts
receivable............................. -- 6,388 385 -- 6,773
Other, net............................... 498 (853) (83) -- (438)
Changes in operating assets and
liabilities:
Accounts receivable.................... -- (66,211) (4,573) -- (70,784)
Other current assets................... 11,874 (1,909) (2,031) -- 7,934
Other current liabilities.............. 9,073 8,963 7,600 -- 25,636
Income taxes payable................... 25,852 343 990 -- 27,185
--------- ----------- -------------- ----------- ------------
Net cash provided by (used for) operating
activities............................... 76,778 (31,374) 9,008 -- 54,412
--------- ----------- -------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................. (2,703) (12,921) (14,466) -- (30,090)
Acquisitions, net of cash acquired......... -- (33,133) (147,799) -- (180,932)
Proceeds from the sale and leaseback of
property and equipment................... -- 30,639 13,129 -- 43,768
Other assets expenditures.................. (26,117) (15,733) (6,827) -- (48,677)
--------- ----------- -------------- ----------- ------------
Net cash used for investing activities..... (28,820) (31,148) (155,963) -- (215,931)
--------- ----------- -------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings.................. 143,629 1,652 15,003 -- 160,284
Long-term debt repayments.................. (165) (571) (3,691) -- (4,427)
Net proceeds from issuance of common
stock.................................... 1,677 -- -- -- 1,677
Other financing activities................. (758) (97) (216) -- (1,071)
Intercompany advances...................... (197,780) 60,536 137,244 -- --
--------- ----------- -------------- ----------- ------------
Net cash provided by (used for) financing
activities.................................. (53,397) 61,520 148,340 -- 156,463
--------- ----------- -------------- ----------- ------------
Effect of exchange rate on cash and cash
equivalents................................. -- -- (1,779) -- (1,779)
--------- ----------- -------------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................. (5,439) (1,002) (394) -- (6,835)
Cash and cash equivalents at beginning of
period...................................... 2,226 10,870 1,784 -- 14,880
--------- ----------- -------------- ----------- ------------
Cash and cash equivalents at end of period... $ (3,213) $ 9,868 $ 1,390 $ -- $ 8,045
--------- ----------- -------------- ----------- ------------
--------- ----------- -------------- ----------- ------------
</TABLE>
F-58
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(9) SUMMARIZED CONSOLIDATING INFORMATION (CONTINUED)
SUN HEALTHCARE GROUP, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
----------- ----------- -------------- ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)........................ $ 31,705 $ 12,661 $ 2,045 $ (14,706) $ 31,705
Adjustments to reconcile net earnings
(loss) to net cash provided by
(used for) operating activities --
Equity in earnings of subsidiaries....... (14,706) -- -- 14,706 --
Depreciation and amortization............ 1,698 12,862 1,929 -- 16,489
Provision for losses on accounts
receivable............................. -- 2,437 26 -- 2,463
Other, net............................... 309 (240) (1,160) -- (1,091)
Changes in operating assets and
liabilities:
Accounts receivable.................... -- (34,515) (1,814) -- (36,329)
Other current assets................... (4,652) 7,226 (2,318) -- 256
Other current liabilities.............. (4,079) 1,922 (861) -- (3,018)
Income taxes payable................... 27,330 508 217 -- 28,055
----------- ----------- -------------- ----------- ------------
Net cash provided by (used for) operating
activities............................... 37,605 2,861 (1,936) -- 38,530
----------- ----------- -------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.................. (5,834) (7,748) (6,372) -- (19,954)
Acquisitions, net of cash acquired......... -- (20,563) (13,739) -- (34,302)
Purchases of minority interest in Ashbourne
PLC...................................... -- (9,631) -- (9,631)
Purchase of minority interest in OmniCell
Technologies, Inc........................ (25,332) -- -- -- (25,332)
Net proceeds from sale of SunSurgery
Corporation.............................. -- 24,827 -- -- 24,827
Proceeds from the sale and leaseback of
property and equipment................... -- -- 9,809 -- 9,809
Other assets expenditures.................. (9,419) (6,785) 7,139 -- (9,065)
----------- ----------- -------------- ----------- ------------
Net cash used for investing activities... (40,585) (10,269) (12,794) -- (63,648)
----------- ----------- -------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings.................. 31,962 199 7,406 -- 39,567
Long-term debt repayments.................. (122) (1,854) (1,626) -- (3,602)
Net proceeds from issuance of common
stock.................................... 718 -- -- -- 718
Purchases of treasury stock................ (25,069) -- -- -- (25,069)
Other financing activities................. (105) 7 -- -- (98)
Intercompany advances...................... (2,582) (5,627) 8,209 -- --
----------- ----------- -------------- ----------- ------------
Net cash provided by (used for) financing
activities.................................. 4,802 (7,275) 13,989 -- 11,516
----------- ----------- -------------- ----------- ------------
Effect of exchange rate on cash and cash
equivalents................................. -- -- (85) -- (85)
----------- ----------- -------------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................. 1,822 (14,683) (826) -- (13,687)
Cash and cash equivalents at beginning of
period...................................... (6,647) 27,591 2,158 -- 23,102
----------- ----------- -------------- ----------- ------------
Cash and cash equivalents at end of period... $ (4,825) $ 12,908 $ 1,332 $ -- $ 9,415
----------- ----------- -------------- ----------- ------------
----------- ----------- -------------- ----------- ------------
</TABLE>
F-59
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(10) 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% Convertible Subordinated Debentures and the
11 3/4% Senior Subordinated Notes subsequent to the acquisition. Summarized
financial information of Mediplex is provided below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
Current assets........................................................................ $ 103,269 $ 97,489
Noncurrent assets..................................................................... 429,555 403,807
Current liabilities................................................................... 21,904 26,989
Noncurrent liabilities................................................................ 83,370 75,931
Due to parent......................................................................... 152,447 136,799
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................. $ 116,357 $ 126,589 $ 233,170 $ 247,948
Costs and expenses............................................ 105,280 119,664 213,174 235,792
Earnings before intercompany charges and income taxes......... 11,077 6,925 19,996 12,156
Intercompany charges(1)....................................... 13,115 17,976 25,926 34,331
Earnings (loss) before income taxes........................... (2,038) (11,051) (5,930) (22,175)
Income taxes (benefit)........................................ (135) (4,241) (983) (8,648)
Net earnings (loss)........................................... $ (1,903) $ (6,810) $ (4,947) $ (13,527)
</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 $8,146,000 and
$7,858,000 for the three months ended June 30, 1996 and 1997, respectively;
and $16,123,000 and $15,426,000 for the six months ended June 30, 1996 and
1997, respectively. Royalty fees charged to Mediplex for the three months
ended June 30, 1996 and 1997 for the use of Sun trademarks were $1,639,000
and $1,806,000, respectively; and $3,242,000 and $3,545,000 for the six
months ended June 30, 1996 and 1997, respectively. Intercompany interest
charged to Mediplex for the three months ended June 30, 1996 and 1997 for
advances from Sun was $3,330,000 and $8,312,000, respectively; and
$6,561,000 and $15,360,000 for the six months ended June 30, 1996 and 1997,
respectively.
(11) SUBSEQUENT EVENTS
On July 26, 1997, the Company signed a definitive agreement with Regency
Health Services, Inc. ("Regency") under which the Company will acquire all of
the outstanding shares of Regency for $22 per share, or approximately
$369,000,000 in cash. The Company commenced a tender offer for all of the
outstanding shares of Regency on August 1, 1997. The acquisition will be
accounted for on a purchase accounting basis. The acquisition is expected to
close during the fourth quarter of 1997. Regency is an operator of skilled
nursing facilities and a diversified provider of rehabilitation therapy,
institutional pharmacy and home health services.
The Company has obtained a new long-term financing commitment. This new
commitment contains a $500,000,000 term loan facility with several borrowing
tranches. Tranche A has a borrowing maximum of $250,000,000 and Tranche B has
the same maximum borrowing limit. Borrowings bear interest at either the
prevailing prime rate +.075% for Tranche A and prime rate +.125% for
F-60
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(11) SUBSEQUENT EVENTS (CONTINUED)
Tranche B or LIBOR +.225% for Tranche A or LIBOR +.275% for Tranche B. The term
loan facilities will be subject to an amortization schedule to be agreed upon.
Tranche A will be due six years from the date of a final agreement and Tranche B
will be due seven years from the date of a final agreement.
On July 8, 1997, the Company issued $250,000,000 aggregate principal amount
of 9 1/2% Senior Subordinated Notes due 2007 (the "9 1/2% Notes"). The net
proceeds from the sale were used to reduce outstanding borrowings under the
Company's revolving credit facility, which amounts may be subsequently
reborrowed. The 9 1/2% Notes are redeemable by the Company at a premium, in
whole or in part, after July 1, 2002.
F-61
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Regency Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Regency
Health Services, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1996. 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 audits.
We conducted our audits 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 audits provide 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 Regency Health Services,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Orange County, California
February 14, 1997
F-62
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS,
EXCEPT PAR VALUE)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 104,238 $ 22,875
Restricted cash......................................................................... -- 4,425
Accounts receivable, net of allowances of $3,757 and $4,723 at December 31, 1995 and
1996, respectively..................................................................... 51,203 80,949
Estimated third party settlements....................................................... 800 10,180
Notes and other receivables............................................................. 2,182 1,355
Deferred income taxes................................................................... 5,447 6,898
Assets held for sale.................................................................... 8,970 6,915
Other current assets.................................................................... 6,396 7,819
---------- ----------
Total current assets.................................................................. 179,236 141,416
---------- ----------
PROPERTY AND EQUIPMENT:
Land.................................................................................... 21,249 21,207
Buildings and improvements.............................................................. 96,396 100,120
Leasehold interests -- other............................................................ 17,556 17,640
Leasehold interests -- related party.................................................... 2,075 1,989
Equipment............................................................................... 24,610 38,054
---------- ----------
161,886 179,010
Less accumulated depreciation and amortization.......................................... (34,679) (43,938)
---------- ----------
Total property and equipment.......................................................... 127,207 135,072
---------- ----------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $951 and $1,352 at December 31, 1995 and
1996, respectively....................................................................... 5,163 1,014
Goodwill, net of accumulated amortization of $563 and $3,700 at December 31, 1995 and
1996, respectively....................................................................... 13,621 53,753
Other assets, net of accumulated amortization of $2,206 and $3,736 at December 31, 1995
and 1996, respectively................................................................... 13,715 22,321
---------- ----------
Total other assets.................................................................... 32,499 77,088
---------- ----------
$ 338,942 $ 353,576
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... $ 4,371 $ 2,418
Accounts payable........................................................................ 22,285 24,958
Accrued expenses........................................................................ 5,946 8,290
Accrued compensation.................................................................... 18,051 26,253
Accrued workers' compensation........................................................... 5,377 4,338
Deferred revenue........................................................................ 1,743 2,407
Accrued interest........................................................................ 4,231 5,578
---------- ----------
Total current liabilities............................................................. 62,004 74,242
LONG-TERM DEBT, NET OF CURRENT PORTION.................................................... 179,615 182,490
OTHER LIABILITIES AND NONCURRENT RESERVES................................................. 8,988 10,878
DEFERRED INCOME TAXES..................................................................... 7,946 5,018
---------- ----------
Total liabilities..................................................................... 258,553 272,628
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized -- 35,000 shares;
16,670 and 15,919 shares issued and outstanding at December 31, 1995 and 1996,
respectively, net of 862 shares held in treasury in 1996............................... 167 168
Additional paid-in capital.............................................................. 56,679 52,031
Retained earnings....................................................................... 23,543 28,749
---------- ----------
Total stockholders' equity............................................................ 80,389 80,948
---------- ----------
$ 338,942 $ 353,576
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-63
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET OPERATING REVENUE...................................................... $ 377,336 $ 416,093 $ 558,050
----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses....................................................... 307,807 335,849 453,131
Corporate general and administrative..................................... 19,392 19,811 24,292
Rent expense............................................................. 15,555 16,767 24,956
Depreciation and amortization............................................ 9,295 10,122 15,317
Interest expense......................................................... 7,844 9,676 18,060
Merger and restructuring expenses........................................ 14,650 -- --
Class action lawsuit settlement.......................................... -- 3,098 --
Restructuring and other non-recurring charges............................ 1,600 9,000 11,283
----------- ----------- -----------
Total costs and expenses............................................... 376,143 404,323 547,039
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM............ 1,193 11,770 11,011
PROVISION FOR INCOME TAXES................................................. 1,993 7,316 4,612
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................................... (800) 4,454 6,399
EXTRAORDINARY ITEM -- Loss on extinguishment of debt, net of applicable
income taxes of $1,072 and $812 in 1995 and 1996, respectively............ -- (1,609) (1,193)
----------- ----------- -----------
NET INCOME (LOSS).......................................................... $ (800) $ 2,845 $ 5,206
----------- ----------- -----------
----------- ----------- -----------
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item.................................. $ (.05) $ .27 $ .39
Extraordinary item....................................................... -- (.10) (.07)
----------- ----------- -----------
Net income (loss) per share.............................................. $ (.05) $ .17 $ .32
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares of common stock and equivalents.................... 16,545 16,654 16,476
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-64
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993................................ 16,220 $ 162 $ 45,355 $ 21,498 $ 67,015
Exercise of stock options............................... 95 1 475 -- 476
Conversion of Convertible Subordinated Debentures....... 87 1 1,031 -- 1,032
Charge in lieu of income taxes (1994)................... -- -- 2,636 -- 2,636
Retroactive charge in lieu of income taxes (1993)....... -- -- 2,608 -- 2,608
Net loss................................................ -- -- -- (800) (800)
--------- ----- ----------- --------- ---------
BALANCE, December 31, 1994................................ 16,402 164 52,105 20,698 72,967
Exercise of stock options............................... 211 2 1,254 -- 1,256
Exercise of share appreciation rights................... 55 1 614 -- 615
Conversion of Convertible Subordinated Debentures....... 2 -- 20 -- 20
Charge in lieu of income taxes.......................... -- -- 2,686 -- 2,686
Net income.............................................. -- -- -- 2,845 2,845
--------- ----- ----------- --------- ---------
BALANCE, December 31, 1995................................ 16,670 167 56,679 23,543 80,389
Exercise of stock options............................... 99 1 680 -- 681
Restricted Stock Distribution........................... 12 -- 144 -- 144
Charge in lieu of income taxes.......................... -- -- 2,814 -- 2,814
Repurchase of common stock.............................. (862) -- (8,286) -- (8,286)
Net income.............................................. -- -- -- 5,206 5,206
--------- ----- ----------- --------- ---------
BALANCE, December 31, 1996................................ 15,919 $ 168 $ 52,031 $ 28,749 $ 80,948
--------- ----- ----------- --------- ---------
--------- ----- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-65
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ (800) $ 2,845 $ 5,206
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss on extinguishment of debt........................... -- 2,681 2,005
Depreciation and amortization.......................................... 9,295 10,122 15,317
Deferred income taxes and charge in lieu of taxes...................... 408 4,506 (1,317)
Restructuring and other non-recurring charges.......................... 6,052 9,000 9,749
Other, net............................................................. (94) 649 122
Change in cash from changes in assets and liabilities, excluding
effects of acquisitions and dispositions:
Accounts receivable.................................................. (4,640) 1,481 (28,537)
Estimated third party settlements.................................... 1,645 (3,569) (9,380)
Other current assets................................................. (1,582) 6,748 (270)
Current and other liabilities........................................ 814 (4,003) 11,308
----------- ----------- -----------
Net cash provided by operating activities............................ 11,098 30,460 4,203
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions............................................................. -- (13,225) (50,800)
Proceeds from disposition of facilities.................................. 2,239 -- 3,682
Purchases of property and equipment...................................... (12,576) (14,223) (12,575)
Collection on mortgage notes receivable.................................. 410 349 695
Changes in other assets, net............................................. (2,585) (1,278) (1,623)
----------- ----------- -----------
Net cash used in investing activities................................ (12,512) (28,377) (60,621)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt............................................... (2,705) (31,940) (62,598)
Proceeds from issuance of long-term debt................................. 2,996 107,162 56,143
Workers compensation trust funding....................................... -- -- (10,637)
Purchase of treasury stock............................................... -- -- (8,286)
Proceeds from exercise of options........................................ 476 1,256 433
----------- ----------- -----------
Net cash provided by (used in) financing activities.................. 767 76,478 (24,945)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (647) 78,561 (81,363)
CASH AND CASH EQUIVALENTS, beginning of period............................. 26,324 25,677 104,238
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period................................... $ 25,677 $ 104,238 $ 22,875
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................... $ 6,788 $ 8,334 $ 16,713
----------- ----------- -----------
----------- ----------- -----------
Cash paid during the year for income taxes............................... $ 2,651 $ 2,152 $ 3,750
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-66
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1994:
$1,076,000 of the Company's Convertible Subordinated Debentures were
converted into 86,946 shares of common stock. Unamortized debenture fees
of $44,000 were offset against additional paid-in capital.
During the year ended December 31, 1995:
$20,000 of the Company's Convertible Subordinated Debentures were
converted into 1,616 shares of common stock.
The Company issued a promissory note of $3,400,000 in connection with
the acquisition of SCRS and Communicology, Inc.
During the year ended December 31, 1996:
The Company acquired Assist-A-Care Pharmacy in San Diego, California and
issued a promissory note in the amount of $2.6 million as part of the
purchase price.
The Company issued a promissory note in the amount of $2.2 million in
connection with the acquisition of 18 healthcare facilities in Tennessee
and North Carolina.
The Company acquired Executive Pharmacy and issued a promissory note in
the amount of $763,000.
The accompanying notes are an integral part of these consolidated statements.
F-67
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MERGER AND BASIS OF PRESENTATION
On April 4, 1994, Regency Health Services, Inc. ("Regency" or the "Company")
and Care Enterprises, Inc. ("Care") completed the merger (the "Merger").
Pursuant to the Agreement and Plan of Merger, dated as of December 20, 1993, as
amended, Care Merger Sub, Inc., a wholly owned subsidiary of Regency, was merged
with and into Care, and Care became a wholly owned subsidiary of Regency. Each
share of common stock of Care was converted into 0.71 of a share of common stock
of Regency. Approximately 9,400,000 shares of common stock were issued in this
transaction. At the time of the Merger, Regency operated 43 healthcare
facilities with 4,215 licensed beds and Care operated 51 healthcare facilities
with 5,040 licensed beds.
The Merger qualified as a pooling-of-interests transaction under generally
accepted accounting principles. The pooling-of-interests method of accounting is
intended to present as a single interest two or more common stockholder
interests that were previously independent. The pooling-of-interests method of
accounting assumes that the combining companies have been merged from inception.
Consequently, the historical financial statements for periods prior to the
consummation of the combination are restated as though the companies had been
merged since inception. The calculation of income per share for 1994 presented
reflects the issuance of .71 of a share of Regency Common Stock for each share
of common and common equivalent share of Care Common Stock. The restated
financial statements are adjusted to conform the accounting policies of the
separate companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
As of December 31, 1996, the Company operated 107 healthcare facilities with
11,200 licensed beds that provide nursing, rehabilitative, subacute and other
specialized medical services primarily in California and in Ohio, West Virginia,
North Carolina and Tennessee. Through its wholly owned home health subsidiaries,
the Company provides patients with technical medical support at home such as
infusion therapy, ventilator care and respite services. The Company also
provides ancillary services such as rehabilitation programs and pharmaceutical
services at certain of its healthcare facilities as well as at non-affiliated
facilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents.
At December 31, 1995 and 1996, the Company held personal funds in trust for
patients approximating $690,000 and $1,505,000, respectively, which are not
reflected on the accompanying balance sheets.
RESTRICTED CASH
Restricted cash of $4,425,000 at December 31, 1996 represents the portion of
the cash in the Company's pre-funded workers' compensation claims payment trust
expected to be paid during 1997.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the net realizable value expected to be
received from federal and state assistance programs or from private sources
including managed care organizations and third party insurers. Receivables from
government agencies represent the only concentrated group of credit risk for the
Company. Management does not believe that there are any credit risks associated
F-68
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with these government agencies other than possible funding delays.
Non-government agency receivables consist of receivables from various payors
that are subject to differing economic conditions and do not represent any
concentrated credit risks to the Company. Furthermore, management continually
monitors and adjusts its reserves and allowances associated with these
receivables.
PROPERTY AND EQUIPMENT
At the time of Care's emergence from bankruptcy on December 31, 1990,
property and equipment owned by Care and certain leasehold interests were
adjusted to current fair market value. All other property and equipment is
recorded at cost. The assets are depreciated over their estimated useful lives
using the straight-line method as follows:
<TABLE>
<S> <C>
Buildings and improvements................................... 7-40 years
Life of
Leasehold interests and improvements......................... leases
Equipment.................................................... 5-10 years
</TABLE>
Betterments, renewals, and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed. The cost and
accumulated depreciation applicable to assets retired are removed from the
accounts and any gain or loss on disposition is recognized in income.
ASSETS HELD FOR SALE
During 1995, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The adoption of SFAS No. 121 did not have
a material effect on the Company's financial statements. At December 31, 1995,
assets held for sale represents the assets of 13 facilities which the Company
determined to dispose of in 1995. At December 31, 1996, it represents the assets
of the seven remaining facilities which the Company intends to dispose of during
1997 (see Note 14). Such amounts are carried at estimated fair value less
selling costs.
GOODWILL
The excess of the purchase price over the value of the net assets of the
businesses acquired by the Company is amortized using the straight-line method
over periods ranging from 15 to 22 years. The Company periodically evaluates the
carrying value of goodwill in relation to the operating performance and future
undiscounted cash flows of the underlying business to assess recoverability.
Adjustments are made if the sum of expected future net cash flows is less than
book value of goodwill and other depreciable or amortizable assets.
ASSET IMPAIRMENT
The carrying values of long-lived assets are reviewed if the facts and
circumstances suggest that an item may be impaired. If this review indicates
that a long-lived asset will not be recoverable, as determined based on the
future undiscounted cash flows of the asset, the Company's carrying value of the
long-lived asset is reduced to fair value.
OTHER LONG-TERM ASSETS
Costs incurred to obtain long-term financing are amortized using the
effective interest method. Costs to initiate and implement subacute specialty
units are amortized on a straight-line basis over 36 months.
DEFERRED REVENUE
Deferred revenue consists of patient billings recorded in advance of
services rendered.
F-69
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WORKERS' COMPENSATION
The Company maintains self-insurance programs for workers' compensation for
its nursing facilities in California and Ohio, pharmacy operations, home health
operations and its corporate office employees. For all other operations, the
Company purchases insurance for this risk. The self-insurance liability under
these programs is based on claims filed and actuarial estimates of claims
incurred but not reported. Differences between the amounts accrued and
subsequent settlements are recorded in operations in the year of settlement.
NET OPERATING REVENUE
Revenues are derived from the operation of healthcare facilities, which are
subject to federal and state regulation. Approximately 74.0%, 71.8%, and 69.9%,
percent of revenues were derived from services provided under federal (Medicare)
and state (Medicaid) medical assistance programs for the years ended December
31, 1994, 1995 and 1996, respectively. Revenues from Medicaid are recorded at
the prescribed contract rate. Revenues from Medicare are recorded based on an
estimate of the Company's reimbursable cost. Limitations on Medicare and
Medicaid reimbursement for healthcare services are continually proposed. Changes
in applicable laws and regulations could have an adverse effect on the levels of
reimbursement from governmental, private, and other sources. These revenues are
based, in part, on cost reimbursement principles and are subject to audit.
Provisions for estimated third-party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
accrued and subsequent settlements are recorded in operations in the year of
settlement.
Additionally, the Company's cost of care for its Medicare patients sometimes
exceeds regional reimbursement limits established by Medicare. The Company has
submitted exception requests for 156 cost reports, covering all cost report
periods through December 31, 1994. To date, final action has been taken by the
Health Care Financing Administration ("HCFA") on 105 exception requests. The
Company's final rates as approved by HCFA represent approximately 84% of the
requested rates as submitted in the exception requests. During 1994, the Company
recognized 50% of the 1994 estimated exception requests anticipated to be
received, which represented revenues of approximately $1,550,000. Commencing
January 1, 1995, the Company recognized 70% of the estimated exception requests
anticipated to be received, which represents revenues of approximately
$3,001,000 and $3,563,000 in 1995 and 1996, respectively. Management believes
that the Company will be able to recover its excess costs under any pending
exception requests or under any exception requests that may be submitted in the
future, however there can be no assurance that it will be able to do so.
STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires
the Company to disclose pro forma net income and earnings per share as if the
fair value based accounting method of SFAS No. 123 had been used to account for
stock based compensation. These disclosures are included in Note 9.
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 and
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.
F-70
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES
During 1995, the Company changed its classification of general and
administrative expenses. Previously, the Company classified all corporate
overhead, regional costs related to the supervision of operations, the
administrative costs at the Company's facilities, pharmacies, and home care
operations as administrative and general expenses. The Company now classifies
corporate overhead and the regional costs related to the supervision of
operations as corporate general and administrative expenses. All other costs
which relate to the daily operations have been classified as operating expenses
for the periods presented. These costs in 1994 have been reclassified to conform
to the 1996 and 1995 presentation.
FINANCIAL STATEMENT PRESENTATION
Estimated third party settlements classified in accounts receivable, other
assets and other liabilities and non-current reserves in the 1995 financial
statements have been reclassified to estimated third party settlements in
current assets to conform to the 1996 presentation. Certain other amounts have
been reclassified in the 1994 and 1995 financial statements to conform to the
1996 presentation.
3. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Senior Subordinated Notes, interest at 9.875 percent, due October 2002. Interest is
payable semi-annually on October 15 and April 15, commencing April 15, 1996; redeemable
beginning October 15, 1999............................................................. $ 110,000 $ 110,000
Junior Subordinated Notes, interest at 12.25 percent, due July 2003, interest payable
semi-annually on January 15 and July 15, commencing January 1997; redeemable beginning
July 15, 2000.......................................................................... -- 50,000
Industrial revenue bonds ("IRBs"), interest at rates from 4.0 to 8.25 percent, due
through September 2012 in varying amounts.............................................. 9,800 9,675
Note payable, collateralized by a deed of trust, interest at 8.75 percent; interest and
principal payable monthly through September 2033....................................... 4,714 4,697
Note payable, secured, interest at 9.0 percent, interest and principal payable monthly,
balance due November 2013.............................................................. 4,308 4,276
Convertible Subordinated Debentures, interest at 6.5 percent, due March 2003, redeemed
in 1996................................................................................ 48,904 --
Note payable, interest at 6.0 percent. Interest payable quarterly commencing October 1,
1995; fully repaid in 1996............................................................. 3,400 --
Other unsecured indebtedness, interest rates up to 13.0 percent, payable in varying
installments through August 2017....................................................... 1,014 646
Other secured long-term debt, interest rates up to 10.25 percent, payable in varying
installments through August 2014....................................................... 1,846 5,614
----------- -----------
183,986 184,908
Less current portion.................................................................... 4,371 2,418
----------- -----------
$ 179,615 $ 182,490
----------- -----------
----------- -----------
</TABLE>
On June 28, 1996, the Company issued 12.25% Junior Subordinated Notes (the
"Junior Subordinated Notes") in an aggregate amount of $50 million. The Junior
Subordinated Notes will mature on July 15, 2003, unless previously redeemed. Net
proceeds received by the Company totaled approximately $48.4 million and funded
the redemption of the Company's outstanding 6.5% Convertible
F-71
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
Subordinated Debentures due 2003 (the "Convertible Subordinated Debentures") on
July 29, 1996. The Junior Subordinated Notes contain certain covenants, which
are similar to the 9.875% Senior Subordinated Notes ("Subordinated Notes"),
including limitations on the ability of the Company to, among other things, (a)
incur additional indebtedness and issue redeemable preferred stock, (b) sell
equity interests in subsidiaries, (c) make certain restricted payments (as
defined), (d) create liens, and (e) engage in mergers, consolidations or
transfers of substantially all of the assets of the Company to another party.
Effective September 30, 1996, the Company refinanced three of its Industrial
Revenue Bond Issues (IRBs) with an aggregate outstanding principal balance of
$7,560,000 with three new issues of tax exempt IRBs maturing through September
2012. One of the new issues has a principal balance of $2,830,000 and bears
interest at rates ranging from 4.2% to 6.0% based on the maturity dates of the
individual bonds. The other two IRBs bear interest at a variable rate initially
set at 4.0% which is capped at 12.0%. The refinancing resulted in an
extraordinary loss on extinguishment of debt of $325,000, net of tax resulting
from the write-off of unamortized underwriting costs and payment of a call
premium. The IRBs are secured by irrevocable standby letters of credit issued
against the Company's Amended Credit Agreement.
On December 28, 1995 the Company entered into a revolving credit loan
agreement ("Credit Agreement") with NationsBank of Texas, N.A. as agent for a
group of banks, which provided up to $50 million in a revolving line of credit
and letters of credit. No borrowings were drawn on the Credit Agreement at
December 31, 1995 and throughout 1996. On December 20, 1996, the Company
increased the available financing to $100 million and revised certain terms and
covenants through the Amended and Restated Credit Agreement ("Amended Credit
Agreement"). Borrowings bear interest at either the Base Rate plus up to .50% or
the Adjusted Eurodollar Rate plus .75% to 2.00%, depending on the Company's
Consolidated Adjusted Leverage Ratio, all as defined in the Amended Credit
Agreement. The Amended Credit Agreement has scheduled commitment reductions of
$25 million each on January 2, 1999 and 2000 and expires on January 2, 2001. The
Amended Credit Agreement is collateralized by accounts receivable, all of the
common stock of each of the Company's subsidiaries and certain other current
assets of the Company and its subsidiaries. The Amended Credit Agreement, among
other things, (a) requires the Company to maintain certain financial ratios, and
(b) restricts the Company's ability to incur debt and liens, make investments,
pay dividends, purchase treasury stock, prepay or modify certain debt of the
Company, liquidate or dispose of assets, merge with another corporation, and
create or acquire subsidiaries. As of December 31, 1996, $16.2 million of
standby letters of credit were issued in connection with the Company's
self-insured workers' compensation programs and refinanced Industrial Revenue
Bonds (discussed above) out of a total available of $35 million. On January 2,
1997 the Company borrowed $40 million under the Amended Credit Agreement.
On October 12, 1995, the Company issued Subordinated Notes in an aggregate
amount of $110 million. Net proceeds received by the Company totaled
approximately $106.7 million of which approximately $31.5 million was used to
repay the principal and a prepayment penalty on the Company's 8.10% Senior
Secured Notes (which resulted in a loss on extinguishment of debt of
approximately $1.6 million, net of tax) and $47.4 million was used for
acquisitions in 1996 (see Note 13). The Subordinated Notes contain certain
covenants, including limitations on the ability of the Company to, among other
things, (a) incur additional indebtedness and issue preferred stock, (b) sell
equity interests in subsidiaries, (c) make certain restricted payments (as
defined), (d) create liens, and (e) engage in mergers, consolidations or the
transfer of substantially all of the assets of the Company to another party.
F-72
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
In March 1993, the Company issued $50,000,000 aggregate principal amount of
its Convertible Subordinated Debentures resulting in net proceeds to the Company
of approximately $47,800,000. During the years ended December 31, 1995 and 1994,
$20,000 and $1,076,000 of the Convertible Subordinated Debentures were converted
into 1,616 and 86,946 shares of common stock, respectively. On July 29, 1996,
the Company completed the redemption of all $48.9 million of its outstanding
Convertible Subordinated Debentures for cash at such amount from the proceeds of
the Junior Subordinated Notes and available cash. The redemption reduces fully
diluted shares by 3.9 million and produces an extraordinary loss on
extinguishment of debt of $868,000, net of tax, resulting from the write-off of
unamortized underwriting costs.
Each of the mortgage notes and certain IRBs are secured by a first deed of
trust on the related facility. Certain IRBs require the maintenance of debt
service reserve funds and all of the IRBs contain affirmative and negative
covenants.
Principal maturities on long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 2,418
1998............................................................................. 3,079
1999............................................................................. 497
2000............................................................................. 505
2001............................................................................. 802
Thereafter....................................................................... 177,607
-----------
Total........................................................................ $ 184,908
-----------
-----------
</TABLE>
4. INCOME TAXES
The Company and its subsidiaries file consolidated federal and state income
tax returns and account for income taxes under the provisions of SFAS No. 109.
As a result of the Care bankruptcy proceedings, a "change in ownership"
occurred. Prior to the Merger, the Company had substantial net operating loss
carryforwards for tax purposes ("Tax NOL") and income tax credit carryforwards.
In March 1994, the Internal Revenue Service ("IRS") issued final regulations
relative to Tax NOL utilization when a "change in ownership" occurs in
bankruptcy proceedings. These regulations reduced the aggregate Tax NOL
available to the Company but did not limit its annual use.
As a result of the Merger, another "change in ownership" occurred and the
Company's Tax NOL and credit carryforward utilization became subject to a
combined annual limitation of approximately $7.9 million (on a pre-tax basis) in
periods after the Merger.
After considering the adjustments resulting from the IRS examination for the
years 1987 through 1990, the Company has a federal Tax NOL of $2,929,000 and
income tax credit carryforwards of $5,503,000 available for use at December 31,
1996. As a result of Fresh Start Reporting, the tax benefits realized from the
pre-bankruptcy Tax NOL and income tax credit carryforwards are recorded as an
increase in additional paid-in capital and are not recorded in the statement of
operations.
F-73
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal................................................... $ 597 $ 722 $ 4,950
State..................................................... 988 1,016 1,315
--------- --------- ---------
1,585 1,738 6,265
Deferred provision:
Federal................................................... (1,971) 2,459 (3,797)
State..................................................... (257) 433 (670)
--------- --------- ---------
(2,228) 2,892 (4,467)
Charge in lieu of income taxes.............................. 2,636 2,686 2,814
--------- --------- ---------
$ 1,993 $ 7,316 $ 4,612
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the federal statutory income tax rate with the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate............................................ 34.0% 34.0% 34.0%
State income taxes, net of federal benefit........................ 6.0 6.0 6.0
Disposition of assets charges..................................... -- 19.6 --
Other non-deductible items........................................ 21.4 -- --
Non-deductible merger related expenses............................ 101.4 -- --
Goodwill amortization............................................. 4.4 1.7 3.1
Other, net........................................................ -- 0.8 (1.2)
--------- --------- ---------
167.2% 62.1% 41.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-74
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
Deferred income taxes arise from temporary differences in the recognition of
certain expenses for financial and tax reporting purposes. The following is a
summary of these differences and the tax effect of each (in thousands):
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts.................................... $ 1,054 $ 1,057
Net operating loss carryforward.................................... 3,789 996
Loss contingencies and legal settlements........................... 734 416
Workers' compensation claims....................................... 4,827 5,370
Covenant not to compete............................................ -- 901
Disposition of assets charges...................................... 2,844 4,166
Accrued interest................................................... 598 --
Other reserves..................................................... 1,035 3,389
Credit carryforwards............................................... 4,883 5,519
Other.............................................................. 613 243
Valuation allowance................................................ (10,100) (5,207)
---------- ----------
Total deferred income tax assets..................................... 10,277 16,850
---------- ----------
Deferred income tax liabilities:
Depreciation....................................................... (9,109) (9,417)
Other.............................................................. (3,667) (5,553)
---------- ----------
Total deferred income tax liabilities................................ (12,776) (14,970)
---------- ----------
Net deferred income tax asset (liability)............................ $ (2,499) $ 1,880
---------- ----------
---------- ----------
</TABLE>
The valuation allowance primarily relates to the net operating loss and
income tax credit carryforwards of the Company for periods prior to its
emergence from bankruptcy. If and when such carryforwards are realized, the
offset will be to additional paid-in capital not to the provision for income
taxes.
5. DEFERRED RENT
Several of the Company's facilities and a home health office are leased
under long-term operating leases that specify scheduled rent increases over the
lease terms. Deferred rent of approximately $932,000 and $986,000, at December
31, 1995 and 1996, respectively, has been established to recognize the
difference between the rent expense paid and the straight-line recognition of
minimum rental expense and is classified in other liabilities and noncurrent
reserves.
6. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
The Company is contingently liable under letters of credit related to
deposit requirements on its self-insured workers' compensation plans and the
IRBs discussed in Note 3. State regulations require the maintenance of deposits
at specified percentages of estimated future workers' compensation claim
payments that can be satisfied through a combination of cash deposits, surety
bonds and letters of credit. The total amount of letters of credit outstanding
at December 31, 1995 and 1996, were $16,050,000 and $16,202,000, respectively.
At December 31, 1995, the letters of credit were collateralized by cash. The
cash collateral was subsequently released in connection with the Company's
Credit Agreement discussed in Note 3.
F-75
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES
The Company leases certain facilities and offices under cancelable and
noncancelable agreements expiring at various dates through 2047. The leases are
generally triple-net leases and provide for the Company's payment of property
taxes, insurance, and repairs. Certain leases contain renewal options and rent
escalation clauses. Rent escalation clauses require either fixed increases or
increases tied to the Consumer Price Index ("CPI"). Six leases include purchase
options at fixed or market prices at various dates.
Future minimum lease payments for operating leases at December 31, 1996 are
as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
1997............................................................................. $ 24,402
1998............................................................................. 23,005
1999............................................................................. 22,358
2000............................................................................. 21,460
2001............................................................................. 20,127
Thereafter....................................................................... 110,805
-----------
$ 222,157
-----------
-----------
</TABLE>
GUARANTEE OF LEASES
The Company is contingently liable for certain operating leases assumed by
the purchasers of the Company's leasehold interests in facilities. With the
exception of a single facility re-entered on October 1, 1994, following the
filing of bankruptcy by the Company's sublessee, which has been operated by the
Company since November 1, 1994, the Company is not aware of any failure on the
part of these purchasers to meet the terms of their obligations, and does not
anticipate any expenditures to be incurred in connection with its guarantees. If
a default were to occur, the Company generally would be able to assume
operations of the facility and use the net revenues thereof to defray the
Company's expenditures on these guarantees.
The following is a schedule of future minimum lease payments at December 31,
1996 for the operating leases for which the Company is contingently liable (in
thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
1997............................................................................. $ 3,165
1998............................................................................. 1,125
1999............................................................................. 1,128
2000............................................................................. 1,136
2001............................................................................. 1,023
Thereafter....................................................................... 4,617
-----------
$ 12,194
-----------
-----------
</TABLE>
LITIGATION
In 1995, a class action lawsuit, which had been filed against the Company in
July 1994, was settled for $9,000,000. The Company's portion of this settlement,
together with related legal fees and other costs, resulted in a pre-tax charge
of $3,098,000, which is included in the consolidated statement of operations for
the year ended December 31, 1995.
The Company is subject to claims and legal actions by patients and others in
the ordinary course of its business. The Company has insurance policies related
to patient care claims and legal actions. In
F-76
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
the event judgments were awarded for non-patient care legal actions or in excess
of the insurance coverage for patient care legal actions, the burden would fall
on the Company. The Company does not expect that the ultimate outcome of an
unfavorable judgment in any pending legal matters would result in a material
adverse effect on the Company's consolidated financial position or results of
operations.
EMPLOYMENT AGREEMENTS
At December 31, 1996, the Company had employment agreements with its
president, and certain executive and senior vice presidents, which provide for
annual base salaries in the aggregate of $1,212,000. The agreements expire at
various dates through 1999.
INSURANCE
The Company maintains general and professional liability insurance on a
claims made basis, subject to a $100,000 self-insurance retention. In addition,
all-risk property insurance, including earthquake and flood, is maintained for
all Company locations.
The Company estimates its liability under the above described programs,
including potential legal fees and settlement amounts, with respect to incurred
but not reported claims on a monthly basis, based upon its historical
experience.
7. RELATED PARTY TRANSACTIONS
In February 1988, the Company entered into a 20-year lease with three
five-year option periods for its Heritage (Torrance) facility that is owned by a
former director of the Company. The lease provides for monthly payments,
currently $35,000, which are adjusted annually based on the CPI. Lease expense
for the years ended December 31, 1994, 1995 and 1996, was approximately
$409,000, $415,000, and $419,000, respectively.
In June 1990, the Company entered into a ten year lease with four five-year
option periods for its Glendora facility that is directly owned by one former
director and indirectly owned by another director. The lease provides for equal
monthly payments for three years, after which the monthly payment is adjusted
annually based on increases in the CPI. Lease expense for the years ended
December 31, 1994, 1995 and 1996, was approximately $420,000, $437,000, and
$446,000, respectively.
The Company leases from Newport Harbor Investments Limited, Inc. ("Newport
Harbor"), a corporation wholly-owned by a former director of the Company, two
nursing facilities located in Beaumont and Riverside, California. The leases
provide for monthly rent payments of $7,083 and $5,142, respectively, subject to
periodic adjustments based on certain increases in the CPI or Medi-Cal
reimbursement rates. The Riverside facility lease contains an option to purchase
the facility for $675,000, subject to adjustment based on increases in the CPI
from March 1992. In 1992, the Company paid Newport Harbor $120,000 as
consideration for the extension of the purchase option on the Riverside facility
for a five-year period. During 1996 the Company exercised the option and
acquired the facility for approximately $700,000, net of the consideration
already paid. Lease expense paid by the Company for the years ended December 31,
1994, 1995 and 1996, was approximately $147,000, $147,000 and $133,000,
respectively.
The Company had a 26% interest in a pharmacy partnership formed in April
1992, which provided products and services to several healthcare facilities
operated by the Company. For the year ended December 31, 1994 these purchases
totaled approximately $7,525,000. In August 1994, the Company sold its interest
in the pharmacy partnership to the other partner. The Company received its net
equity in the partnership plus $200,000 for goodwill. The total cash received by
the Company was $2,239,000.
F-77
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME (LOSS) PER SHARE
For the years ended December 31, 1994, 1995 and 1996, income (loss) per
share was calculated based on the weighted average number of common and common
equivalent shares outstanding during the periods of 16,545,000, 16,654,000, and
16,476,000, respectively. Fully diluted income (loss) per share for the years
ended December 31, 1994, 1995 and 1996 is not presented because the effect of
the assumed conversion of the Convertible Subordinated Debentures was
anti-dilutive.
The 1994 income per share calculation does not include the shares reserved
for issuance in connection with the Company's Share Appreciation Rights Plan,
which provides for settlement of the rights in cash or stock. Through December
31, 1994, all Share Appreciation Rights that had been settled were settled for
cash. During 1995, the Board of Directors settled all remaining outstanding
rights and issued shares which are included in the weighted average share
calculation for 1996 and 1995. (See Note 10.)
9. STOCK OPTIONS
Pursuant to the Merger, Care became a wholly owned subsidiary of Regency.
Stockholders of Care received 0.71 of a share of Regency common stock for each
share of Care common stock outstanding. Pursuant to the Merger, Regency's stock
option plan was amended to increase the number of shares of Regency common stock
available for grant to 1,937,991 shares. This amount does not include the
assumption of the Care stock option plan or share appreciation rights plan.
The Company has a Director Stock Plan whereby each non-employee director of
the Company receives on July 1 of each year 2,000 restricted shares of Company
Common Stock and options to purchase an additional 6,000 shares of Company
Common Stock. The period of restriction for each award of shares of restricted
stock expires on the last to occur of: the end of the six month period following
the grant date; participant's direct or indirect pecuniary ownership of shares
not subject to restrictions for at least 12 months, provided that the
restrictions shall lapse with respect to one restricted share granted for every
two shares of unrestricted shares; and participants attendance at 75% of the
scheduled board meetings during the 12 month period immediately preceding the
grant date. Any shares which remain restricted when a director's service on the
Company's Board terminates, will be forfeited. The stock options are granted at
fair market value on the date of grant and the participants are entitled to
exercise such options beginning six months and one day after grant and ending
ten years after grant. During the years ended December 31, 1994, 1995 and 1996,
the Company awarded 12,000, 14,000, and 12,000 shares of restricted stock,
respectively, and during the year ended December 31, 1994, 6,000 shares of
restricted stock were forfeited. At December 31, 1996 restrictions remained on
12,000 shares of stock. In January 1997, the period of restriction lapsed on
12,000 shares.
F-78
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
The following is a summary of options granted pursuant to Regency's Employee
and Director stock option plans (such amounts do not include restricted stock
awards):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at the beginning of
the year............................... 659,058 $ 5.63 1,773,436 $ 12.37 1,226,214 $ 11.94
Granted................................. 1,461,015 15.08 262,641 11.42 911,000 10.34
Exercised............................... (94,736) 5.27 (210,004) 5.90 (99,491) 4.28
Canceled................................ (251,901) 13.28 (599,859) 15.11 (288,612) 13.28
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Options outstanding at the end of the
year................................... 1,773,436 $ 12.37 1,226,214 $ 11.94 1,749,111 $ 11.32
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Options Exercisable..................... 701,563 527,284 493,008
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
During 1994, 1995 and 1996, no compensation cost was recognized related to
the above stock options. The following outlines the significant assumptions used
to calculate the fair value information presented utilizing the Black-Scholes
Single Option approach with ratable amortization.
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Risk-free interest rate..................................................... 6.14% 5.90%
Expected life............................................................... 6.50 7.65
Expected volatility......................................................... 41% 41%
Expected dividends.......................................................... -- --
Weighted average grant date fair value of options granted................... $ 5.95 $ 5.61
</TABLE>
A detail of the options outstanding and exercisable as of December 31, 1996
is presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- ------------------ ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 3.17 - $ 6.98 105,561 .84 $ 3.95 100,235 $ 3.94
9.15 - 10.75 821,112 8.83 10.04 86,796 10.15
11.00 - 12.88 389,000 8.72 11.69 71,250 11.68
15.00 - 15.38 433,438 7.34 15.22 234,727 15.21
- ------------------ ----------- --- ----------- ----------- -----------
$ 3.17 - $15.38 1,749,111 7.96 $ 11.32 493,008 $ 11.52
- ------------------ ----------- --- ----------- ----------- -----------
- ------------------ ----------- --- ----------- ----------- -----------
</TABLE>
F-79
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
As the Company has adopted the disclosure requirement of SFAS No. 123, the
following table shows pro forma net income and earnings per share as if the fair
value based accounting method had been used to account for stock-based
compensation cost.
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(IN THOUSANDS,
EXCEPT EARNINGS
PER SHARE)
<S> <C> <C>
Net income as reported................................................... $ 2,845 $ 5,206
Pro forma compensation expense........................................... (235) (774)
--------- ---------
--------- ---------
Pro forma net income..................................................... $ 2,610 $ 4,432
--------- ---------
--------- ---------
Pro forma earnings per share............................................. $ .16 $ .27
--------- ---------
--------- ---------
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. At December 31, 1996, 2,123,897 shares of common
stock have been reserved for issuance under the Company's stock option plans.
10. SHARE APPRECIATION RIGHTS PLAN
In January 1991, Care's Board of Directors adopted a Share Appreciation
Rights Plan (the "SAR Plan"), which provided for the award of up to 710,000
units to certain key executives. The SAR Plan was amended by the Care Board of
Directors and stockholders in May 1992, and assumed by Regency at the time of
the Merger.
The SAR Plan provides that upon award, 25% of the units vest on each of the
first four anniversaries of the award date and vested units must be exercised
before the fifth anniversary of the award. All outstanding units fully vested on
January 1, 1995. Upon exercise, the awardee is entitled to receive the
difference between the base value and the market value on the date the units are
exercised, in cash or stock, at the Company's option. During 1995, the Company
discontinued the SAR Plan and settled all outstanding units for $1,628,000 cash
and 55,310 shares. This resulted in a charge to income of $534,000 during 1995.
The following is a summary of the SAR Plan (as adjusted by the Exchange
Ratio due to the Merger):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1995
- -------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Units outstanding at beginning of the year.......................... 236,430 236,430
Granted............................................................. -- --
Settled............................................................. -- (236,430)
Canceled............................................................ -- --
----------- -----------
----------- -----------
Units outstanding at end of the year................................ 236,430 --
----------- -----------
----------- -----------
Units exercisable at end of the year................................ 177,322 --
----------- -----------
----------- -----------
Unit price of outstanding units..................................... $ 1.41 --
----------- -----------
----------- -----------
Unit price of settled units......................................... -- $ 1.41
----------- -----------
----------- -----------
</TABLE>
F-80
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT SAVINGS PLAN
Regency sponsors an employee retirement savings plan under Section 401(k) of
the Internal Revenue Code. All employees who are regularly scheduled to work 20
hours or more per week, and complete 90 days of service are eligible to
participate. Participants can contribute, on a pre-tax basis, up to 15% of their
earnings to the plan (subject to certain limitations), for which the Company
matched 15% of the first 3% of contributions made for persons with less than
three years of service and 25% of the first 5% for all others. The Company's
contributions are subject to a four-year vesting period. Matching contributions
made by the Company for the years ended December 31, 1994, 1995 and 1996 were
approximately $279,000, $471,000, and $697,000, respectively.
12. MERGER AND RESTRUCTURING EXPENSES
All fees and expenses related to the Merger and to the consolidation and
restructuring of the combining companies during the year ended December 31,
1994, were expensed as required under the pooling-of-interests accounting
method.
The following is a summary of the merger and restructuring expenses,
separated into cash and non-cash items (in thousands):
<TABLE>
<CAPTION>
CASH NON-CASH TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Severance.................................................. $ 4,394 $ -- $ 4,394
Management information, accounting, and operational
integration.............................................. 2,373 -- 2,373
Investment banking fees.................................... 1,400 -- 1,400
Value of assets written off................................ -- 777 777
Legal fees................................................. 612 -- 612
Mailing and printing costs................................. 501 -- 501
Merger bonuses............................................. 500 -- 500
Accounting fees............................................ 440 -- 440
Former Care director and officer liability insurance....... 550 -- 550
Miscellaneous.............................................. 453 -- 453
--------- ----------- ---------
11,223 777 12,000
--------- ----------- ---------
Duplicate facility disposals:
Operating losses......................................... 581 -- 581
Value of assets written off.............................. -- 1,569 1,569
Loss on disposals........................................ 500 -- 500
--------- ----------- ---------
1,081 1,569 2,650
--------- ----------- ---------
--------- ----------- ---------
Total...................................................... $ 12,304 $ 2,346 $ 14,650
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
As of December 31, 1994, the remaining accrual relating to merger and
restructuring expenses was $4,452,000 including cash and non-cash items of
$2,800,000 and $1,700,000, respectively. The remaining accrual consisted of a
provision for duplicate facility disposals of $2.3 million, severance costs of
$1.5 million, investment banking fees of $126,000, and other costs totaling
$545,000. All remaining costs were utilized during 1995. (See Note 14.)
13. ACQUISITIONS
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, composed of $3.2 million cash and a $2.6
million note payable.
F-81
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ACQUISITIONS (CONTINUED)
Effective February 1, 1996, the Company acquired leasehold interests in 18
health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and
one in Tennessee) with a $763,000 note payable and an enteral feeding business
for $1.5 million cash from businesses affiliated with Liberty. In addition, the
Company paid $400,000 cash for the inventory of Liberty. A portion of the
purchase was funded with notes payable, which may be reduced as a result of
certain seller liabilities and audit adjustments. Escrow accounts established at
the time of purchase were funded with $2.96 million for payment on the notes
payable and are included in other assets on the accompanying consolidated
balance sheet as of December 31, 1996.
On April 1, 1996, the Company completed the acquisition of the assets of
Buena Vista Nursing Center ("Buena Vista"), a health care facility with 64
skilled nursing beds and 22 assisted living beds, located in Lexington, North
Carolina. The purchase price was $2.875 million, consisting of $2.675 million in
cash and a $200,000 note payable. Payment of the note is dependent upon Buena
Vista attaining certain financial targets.
On July 6, 1995, the Company acquired all of the stock of SCRS &
Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of
which $3.4 million is represented by a promissory note which was paid in January
1996. SCRS provides contract rehabilitation services to Company operated and
third party healthcare facilities.
All acquisitions during 1995 and 1996 were accounted for under the purchase
method of accounting.
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 acquisitions of Liberty and
Liberty-affiliated businesses for the years ended December 31, 1995 and 1996, as
if such acquisitions had been consummated on January 1, 1995 (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net operating revenue............................................... $ 495,690 $ 564,856
Total costs and expenses............................................ 483,020 553,264
----------- -----------
Income before provision for income taxes............................ 12,670 11,592
Provision for income taxes.......................................... 7,676 4,856
----------- -----------
Net income before extraordinary item................................ $ 4,994 $ 6,736
----------- -----------
----------- -----------
Income before extraordinary item per common share................... $ 0.30 $ 0.41
----------- -----------
----------- -----------
</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 effect of the other acquisitions is
immaterial.
14. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During 1996 the Company developed a comprehensive strategic plan impacting
all of its operating divisions. In connection with this strategic plan the
Company has undertaken initiatives designed to reengineer the operating model
through which it manages its business. This reengineering effort is focused on
identifying and implementing the most effective and efficient model for managing
the delivery of products and services to the Company's patients on a local
market by market basis. The
F-82
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
plan includes consolidating and automating the Pharmacy operations,
consolidating the Home Health operations, automating and streamlining certain
functions in the nursing center operations, and streamlining the corporate
support structure. Through this process the Company identified approximately 350
non-direct patient care positions across all divisions, including the Corporate
Office, which will be eliminated. Of the positions identified, approximately 30
were eliminated during 1996. The Company began the implementation phase of this
plan during the fourth quarter of 1996.
Additionally, the Company has identified the implementation of significant
management information system (MIS) enhancements as a critical component of its
overall strategic plan. Implementing these MIS initiatives will be an integral
part of the realization of an effective and efficient management model, through
which the Company can monitor its patients, from both a cost and a clinical
perspective, seamlessly throughout the continuum of care and across all
divisions of the Company. Furthermore, these MIS initiatives will provide
management with complete patient information within each local market, which is
vital in the managed care environment of today and in the future. This
implementation is expected to continue during 1997 and into 1998. Several of the
Company's current management information systems will be replaced in connection
with the MIS initiatives. The Company has also identified certain impaired
property and equipment and intangible assets and future contractual obligations
that will have no value to the Company under the new operating model due to
obsolescence, consolidation of locations, and streamlining of processes.
Accordingly, the Company has written off certain long-term assets and accrued
certain obligations, including obligations related to leases.
The Company has evaluated the reserve established in 1995 for the
disposition of 13 facilities located in California discussed below and
allowances established for certain notes and other non-patient receivables.
Based on the actual sale of six of the 13 facilities, and the estimated sales
prices for the remaining seven facilities, the Company has reduced the reserve
for the disposition of 13 facilities as of December 31, 1996. Earnings before
income taxes for the remaining seven facilities were $316,000, $765,000 and
$940,000 for 1994, 1995 and 1996, respectively. In addition, an allowance was
established for certain notes and non-patient receivables that arose in prior
years, which were not collected as anticipated by the Company and certain
long-term assets were written down to net realizable value.
The following summarizes the impact of the above items on the Company's
results of operations for 1996:
<TABLE>
<CAPTION>
RESTRUCTURING NON-RECURRING TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
MIS and other property and equipment written
off......................................... $ 2,057,000 $ 2,320,000 $ 4,377,000
Goodwill and other assets written off......... 2,300,000 1,255,000 3,555,000
Future lease and other obligations............ 325,000 1,891,000 2,216,000
Severance (including $711,000 paid during
1996)....................................... 1,377,000 -- 1,377,000
Allowance for notes and other receivables..... -- 1,010,000 1,010,000
Reengineering costs incurred.................. 511,000 -- 511,000
Reduction of reserve for assets held for
sale........................................ -- (1,763,000) (1,763,000)
------------- -------------- --------------
$ 6,570,000 $ 4,713,000 $ 11,283,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
F-83
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RESTRUCTURING AND OTHER NON-RECURRING CHARGES (CONTINUED)
In 1995, the Company determined to dispose of 13 facilities located in
California. In addition, during 1995 the Company completed the disposition of
duplicate facilities identified during 1994 as part of the merger and
restructuring costs, the Simi Valley healthcare facility damaged in the Southern
California (Northridge) earthquake and one other facility, and exchanged
leasehold interests in three nursing centers in New Mexico for leasehold
interest in four nursing centers in Ohio. These transactions resulted in a net
charge of $9,000,000 during 1995. This charge was based upon management's best
estimates of the amounts expected to be realized on the disposition of those
facilities with carrying amounts in excess of estimated fair value less selling
costs.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
---------------- -----------
<S> <C> <C>
Cash and cash equivalents...................................... $ 22,875 $ 22,875
---------------- -----------
---------------- -----------
Mortgage notes receivable...................................... $ 1,937 $ 1,937
---------------- -----------
---------------- -----------
Long-term debt, including current portion...................... $ 184,908 $ 190,139
---------------- -----------
---------------- -----------
</TABLE>
The carrying amount approximates fair value for cash and cash equivalents
because of the short maturity of these instruments. The fair value of mortgage
notes receivable was estimated based on the present value of future cash flows
using current rates the Company could obtain on notes with similar
characteristics and maturities. The fair value for the Company's long-term debt
was estimated based on the quoted market prices for the same or similar issues
or on the present value of future cash flows using current rates the Company
could obtain on debt with similar characteristics and maturities.
16. SUBSEQUENT EVENTS
Effective January 1, 1997, the Company acquired four acute rehabilitation
hospitals, eleven outpatient rehabilitation clinics and six neurological
treatment centers from Horizon/CMS Healthcare Corporation ("CMS"). The purchase
price was $43.0 million, made up of a cash payment of $36.3 million and notes
payable totaling $6.7 million.
F-84
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenue........................... $ 129,963 $ 137,632 $ 144,103 $ 146,352 $ 558,050
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item......... $ 2,737 $ 3,065 $ 3,641 $ (3,044) $ 6,399
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ 2,737 $ 3,065 $ 2,448 $ (3,044) $ 5,206
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income (loss) per share -- Primary:
Income (loss) before extraordinary item....... $ .16 $ .19 $ .22 $ (.19) $ .39
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ .16 $ .19 $ .15 $ (.19) $ .32
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income (loss) per share -- Fully Diluted:
Income (loss) before extraordinary item....... $ .16 $ .18 $ .22 $ (.19) $ .39
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ .16 $ .18 $ .15 $ (.19) $ .32
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Effective January 2, 1996, the Company completed the acquisition of the
assets of Assist-A-Care, a pharmacy located in San Diego, California. The
purchase price was $5.8 million, composed of $3.2 million in cash and a $2.6
million note payable.
Effective February 1, 1996, the Company acquired leasehold interests in 18
health care facilities in Tennessee and North Carolina with 2,375 beds from
Liberty Healthcare Limited Partnership ("Liberty") through an asset purchase for
$39.3 million cash and a note payable for $2.2 million. The Company also
acquired Executive Pharmacy (consisting of one pharmacy in North Carolina and
one in Tennessee) with a $763,000 note payable and an enteral feeding business
for $1.5 million cash from businesses affiliated with Liberty. In addition, the
Company paid $400,000 cash for the inventory of Liberty.
On April 1, 1996, the Company completed the acquisition of the assets of
Buena Vista Nursing Center in Lexington, North Carolina. The purchase price was
$2.875 million, consisting of $2.675 million in cash and a note payable for
$200,000.
On July 29, 1996, the Company completed the redemption of all $48.9 million
of its outstanding Convertible Subordinated Debentures for cash at such amount.
The redemption reduces fully diluted shares by 3.9 million shares and results in
an extraordinary loss on extinguishment of debt of $868,000, net of tax,
resulting from the write-off of unamortized underwriting costs.
Effective September 30, 1996, the Company refinanced three of its IRBs with
an aggregate outstanding principal balance of $7,560,000 with three new issues
of tax exempt IRBs. The refinancing resulted in an extraordinary loss on
extinguishment of debt of $325,000, net of tax, resulting from the write-off of
unamortized underwriting costs and a call premium paid.
F-85
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED): (CONTINUED)
During the fourth quarter of 1996, the Company recorded an $11.3 million
charge related to restructuring and other non-recurring items as discussed in
Note 14.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenue............................. $ 97,548 $ 99,766 $ 107,492 $ 111,287 $ 416,093
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item........... $ 3,087 $ 1,780 $ 4,042 $ (4,455) $ 4,454
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Net income (loss)................................. $ 3,087 $ 1,780 $ 4,042 $ (6,064) $ 2,845
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Income (loss) per share -- Primary:
Income (loss) before extraordinary
item........................................... $ .19 $ .11 $ .24 $ (.27) $ .27
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ .19 $ .11 $ .24 $ (.36) $ .17
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Income (loss) per share -- Fully Diluted:
Income (loss) before extraordinary
item........................................... $ .18 $ .11 $ .22 $ (.27) $ .27
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ .18 $ .11 $ .22 $ (.36) $ .17
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
Effective July 6, 1995, the Company acquired all of the stock of SCRS &
Communicology, Inc. ("SCRS") for a total purchase price of $13.5 million, of
which $3.4 million is represented by a promissory note which was paid in January
1996. The acquisition was accounted for under the purchase method of accounting.
SCRS provides rehabilitation services to Company operated and third party
healthcare facilities.
In May 1995, a class action lawsuit which had been filed against the Company
in July 1994, was settled for $9,000,000. The Company's portion of this
settlement, together with related legal fees and other costs, resulted in a
pre-tax charge of $3,098,000, which is included in the consolidated statement of
operations for the quarter ended June 30, 1995.
In October 1995, the Company repaid its $30 million, 8.10% Senior Secured
Notes resulting in costs and prepayment penalties of $2,681,000 ($1,609,000 net
of tax), classified as an extraordinary item in the quarter ended December 31,
1995.
In December 1995, the Company recorded a $9,000,000 charge, primarily
related to the disposition of certain facilities (See Note 14).
F-86
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31. JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 22,875 $ 13,171
Restricted cash..................................................................... 4,425 6,308
Accounts receivable, net of allowances of $4,723 and $5,751 at December 31, 1996 and
June 30, 1997, respectively........................................................ 80,949 95,029
Estimated third party settlements................................................... 10,180 13,957
Notes and other receivables......................................................... 1,355 1,254
Deferred income taxes............................................................... 6,898 6,897
Assets held for sale................................................................ 6,915 6,770
Other current assets................................................................ 7,819 8,578
------------ -----------
Total current assets.............................................................. 141,416 151,964
------------ -----------
PROPERTY AND EQUIPMENT:
Land................................................................................ 21,207 24,439
Building and improvements........................................................... 100,120 126,461
Leasehold interests................................................................. 19,629 19,629
Equipment........................................................................... 38,054 48,635
------------ -----------
179,010 219,164
Less accumulated depreciation and amortization...................................... (43,938) (49,905)
------------ -----------
Total property and equipment...................................................... 135,072 169,259
------------ -----------
OTHER ASSETS:
Mortgage notes receivable, net of allowances of $1,352 at
December 31, 1996 and June 30, 1997................................................ 1,014 528
Goodwill, net of accumulated amortization of $3,700 and $5,362 at December 31, 1996
and June 30,1997, respectively..................................................... 53,753 59,466
Other assets, net of accumulated amortization of $3,736 and $6,253 at December 31,
1996 and June 30, 1997, respectively............................................... 22,321 27,435
------------ -----------
Total other assets................................................................ 77,088 87,429
------------ -----------
$ 353,576 $ 408,652
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-87
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31. JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt................................................... $ 2,418 $ 5,959
Accounts payable.................................................................... 24,958 22,701
Accrued expenses.................................................................... 8,290 10,608
Accrued compensation................................................................ 26,253 28,955
Accrued workers' compensation....................................................... 4,338 5,904
Deferred revenue.................................................................... 2,407 1,735
Accrued interest.................................................................... 5,578 5,508
------------ -----------
Total current liabilities......................................................... 74,242 81,370
------------ -----------
LONG-TERM DEBT, NET OF CURRENT PORTION................................................ 182,490 222,927
OTHER LIABILITIES AND NONCURRENT RESERVES............................................. 10,878 10,656
DEFERRED INCOME TAXES................................................................. 5,018 7,055
------------ -----------
Total liabilities................................................................. 272,628 322,008
------------ -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized -- 35,000 shares, 15,919 and 15,879 shares
issued and outstanding at December 31, 1996 and June 30, 1997, respectively, net of
862 and 1,008 shares held in treasury, respectively................................ 168 169
Additional paid-in capital.......................................................... 52,031 51,050
Retained earnings................................................................... 28,749 35,425
------------ -----------
Total stockholders' equity........................................................ 80,948 86,644
------------ -----------
$ 353,576 $ 408,652
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-88
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET OPERATING REVENUE......................................... $ 137,102 $ 163,191 $ 266,075 $ 322,638
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses.......................................... 109,577 129,667 216,036 257,352
Corporate general and administrative........................ 8,607 9,186 14,337 17,891
Rent expense................................................ 6,178 8,629 11,690 17,001
Depreciation and amortization............................... 3,836 4,846 7,186 9,442
Interest expense, net....................................... 3,664 5,178 6,826 10,170
----------- ----------- ----------- -----------
Total costs and expenses.................................. 131,862 157,506 256,075 311,856
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST AND PROVISION FOR INCOME
TAXES........................................................ 5,240 5,685 10,000 10,782
MINORITY INTEREST............................................. -- (86) -- (163)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES...................... 5,240 5,771 10,000 10,945
PROVISION FOR INCOME TAXES.................................... 2,175 2,250 4,198 4,268
----------- ----------- ----------- -----------
NET INCOME.................................................... $ 3,065 $ 3,521 $ 5,802 $ 6,677
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
INCOME PER SHARE:
Primary..................................................... $ 0.19 $ 0.22 $ 0.35 $ 0.42
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully Diluted............................................... $ 0.18 $ 0.22 $ 0.33 $ 0.42
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OF COMMON STOCK AND EQUIVALENTS:
Primary..................................................... 16,382 15,997 16,617 15,929
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully Diluted............................................... 20,341 16,160 20,573 16,020
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-89
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 5,802 $ 6,677
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 7,186 9,442
Deferred income taxes and charge in lieu of taxes.................................... 2,468 2,038
Other, net........................................................................... 296 --
Change in cash from changes in assets and liabilities, excluding effects of
acquisitions and dispositions:
Accounts receivable................................................................ (20,720) (8,541)
Estimated third party settlements.................................................. (7,160) (163)
Other current assets............................................................... 335 (1,313)
Current and other liabilities...................................................... 3,203 1,062
---------- ----------
Net cash provided by (used in) operating activities................................ (8,590) 9,202
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions........................................................................... (48,183) (44,989)
Purchases of property and equipment.................................................... (5,600) (6,216)
Collection on mortgage notes receivable................................................ 109 889
Changes in other assets, net........................................................... (3,271) 4,380
---------- ----------
Net cash used in investing activities.............................................. (56,945) (45,936)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt............................................................. (4,898) (14,490)
Proceeds from issuance of long-term debt............................................... 48,582 49,000
Workers compensation trust funding..................................................... (10,637) (6,500)
Purchase of treasury stock............................................................. (5,082) (1,442)
Proceeds from exercise of options...................................................... 232 462
---------- ----------
Net cash provided by financing activities.......................................... 28,197 27,030
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................ (37,338) (9,704)
CASH AND CASH EQUIVALENTS, beginning of period........................................... 104,238 22,875
---------- ----------
CASH AND CASH EQUIVALENTS, end of period................................................. $ 66,900 $ 13,171
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................... $ 8,380 $ 11,190
---------- ----------
---------- ----------
Cash paid during the period for income taxes........................................... $ 1,360 $ 2,287
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-90
<PAGE>
REGENCY HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1996:
The Company acquired Assist-A-Care Pharmacy in San Diego, California and
issued a promissory note in the amount of $2.6 million as part of the
purchase price.
The Company issued a promissory note in the amount of $2.2 million in
connection with the acquisition of 18 healthcare facilities in Tennessee
and North Carolina.
The Company acquired Executive Pharmacy and issued a promissory note in
the amount of $763,000.
During the six months ended June 30, 1997:
The Company issued a promissory note in the amount of $6.7 million in
connection with the acquisition of four acute rehabilitation hospitals,
ten outpatient rehabilitation clinics and six neurological treatment
centers in California.
The Company acquired HHC Health Group, Inc., a home health and infusion
therapy provider and issued a note payable in the amount of $.6 million.
The Company issued a promissory note in the amount of $.3 million in
connection with the acquisition of Advanced Physical Therapy, Inc.
The Company acquired Rainbow Medical LLC, a pharmacy located in Las
Vegas, Nevada and issued a note payable in the amount of $.7 million.
The Company acquired Health Fitness Physical Therapy, Inc., and issued
notes payable in the amount of $.7 million.
The Company issued a promissory note in the amount of $.2 million in
connection with the acquisition of Peachwood Physical Therapy, Inc.
The Company acquired Adams & Schmidt Sports Therapy, and issued a note
payable in the amount of $.4 million.
F-91
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have not been presented. The accompanying unaudited
financial statements and related notes should be read in conjunction with the
consolidated financial statements and related notes included in Regency Health
Services, Inc.'s ("Regency" or the "Company") 1996 Annual Report on Form 10-K.
In the opinion of the management of Regency, all material adjustments
necessary to present fairly the Company's financial condition, results of
operations, and changes in financial position have been made. All material
intercompany balances, profits, and transactions have been eliminated. The
consolidated results of operations presented are not necessarily indicative of
the consolidated results for a full year.
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 and
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 have been reclassified in the 1996 financial statements to
conform to the 1997 presentation.
2. ACQUISITIONS
Effective January 1, 1997, the Company acquired four acute rehabilitation
hospitals, ten outpatient rehabilitation clinics and six neurological treatment
centers from Horizon/CMS Healthcare Corporation ("CMS"). The purchase price was
$43.0 million, made up of a cash payment of $36.3 million and notes payable
totaling $6.7 million. The Company funded the acquisition with borrowings
against the Amended and Restated Credit Agreement dated December 20, 1996 with
NationsBank of Texas, N.A. as agent for a group of banks (the "NationsBank
Credit Agreement"). Two of the acquired hospitals have joint venture partners
with 30% and 50% interests. Accordingly, the income statement reflects minority
interest related to the joint venture partners' share of the revenues and
expenses of the two hospitals. The purchase accounting for this transaction has
not yet been finalized.
On April 1, 1997, the Company acquired HHC Health Group, Inc., a home health
and infusion therapy provider with four locations in California, for $2.3
million, consisting of a cash payment of $1.7 million and a note payable of $.6
million.
On May 1, 1997, the Company acquired Asher Clinic, an outpatient clinic in
California, for $1.7 million in cash.
On May 1, 1997, the Company also acquired Advanced Physical Therapy, Inc.,
which operates three outpatient clinics in California, for $1.7 million,
consisting of a cash payment of $1.4 million and a note payable of $.3 million.
On May 16, 1997, the Company acquired Rainbow Medical LLC, a pharmacy
located in Las Vegas, Nevada for $1.9 million, consisting of $1.2 million in
cash and a note payable of $.7 million.
Effective June 1, 1997, the Company acquired Health Fitness Physical
Therapy, Inc., which operates seven outpatient clinics in California for $1.8
million, consisting of a cash payment of $1.1 million and notes payable of $.7
million.
F-92
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
Effective June 1, 1997, the Company acquired Peachwood Physical Therapy,
Inc., an outpatient clinic in California for $.7 million, $.5 million in cash
and a note payable for $.2 million.
Effective June 1, 1997, the Company acquired Adams & Schmidt Sports Therapy,
which operates four outpatient clinics in California for $1.2 million,
consisting of a cash payment of $.8 million and a note payable for $.4 million.
Effective June 12, 1997, the company acquired Hospice of the Pacific, a
hospice provider in California for $.4 million in cash.
These transactions were accounted for using the purchase method of
accounting under generally accepted accounting principles. Revenues and expenses
are included in the accompanying financial statements subsequent to the
acquisition date.
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 the four acute rehabilitation
hospitals, ten outpatient rehabilitation clinics and six neurological treatment
centers for the six months ended June 30, 1996 and 1997 as if such acquisition
had been consummated on January 1, 1996. All other acquisitions are considered
immaterial and are not included in the pro forma condensed consolidated
statements of earnings.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1997
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net operating revenue......................................................... $ 297,366 $ 322,638
Total costs and expenses (including minority interest)........................ 286,932 311,693
----------- -----------
Income before provision for income taxes...................................... 10,434 10,945
Provision for income taxes.................................................... 4,380 4,268
----------- -----------
Net income.................................................................... $ 6,054 $ 6,677
----------- -----------
----------- -----------
Income per common share:
Primary..................................................................... $ 0.36 $ 0.42
----------- -----------
----------- -----------
Fully Diluted............................................................... $ 0.34 $ 0.42
----------- -----------
----------- -----------
</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.
3. DISPOSITIONS
In connection with the 13 facilities identified for disposition by the
Company during the fourth quarter of 1995, the Company disposed of an 81-bed
facility in Pomona, California effective January 1, 1997 for a nominal amount,
resulting in a $233,000 charge against the reserve established for such
dispositions.
4. WORKERS' COMPENSATION CLAIMS TRUST
In 1995, the Company established a revocable workers' compensation claims
trust ("Trust") to pre-fund its workers' compensation obligations. The Trust was
funded for fiscal 1995 in March 1996
F-93
<PAGE>
REGENCY HEALTH SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. WORKERS' COMPENSATION CLAIMS TRUST (CONTINUED)
with approximately $10.6 million from available cash. In March 1997, the Company
pre-funded its fiscal 1996 workers' compensation obligations with approximately
$6.5 million from available cash. Of the remaining $10.0 million in the Trust at
June 30, 1997, $6.3 million was classified as current restricted cash and $3.7
million was classified as other long-term assets.
5. SUBSEQUENT EVENT
On July 1, 1997, the Company acquired Pacific Beach Physical Therapy, Inc.,
an outpatient clinic in California, for $.6 million, $.5 million in cash and a
note payable for $.1 million. This transaction was accounted for under the
purchase method of accounting.
On July 26, 1997, the Company entered into an Agreement and Plan of Merger
with Sun Healthcare Group, Inc., a Delaware corporation ("Sun Healthcare"),
whereby Sun Healthcare will purchase all of the outstanding shares of the
Company for $22 per share. The transaction is expected to close during fourth
quarter 1997, however there are certain conditions which must be satisfied for
the transaction to be finalized.
6. EARNINGS PER SHARE
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This
statement is effective for both interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed in the
same way as fully diluted EPS, except that the calculation now uses the average
share price for the reporting period to compute dilution from options under the
treasury stock method. The Company will adopt the new standard in its reporting
for the year ending December 31, 1997. Management does not believe that adoption
of this standard will have a significant impact on earnings per share.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement is effective for annual
reporting periods beginning after December 15, 1997 and is required for interim
reporting periods beginning in the second year of application. SFAS No. 131
defines segments and requires disclosure of certain items, including revenues,
assets and profit and loss, related to each segment. The Company will adopt the
new standard in its reporting for the year ending December 31, 1998.
F-94
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE UNDER THE RELIED UPON AS HAVING
BEEN AS AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS
NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 6
Incorporation of Certain Documents by
Reference..................................... 6
Prospectus Summary............................. 7
Risk Factors................................... 15
Use of Proceeds................................ 19
Ratio of Earnings to Fixed Charges............. 19
Selected Consolidated Financial Data........... 20
The Exchange Offer............................. 22
Description of New Notes....................... 29
Certain U.S. Federal Income Tax Consequences... 53
Plan of Distribution........................... 53
Legal Matters.................................. 54
Experts........................................ 54
Index to Financial Statements.................. F-1
</TABLE>
[SUN HEALTHCARE LOGO]
[SUN HEALTHCARE GROUP INC.]
OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED
NOTES DUE 2007
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED
FOR ANY AND ALL OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED
NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
OCTOBER , 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
a court to award or a corporation's Board of Directors to grant indemnification
to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Act").
As authorized by Section 102(b)(7) of the DGCL, Sun's Certificate of
Incorporation limits the personal liability of each Sun director to Sun or its
stockholders for monetary damages for breach of his fiduciary duty as a director
except to the extent such limitation of liability is not permitted under the
DGCL. The DGCL provides that the liability of a director may not be limited (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for liability for
payment of dividends or stock purchases or redemptions in violation of the DGCL
or (iv) for any transaction from which the director derived an improper personal
benefit.
In addition, Sun's Bylaws provide that Sun shall indemnify any and all of
its directors, or former directors, to the fullest extent permitted by law
against claims and liabilities to which such persons may become subject. The
DGCL provides that indemnification is permissible only when the director acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
DGCL also permits indemnification in respect of any claim, issue, or matter as
to which such person shall have been adjudicated to be liable to the corporation
to the extent that the Delaware Court of Chancery or the court in which such
action or suit was brought has determined upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity. Sun has also entered into
indemnification agreements with certain of its officers and with its directors
and also provides insurance coverage to such parties.
Sun has entered into a Registration Rights Agreements with certain of the
Holders. Such Registration Rights Agreement provides for indemnification by such
Holders and its officers and directors, and by the Company of such Holders, for
certain liabilities arising under the Act or otherwise.
ITEM 21. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- ------------------ ----------------------------------------------------------------------------------------------
<S> <C>
Exhibit 1.1*** Purchase Agreement, dated as of July 1, 1997, among Sun Healthcare Group, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, J.P.
Morgan Securities Inc. and NationsBanc Capital Markets, Inc., as Initial Purchasers
Exhibit 4.1*** Form of 9 1/2% Senior Subordinated Notes due 2007 (included in Exhibit 4.2)
Exhibit 4.2*** Indenture, dated as of July 8, 1997, among Sun Healthcare Group, Inc., the Guarantors named
therein and First Trust National Association, as Trustee, relating to 9 1/2% Senior
Subordinated Notes due 2007
Exhibit 4.3*** Registration Rights Agreement, dated as of July 8, 1997, between Sun Healthcare Group, Inc.,
the Guarantors named therein and Donaldson, Lufkin & Jenrette Securities Corporation, Credit
Suisse First Boston Corporation, J.P. Morgan Securities Inc. and NationsBanc Capital
Markets, Inc., as Initial Purchasers
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- ------------------ ----------------------------------------------------------------------------------------------
<S> <C>
Exhibit 5.1*** Opinion of Robert F. Murphy, Senior Vice President and General Counsel of Sun Healthcare
Group, Inc., the Guarantors named therein, relating to the New Notes and Guarantees
Exhibit 12** Computation of Ratio of Earnings to Fixed Charges
Exhibit 23.1** Consent of Arthur Andersen LLP
Exhibit 23.2*** Consent of Robert F. Murphy, Senior Vice President and General Counsel of Sun Healthcare
Group, Inc.
Exhibit 24.1** Powers of Attorney (included on page II-4 of this Registration Statement)
Exhibit 25.1*** Statement of Eligibility of First Trust National Association, as Trustee, relating to the
Senior Subordinated Notes due 2007, on Form T-1
Exhibit 99.1** Form of Letter of Transmittal
Exhibit 99.2** Form of Notice of Guaranteed Delivery
Exhibit 99.3** Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
Exhibit 99.4** Form of Letter to Clients
</TABLE>
- ------------------------
* Previously filed.
** Filed herewith.
*** To be filed by Amendment.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3 and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished
to the Commission by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934, that are incorporated by
reference in the Registration Statement.
II-2
<PAGE>
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses is incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b))(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Albuquerque, New Mexico on the 10th day of October, 1997.
<TABLE>
<S> <C> <C>
SUN HEALTHCARE GROUP, INC. ("SUN")
By: /s/ MARK G. WIMER
------------------------------------------
Mark G. Wimer
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the dates indicated. Each person whose signature appears below
hereby appoints each of Robert Murphy and Robert D. Woltil, as his attorney-
in-fact to sign this Registration Statement on his behalf individually and in
the capacity stated below and to file all supplements, amendments and
post-effective amendments to this Registration Statement, and any and all
instruments or documents filed as a part of or in connection with this
Registration Statement or any amendment or supplement thereto, and any such
attorney-in-fact may make such changes and additions to this Registration
Statement as such attorney-in-fact may deem necessary or appropriate.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ANDREW L. TURNER Chairman of the Board and October 10, 1997
---------------------------- Chief Executive Officer
Andrew L. Turner of Sun Healthcare Group,
Inc.
/s/ MARK G. WIMER President and Chief October 10, 1997
---------------------------- Operating Officer of Sun
Mark G. Wimer Healthcare Group, Inc.;
Chairman of the Board,
Senior Vice President
and Director of each
subsidiary listed on
Annex C
/s/ ROBERT D. WOLTIL Chief Financial Officer October 10, 1997
---------------------------- and Director of Sun
Robert D. Woltil Healthcare Group, Inc.;
President, Senior Vice
President, Chief
Financial Officer and
Director of Sun Lane
Purchase Corporation;
Senior Vice President
and Chief Financial
Officer of Cal Med,
Inc., HC, Inc., Masthead
Corporation and each
subsidiary listed on
Annex A; President,
Chairman of the Board,
Chief Financial Officer
and Director of Sunmark
of New Mexico, Inc.;
President and Director
of SHG International
Holdings Inc.; and
Director of Masthead
Corporation, Sun Quest
Consulting, Inc., Sun
Solution, Inc. and each
subsidiary listed on
Annexes C, D, and E
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ WILLIAM C. WARRICK Vice President/Finance of October 10, 1997
---------------------------- Sun Healthcare Group,
William C. Warrick Inc., and Vice President
and Controller of each
subsidiary listed in
Annex A
/s/ ROBERT A. LEVIN Senior Vice October 10, 1997
---------------------------- President/Rehabilitation
Robert A. Levin Services and Director of
Sun Healthcare Group,
Inc.; Acting President,
Chairman of the Board,
Senior Vice President
and Director of HTA of
New Jersey, Inc.;
Chairman of the Board,
Senior Vice President,
and Director of each
subsidiary listed on
Annex E; and Director of
Sun Quest Consulting,
Inc.
/s/ WARREN C. SCHELLING Senior Vice October 10, 1997
---------------------------- President/Pharmaceutical
Warren C. Schelling Services and Director of
Sun Healthcare Group,
Inc.; and Chairman of
the Board, Senior Vice
President, and Director
of each subsidiary
listed on Annex D
Director of Sun Healthcare October 10, 1997
---------------------------- Group, Inc.
Zev Karkomi
Director of Sun Healthcare October 10, 1997
---------------------------- Group, Inc.
John E. Bingaman
/s/ JAMES R. TOLBERT, III Director of Sun Healthcare October 10, 1997
---------------------------- Group, Inc.
James R. Tolbert, III
/s/ LOIS E. SILVERMAN Director of Sun Healthcare October 10, 1997
---------------------------- Group, Inc.
Lois E. Silverman
/s/ R. JAMES WOOLSEY Director of Sun Healthcare October 10, 1997
---------------------------- Group, Inc.
R. James Woolsey
/s/ MARTIN G. MAND Director of Sun Healthcare October 10, 1997
---------------------------- Group, Inc.
Martin G. Mand
/s/ DALE ZULAUF President of each October 10, 1997
---------------------------- subsidiary listed on
Dale Zulauf Annex B
/s/ MICHAEL SLICE President of Pharmacy October 10, 1997
---------------------------- Factors of California,
Michael Slice Inc., Pharmacy Factors
of Florida, Inc.,
Pharmacy Factors of
Texas, Inc. and
SunFactors, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DAVID KNIESS President of Special October 10, 1997
---------------------------- Medical Services, Inc.,
David Kniess Sundance Rehabilitation
Corporation, SunSpectrum
Outpatient
Rehabilitation --
Concord, Inc., HC, Inc.
and Cal-Med, Inc.
/s/ JERRY MEYER President and Chief October 10, 1997
---------------------------- Executive Officer of
Jerry Meyer SunBridge, Inc.
/s/ TOM R. FUTCH President and Chief October 10, 1997
---------------------------- Executive Officer of Sun
Tom R. Futch Care Respiratory
Services, Inc.
/s/ MICHAEL S. WESTMILLER President of SunQuest October 10, 1997
---------------------------- Consulting, Inc.
Michael S. Westmiller
/s/ JOHN W. DRISCOLL President of Sunscript October 10, 1997
---------------------------- Pharmacy Corporation
John W. Driscoll
/s/ ROBERT F. MURPHY President and Director of October 10, 1997
---------------------------- Masthead Corporation and
Robert F. Murphy Director of SHG
International Holdings,
Inc. and Sunmark of New
Mexico, Inc.
/s/ PETER STEENBLOCK President and Chief October 10, 1997
---------------------------- Executive Officer of
Peter Steenblock SunAlliance, Inc.
/s/ JULIE COLLINS Director of Masthead October 10, 1997
---------------------------- Corporation and Sun Lane
Julie Collins Purchase Corporation
/s/ TIMOTHY J. COBURN President, Chief Executive October 10, 1997
---------------------------- Officer and Director of
Timothy J. Coburn Golan Healthcare Group,
Inc.
/s/ RAY FITCHETTE President of Sun Choice October 10, 1997
---------------------------- Medical Supply, Inc.
Ray Fitchette
/s/ KENNETH NOONAN Director of Sun Solution, October 10, 1997
---------------------------- Inc.
Kenneth Noonan
</TABLE>
II-6
<PAGE>
ANNEX A
Bay Colony Health Service, Inc.
Bergen Eldercare, Inc.
Clipper Home Affiliates, Inc.
Clipper Home of North Conway, Inc.
Clipper Home of Portsmouth, Inc.
Clipper Home of Rochester, Inc.
Clipper Home of Wolfeboro, Inc.
Community Re-Entry Services of Cortland, Inc.
Golan Healthcare Group, Inc.
G-WZ of Stamford, Inc.
Goodwin Nursing Home, Inc.
HTA of New Jersey, Inc.
Langdon Place of Dover, Inc.
Langdon Place of Exeter, Inc.
Langdon Place of Nashua, Inc.
Living Services, Inc.
LTC Staffinders, Inc.
Manatee Springs Nursing Center, Inc.
Mediplex Atlanta Rehabilitation Institute, Inc.
Mediplex of Colorado, Inc.
Mediplex of Concord, Inc.
Mediplex of Connecticut, Inc.
Mediplex of Kentucky, Inc.
Mediplex of Maryland, Inc.
Mediplex of Massachusetts, Inc.
Mediplex of New Hampshire, Inc.
Mediplex of New York, Inc.
Mediplex of Ohio, Inc.
Mediplex of Tennessee, Inc.
Mediplex of Virginia, Inc.
Mediplex Management, Inc.
Mediplex Management of Palm Beach County, Inc.
Mediplex Management of Texas, Inc.
Mediplex Rehabilitation of Massachusetts, Inc.
New Bedford Acquisition Corp.
New Bedford Nursing Center, Inc.
Nursing Home, Inc.
Oakview Treatment Centers of Kansas, Inc.
P.M.N.F. Management, Inc.
Pharmacy Factors of California, Inc.
Pharmacy Factors of Florida, Inc.
Pharmacy Factors of Texas, Inc.
Quality Care Holding Corp
Quality Nursing Care of Massachusetts, Inc.
SHG International Holdings, Inc.
Special Medical Services, Inc.
Spofford Land, Inc.
Sun Alliance, Inc.
SunBridge, Inc.
Sun Care Corp
SunCare Respiratory Services, Inc.
II-7
<PAGE>
ANNEX A CONTINUED
SunChoice Medical Supply, Inc.
Sundance Rehabilitation Corporation
SunFactors, Inc.
Sunmark of New Mexico
SunQuest Consulting, Inc.
Sunrise Rehab of Colorado, Inc.
Sunrise Healthcare of Colorado, Inc.
Sunrise Healthcare of Florida, Inc.
Sunrise Healthcare Corporation
SunScript Pharmacy Corporation
SunSolution, Inc.
SunSpectrum Outpatient Rehabilitation-Concord, Inc.
The Mediplex Group, Inc.
Valley View Psychiatric Services, Inc.
II-8
<PAGE>
ANNEX B
Bay Colony Health Service, Inc.
Bergen Eldercare, Inc.
Clipper Home Affiliates, Inc.
Clipper Home of North Conway, Inc.
Clipper Home of Portsmouth, Inc.
Clipper Home of Rochester, Inc.
Clipper Home of Wolfeboro, Inc.
Community Re-Entry Services of Cortland, Inc.
G-WZ of Stamford, Inc.
Goodwin Nursing Home, Inc.
Langdon Place of Dover, Inc.
Langdon Place of Exeter, Inc.
Langdon Place of Nashua, Inc.
Living Services, Inc.
LTC Staffinders, Inc.
Manatee Springs Nursing Center, Inc.
Mediplex Atlanta Rehabilitation Institute, Inc.
Mediplex of Colorado, Inc.
Mediplex of Concord, Inc.
Mediplex of Connecticut, Inc.
Mediplex of Kentucky, Inc.
Mediplex of Maryland, Inc.
Mediplex of Massachusetts, Inc.
Mediplex of New Hampshire, Inc.
Mediplex of New York, Inc.
Mediplex of Ohio, Inc.
Mediplex of Tennessee, Inc.
Mediplex of Virginia, Inc.
Mediplex Management, Inc.
Mediplex Management of Palm Beach County, Inc.
Mediplex Management of Texas, Inc.
Mediplex Rehabilitation of Massachusetts, Inc.
New Bedford Acquisition Corp.
New Bedford Nursing Center, Inc.
Nursing Home, Inc.
Oakview Treatment Centers of Kansas, Inc.
P.M.N.F. Managment, Inc.
Quality Care Holding Corp
Quality Nursing Care of Massachusetts, Inc.
Spofford Land, Inc.
Sun Care Corp
Sunrise Healthcare of Colorado, Inc.
Sunrise Healthcare of Florida, Inc.
Sunrise Healthcare Corporation
Sunrise Rehab of Colorado, Inc.
The Mediplex Group, Inc.
Valley View Psychiatric Services, Inc.
Worcester Nursing Center, Inc.
II-9
<PAGE>
ANNEX C
Bay Colony Health Service, Inc.
Bergen Eldercare, Inc.
Clipper Home Affiliates, Inc.
Clipper Home of North Conway, Inc.
Clipper Home of Portsmouth, Inc.
Clipper Home of Rochester, Inc.
Clipper Home of Wolfeboro, Inc.
Community Re-Entry Services of Cortland, Inc.
G-WZ of Stamford, Inc.
Goodwin Nursing Home, Inc.
Langdon Place of Dover, Inc.
Langdon Place of Exeter, Inc.
Langdon Place of Nashua, Inc.
Living Services, Inc.
LTC Staffinders, Inc.
Manatee Springs Nursing Center, Inc.
Mediplex Atlanta Rehabilitation Institute, Inc.
Mediplex of Colorado, Inc.
Mediplex of Concord, Inc.
Mediplex of Connecticut, Inc.
Mediplex of Kentucky, Inc.
Mediplex of Maryland, Inc.
Mediplex of Massachusetts, Inc.
Mediplex of New Hampshire, Inc.
Mediplex of New York, Inc.
Mediplex of Ohio, Inc.
Mediplex of Tennessee, Inc.
Mediplex of Virginia, Inc.
Mediplex Management, Inc.
Mediplex Management of Palm Beach County, Inc.
Mediplex Management of Texas, Inc.
Mediplex Rehabilitation of Massachusetts, Inc.
New Bedford Acquisition Corp.
New Bedford Nursing Center, Inc.
Nursing Home, Inc.
Oakview Treatment Centers of Kansas, Inc.
P.M.N.F. Managment, Inc.
Quality Care Holding Corp
Quality Nursing Care of Massachusetts, Inc.
Spofford Land, Inc.
Sun Care Corp
SunBridge, Inc.
Sunrise Healthcare of Colorado, Inc.
Sunrise Healthcare of Florida, Inc.
Sunrise Healthcare Corporation
Sunrise Rehab of Colorado, Inc.
The Mediplex Group, Inc.
Valley View Psychiatric Services, Inc.
Worcester Nursing Center, Inc.
II-10
<PAGE>
ANNEX D
Pharmacy Factors of California, Inc.
Pharmacy Factors of Florida, Inc.
Pharmacy Factors of Texas, Inc.
SunChoice Medical Supply, Inc.
Sun Factors, Inc.
Sunscript Pharmacy Corporation
II-11
<PAGE>
ANNEX E
Cal-Med, Inc.
Golan Healthcare Group, Inc.
HC, Inc.
HTA of New Jersey, Inc.
Special Medical Services, Inc.
Sun Alliance, Inc.
Sun Care Respiratory Services, Inc.
Sundance Rehabilitation Corporation
SunSpectrum Outpatient Rehabilitation-Concord, Inc.
II-12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
REGENCY HEALTH SERVICES, INC.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Regency Health Services, Inc. included
in this registration statement and have issued our report thereon dated February
14, 1997. Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed on page
II-16 is the responsibility of the Company's management and is presented for the
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
<TABLE>
<S> <C> <C>
/s/ ARTHUR ANDERSEN LLP
---------------------------------
Arthur Andersen LLP
</TABLE>
Orange County, California
February 14, 1997
II-15
<PAGE>
SCHEDULE II
REGENCY HEALTH SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS & OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts........................... $ 3,757 $ 2,890 $ 410(a) $ 2,334 $ 4,723
Allowance for mortgage loan losses........................ 951 689 -- 288 1,352
----------- ----------- ----- ----------- -----------
$ 4,708 $ 3,579 $ 410 $ 2,622 $ 6,075
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts........................... $ 4,189 $ 1,922 $ 734(b) $ 3,088 $ 3,757
Allowance for mortgage loan losses........................ 951 -- -- -- 951
----------- ----------- ----- ----------- -----------
$ 5,140 $ 1,922 $ 734 $ 3,088 4,708
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts........................... $ 2,970 $ 1,344 $ 687(c) $ 812 $ 4,189
Allowance for mortgage loan losses........................ 1,664 -- -- 713 951
----------- ----------- ----- ----------- -----------
$ 4,634 $ 1,344 $ 687 $ 1,525 $ 5,140
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
</TABLE>
- ------------------------
(a) Includes (i) Executive Pharmacy acquired reserves and (ii) recoveries
(b) Includes (i) the reclassification of accruals established in 1994 for
receivables related to duplicate facility disposals, (ii) SCRS acquired
reserves, and (iii) recoveries
(c) Reclassification of reserve established against note received by Care
II-16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- ------------------ ----------------------------------------------------------------------------------------------
<S> <C>
Exhibit 1.1*** Purchase Agreement, dated as of July 1, 1997, among Sun Healthcare Group, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, J.P.
Morgan Securities Inc. and NationsBanc Capital Markets, Inc., as Initial Purchasers
Exhibit 4.1*** Form of 9 1/2% Senior Subordinated Notes due 2007 (included in Exhibit 4.2)
Exhibit 4.2*** Indenture, dated as of July 8, 1997, among Sun Healthcare Group, Inc., the Guarantors named
therein and First Trust National Association, as Trustee, relating to 9 1/2% Senior
Subordinated Notes due 2007
Exhibit 4.3*** Registration Rights Agreement, dated as of July 8, 1997, between Sun Healthcare Group, Inc.,
the Guarantors named therein and Donaldson, Lufkin & Jenrette Securities Corporation, Credit
Suisse First Boston Corporation, J.P. Morgan Securities Inc. and NationsBanc Capital
Markets, Inc., as Initial Purchasers
Exhibit 5.1*** Opinion of Robert F. Murphy, Senior Vice President, General Counsel of Sun Healthcare Group,
Inc., relating to the New Notes and Guarantees
Exhibit 12** Computation of Ratio of Earnings to Fixed Charges
Exhibit 23.1** Consent of Arthur Andersen LLP
Exhibit 23.2*** Consent of Robert F. Murphy, Senior Vice President, General Counsel of Sun Healthcare Group,
Inc.
Exhibit 24.1** Powers of Attorney (included on page II-4 of this Registration Statement)
Exhibit 25.1*** Statement of Eligibility of First Trust National Association, as Trustee, relating to the
Senior Subordinated Notes due 2007, on Form T-1
Exhibit 99.1** Form of Letter of Transmittal
Exhibit 99.2** Form of Notice of Guaranteed Delivery
Exhibit 99.3** Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
Exhibit 99.4** Form of Letter to Clients
</TABLE>
- ------------------------
* Previously filed.
** Refiled herewith.
*** To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the financial statements and schedules of Sun Healthcare Group, Inc.
and subsidiaries included in this registration statement and the use of our
report on the financial statements and schedules of Regency Health Services,
Inc. included in this registration statement and the incorporation by reference
of our report dated March 26, 1997 on the financial statements of Golden Care,
Inc. for the year ended December 31, 1994 included in Sun Healthcare Group,
Inc.'s Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 28, 1997, and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
October 9, 1997
<PAGE>
EXHIBIT 12
SUN HEALTHCARE GROUP, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS, EXCEPT RATIO)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------------------------- -----------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Earnings before income taxes and
extraordinary items.................. $ 7,258 $ 22,710 $ 36,807 $ 12,794 $ 52,466 $ 55,342
Add Fixed Charges (excluding portion
capitalized)......................... 7,891 9,634 39,742 65,444 75,553 53,175
--------- --------- --------- --------- ----------- -----------
Earnings available for fixed charges..... $ 15,149 $ 32,344 $ 76,549 $ 78,238 $ 128,019 $ 108,517
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
FIXED CHARGES:
Interest charges (including portion
capitalized)......................... $ 925 $ 379 $ 14,253 $ 24,668 $ 28,371 $ 26,450
Estimated interest factor on rental
expense.............................. 6,966 9,293 29,194 43,615 49,654 27,689
--------- --------- --------- --------- ----------- -----------
Total fixed charges...................... $ 7,891 $ 9,672 $ 43,447 $ 68,283 $ 78,025 $ 54,139
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
RATIO OF EARNINGS TO FIXED
CHARGES................................ 1.92 3.34 1.76 1.15 1.64 2.00
--------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- ----------- -----------
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- ------------------ ----------------------------------------------------------------------------------------------
<S> <C>
Exhibit 1.1*** Purchase Agreement, dated as of July 1, 1997, among Sun Healthcare Group, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston Corporation, J.P.
Morgan Securities Inc. and NationsBanc Capital Markets, Inc., as Initial Purchasers
Exhibit 4.1*** Form of 9 1/2% Senior Subordinated Notes due 2007 (included in Exhibit 4.2)
Exhibit 4.2*** Indenture, dated as of July 8, 1997, among Sun Healthcare Group, Inc., the Guarantors named
therein and First Trust National Association, as Trustee, relating to 9 1/2% Senior
Subordinated Notes due 2007
Exhibit 4.3*** Registration Rights Agreement, dated as of July 8, 1997, between Sun Healthcare Group, Inc.,
the Guarantors named therein and Donaldson, Lufkin & Jenrette Securities Corporation, Credit
Suisse First Boston Corporation, J.P. Morgan Securities Inc. and NationsBanc Capital
Markets, Inc., as Initial Purchasers
Exhibit 5.1*** Opinion of Robert F. Murphy, Senior Vice President, General Counsel of Sun Healthcare Group,
Inc., relating to the New Notes and Guarantees
Exhibit 12** Computation of Ratio of Earnings to Fixed Charges
Exhibit 23.1** Consent of Arthur Andersen LLP
Exhibit 23.2*** Consent of Robert F. Murphy, Senior Vice President, General Counsel of Sun Healthcare Group,
Inc.
Exhibit 24.1** Powers of Attorney (included on page II-4 of this Registration Statement)
Exhibit 25.1*** Statement of Eligibility of First Trust National Association, as Trustee, relating to the
Senior Subordinated Notes due 2007, on Form T-1
Exhibit 99.1** Form of Letter of Transmittal
Exhibit 99.2** Form of Notice of Guaranteed Delivery
Exhibit 99.3** Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
Exhibit 99.4** Form of Letter to Clients
</TABLE>
- ------------------------
* Previously filed.
** Refiled herewith.
*** To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the financial statements and schedules of Sun Healthcare Group, Inc.
and subsidiaries included in this registration statement and the use of our
report on the financial statements and schedules of Regency Health Services,
Inc. included in this registration statement and the incorporation by reference
of our report dated March 26, 1997 on the financial statements of Golden Care,
Inc. for the year ended December 31, 1994 included in Sun Healthcare Group,
Inc.'s Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 28, 1997, and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
October 9, 1997
<PAGE>
LETTER OF TRANSMITTAL
SUN HEALTHCARE GROUP, INC.
OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007,
PURSUANT TO THE PROSPECTUS, DATED OCTOBER , 1997
----------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON , 1997.
- --------------------------------------------------------------------------------
DELIVERY TO: First Trust National Association, Exchange Agent
<TABLE>
<S> <C>
BY MAIL: BY HAND:
First Trust National Association First Trust National Association
First Trust Center First Trust Center
180 East Fifth Street 180 East Fifth Street 4th Floor
St. Paul, Minnesota 55101 Bond-Drop Window
St. Paul, Minnesota 55101
</TABLE>
ATTENTION: Therese Linscheid
TELEPHONE: (612) 244-1234
FACSIMILE: (612) 244-1537
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
The undersigned acknowledges receipt of the Prospectus, dated October ,
1997 (the "Prospectus"), of Sun Healthcare Group, Inc., a Delaware corporation
(the "Company") and the Guarantors named therein, and this Letter of Transmittal
(this "Letter"), which together constitute the offer (the "Exchange Offer") to
exchange an aggregate principal amount of up to $250,000,000 of 9 1/2% Series B
Senior Subordinated Notes dues 2007 (the "New Notes") for an equal principal
amount of the outstanding 9 1/2% Series A Senior Subordinated Notes due 2007
(the "Old Notes").
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. The New Notes will accrue interest at the applicable per
annum rate from July 8, 1997 (the "Issue Date"). Interest on the New Notes is
payable on January 1 and July 1 of each year commencing January 1, 1998. In the
event that neither the consummation of the Exchange Offer nor the declaration by
the Commission of the Shelf Registration Statement to be effective (each a
"Registration Default") occurs on or prior to the 225th calendar day after
1
<PAGE>
the Issue Date, then Sun is obligated to pay liquidated damages ("Liquidated
Damages") to each Holder, with respect to the first 90-day period immediately
following the occurrence of such 225 day period, in an amount equal to $.05 per
week per $1,000 principal amount of the Notes held by such Holder. Liquidated
Damages will continue to accrue at the rate specified above until such
Registration Default is cured and the amount of Liquidated Damages will increase
by an additional $.05 per week per $1,000 principal amount of Notes with respect
to each subsequent 90-day period until such Registration Default is cured, up to
a maximum amount of Liquidated Damages of $.25 per week per $1,000 principal
amount of Notes (regardless of whether one or more than one Registration Default
is outstanding. In the event that the Shelf Registration Statement ceases to be
effective at any time, during the period the Company is required to keep such
Shelf Registration Statement effective, Sun is obligated to pay liquidated
damages at the rate set forth above. The Company reserves the right, at any time
or from time to time, to extend the Exchange Offer at its discretion, in which
event the term "Expiration Date" shall mean the latest time and date to which
the Exchange Offer is extended. The Company shall notify the holders of the Old
Notes of any extension by means of a press release or other public announcement
prior to 9:00 A.M., New York City time, on the next business day after the
previously scheduled Expiration Date.
This Letter is to be used: (i) by all Holders who are not members of the
Automated Tender Offering Program ("ATOP") at the Depository Trust Company (the
"Book-Entry Transfer Facility"); (ii) by Holders who are ATOP members but choose
not to use ATOP; or (iii) if the Old Securities are to be tendered in accordance
with the guaranteed delivery procedures set forth in "The Exchange Offer"
section of the Prospectus. Holders of Old Notes whose certificates are not
immediately available, or who are unable to deliver their certificates or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility (a "Book-Entry
Confirmation") and all other documents required by this Letter to the Exchange
Agent on or prior to the Expiration Date, must tender their Old Notes according
to the guaranteed delivery procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
2
<PAGE>
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
List below the Old Notes to which this Letter relates. If the space provided
below is inadequate, the certificate numbers and principal amount of Old Notes
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
-------------------------------------------------------------------------------------------
1 2 3
AGGREGATE
NAME(S) AND ADDRESS(ES) OF PRINCIPAL PRINCIPAL
REGISTERED HOLDER(S) CERTIFICATE AMOUNT OF OLD AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* NOTE(S) TENDERED**
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
TOTAL
- ---------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have
tendered ALL of the Old Notes represented by the Old Notes indicated in
column 2. See Instruction 2. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple
thereof. See Instruction 1.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution ______________________________________________
Account Number _________________ Transaction Code Number ________________
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s) ____________________________________________
Window Ticket Number (if any) ______________________________________________
Date of Execution of Notice of Guaranteed Delivery _________________________
Name of Institution which guaranteed delivery ______________________________
If Delivered by Book-Entry Transfer, Complete the Following:
Account Number _________________ Transaction Code Number ________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
3
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person is engaged in, or intends to engage in a distribution of such New Notes,
or has an arrangement or understanding with any person to participate in the
distribution of such New Notes, and that neither the holder of such Old Notes
nor any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made
based upon the Company's understanding of an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings Corporation,
SEC No-Action Letter (available April 13, 1988), Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June 5, 1991) and Shearman &
Sterling, SEC No-Action Letter (available July 2, 1993), that the New Notes
issued in exchange for the Old Notes pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by holders thereof (other
than a broker-dealer who acquires such New Notes directly from the Company for
resale pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act or any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in the distribution of such New
Notes. If a holder of Old Notes is engaged in or intends to engage in a
distribution of the New Notes or has any arrangement or understanding with
respect to the distribution of the New Notes to be acquired pursuant to the
Exchange Offer, such holder may not rely on the applicable interpretations of
the staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. If the undersigned is a broker-dealer that will receive New
Notes for its own account in exchange for Old Notes, it represents that the Old
Notes to be exchanged for the New Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledges that it
will deliver a prospectus in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall
4
<PAGE>
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at the Book-Entry
Transfer Facility. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, please send the New Notes (and, if
applicable, substitute certificates representing Old Notes for any Old Notes not
exchanged) to the undersigned at the address shown above in the box entitled
"Description of Old Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS
SET FORTH IN SUCH BOX ABOVE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4) (SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if To be completed ONLY if certificates
certificates for Old Notes not for Old Notes not exchanged and/or New
exchanged and/or New Notes are to be Notes are to be sent to someone other
issued in the name of and sent to than the person(s) whose signature(s)
someone other than the person(s) whose appear(s) on this Letter below or to
signature(s) appear(s) on this Letter such person(s) at an address other than
below, or if Old Notes delivered by shown in the box entitled "Description
book-entry transfer which are not of Old Notes" on this Letter above.
accepted for exchange are to be
returned by credit to an account
maintained at the Book-Entry Transfer
Facility other than the account
indicated above.
Issue New Notes and/or Old Notes to Mail New Notes and/or Old Notes to:
(Please Type or Print): (Please Type or Print):
Name(s): Name(s):
Address: Address:
(Complete accompany Substitute Form (Complete accompany Substitute Form
W-9) W-9)
Credit unexchanged Old Notes Credit unexchanged Old Notes delivered
delivered by book-entry transfer to the by book-entry transfer to the
Book-Entry Transfer Facility account Book-Entry Transfer Facility account
set forth below: set forth below:
(BOOK-ENTRY TRANSFER FACILITY (BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE) ACCOUNT NUMBER, IF APPLICABLE)
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
BENEFICIAL OWNER(S)--RESIDENCE
- --------------------------------------------------------------------------------
STATE OF DOMICILE/PRINCIPLE PLACE PRINCIPAL AMOUNT OF
OF BUSINESS OF EACH OLD NOTE HELD FOR
BENEFICIAL OWNER OF OLD NOTES ACCOUNT OF BENEFICIAL OWNER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
BENEFICIAL OWNER(S)--PURCHASER STATUS
The beneficial owner of each of the Old Notes described herein is (check
the box that applies):
/ / A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
/ / A non "U.S. person" (as defined in Regulation S of the Securities
Act) that purchased the Old Notes outside the United States in
accordance with Rule 904 of the Securities Act
/ / Other (describe) ___________________________________________________
______________________________________________________________________
----------------------------------------------------------------------------
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER
REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
----------------------------------------------------------------------------
PLEASE READ THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE.
----------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete accompanying Substitute Form W-9)
(SIGNATURE(S) OF OWNER) (DATE)
Area Code and Telephone Number: ____________________________________________
If a holder is tendering any Old Notes, this Letter must be signed by
the registered holder(s) as the name(s) appear(s) on the certificate(s) for
the Old Notes or by any person(s) authorized to become registered holder(s)
by endorsements and documents transmitted herewith. If signature is by a
trustee, executor, administrator, guardian, officer or other person acting
in a fiduciary or representative capacity, please set forth their full
title. See Instruction 3.
Name(s): ___________________________________________________________________
____________________________________________________________________________
(PLEASE TYPE OR PRINT)
Capacity: __________________________________________________________________
Address: ___________________________________________________________________
____________________________________________________________________________
(INCLUDING ZIP CODE)
Principal place of business (if different from address listed above): ______
____________________________________________________________________________
____________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone No.: ( )_______________________________________
----------------------------------------------------------------------------
SIGNATURE GUARANTEE
(if required by Instruction 3)
Signature(s) Guaranteed by an Eligible Institution: ________________________
(AUTHORIZED SIGNATURE)
____________________________________________________________________________
(TITLE)
____________________________________________________________________________
(NAME AND FIRM)
Dated: _____________________ , 1997
----------------------------------------------------------------------------
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
SUN HEALTHCARE GROUP, INC.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter of Transmittal is to be used: (i) by all Holders who are not
ATOP members, (ii) by Holders who are ATOP members but choose not to use ATOP or
(iii) if the Old Securities are to be tendered in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer--Guaranteed Delivery Procedures." To validly tender Old Securities, a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) with any required signature guarantees and all other required documents
must be received by the Exchange Agent at its address set forth on the cover of
this Letter of Transmittal prior to the Expiration Date or the Holder must
properly complete and duly execute an ATOP ticket in accordance with the
Book-Entry Transfer Facility procedures. Otherwise, the Holder must comply with
the guaranteed delivery procedures set forth below. Old Notes tendered hereby
must be in denominations of principal amount at maturity of $1,000 and any
integral multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not immediately
available or who cannot deliver their certificates and all other required
documents to the Exchange Agent on or prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Old Notes pursuant to the guaranteed delivery procedures set forth
in "The Exchange Offer-- Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, or a Book-Entry Confirmation, as the case may be, and any other documents
required by this letter will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may
be, and all other documents required by this Letter, are received by the
Exchange Agent within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
The method of delivery of this Letter, the Old Notes and all other required
documents is at the election and risk of the tendering holders, but the delivery
will be deemed made only when actually received or confirmed by the Exchange
Agent. If Old Notes are sent by mail, it is suggested that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
See "The Exchange Offer" section of the Prospectus.
8
<PAGE>
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate are
to be tendered, the tendering holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of Old
Notes--Principal Amount Tendered." A reissued certificate representing the
balance of nontendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter, promptly after the
Expiration Date. All of the Old Notes delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
3. SIGNATURES OF THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES.
If this Letter is signed by the registered holder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered holder of the Old Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the New Notes are to be issued,
or any untendered Old Notes are to be reissued, to a person other than the
registered holder, then endorsements of any certificates transmitted hereby or
separate bond powers are required. Signatures on such certificates must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered holder of any
certificates specified herein, such certificates must be endorsed or accompanied
by appropriate bond powers, in either case signed exactly as the name of the
registered holder appears on the certificates and the signatures on such
certificates must be guaranteed by an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 3 must be guaranteed by a firm which is a member of
a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., by a commercial bank or trust company
having an office or correspondent in the United States or by an "eligible
guarantor" institution within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934 (an "Eligible Institution").
Signatures on this Letter need not be guaranteed by an Eligible Institution,
provided the Old Notes are tendered: (i) by a registered holder of Old Notes
(which term, for purposes of the Exchange Offer, includes any participant in the
Book-Entry Transfer Facility system whose name appears on a security position
listing as the holder of such Old Notes) tendered who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
this Letter or (ii) for the account of an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box the
name and address to which New Notes issued pursuant to the Exchange Offer and/or
substitute certificates evidencing Old Notes not exchanged are to be issued or
sent, if different from the name or address of the person signing this Letter.
In the case of issuance in a different name, the employer identification or
social security number of the
9
<PAGE>
person named must also be indicated. A holder of Old Notes tendering Old Notes
by book-entry transfer may request that Old Notes not exchanged be credited to
such account maintained at the Book-Entry Transfer Facility as such holder of
Old Notes may designate hereon. If no such instructions are given, such Old
Notes not exchanged will be returned to the name or address of the person
signing this Letter.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose Old
Notes are accepted for exchange must provide the Company (as payor) with such
Holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9
below, which, in the case of a tendering holder who is an individual, is his or
her social security number. If the Company is not provided with the current TIN
or an adequate basis for an exemption, such tendering holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, delivery of
New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New
Notes and/or substitute Old Notes not exchanged are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
holder of the Old Notes tendered hereby, or if tendered Old Notes are registered
in the name of any person other than the person signing this Letter, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes to
the Company or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 6, it is not necessary for transfer
tax stamps to be affixed to the Old Notes specified in this Letter.
10
<PAGE>
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter, shall
waive any right to receive notice of the acceptance of their Old Notes for
exchange.
Neither the Company, the Exchange Agent nor any other person is obligated to
give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
11
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: SUN HEALTHCARE GROUP
<TABLE>
<C> <S> <C>
- ---------------------------------------------------------------------------------------
SUBSTITUTE Name:
FORM W-9 / / Individual/Sole
Proprietor / / Corporation / / Partnership / / Other
-----------------------------------------------------
Department of the Treasury Part 1--PLEASE
Internal Revenue Service PROVIDE YOUR TIN IN
Payor's Request For Taxpayer THE BOX AT RIGHT TIN:
Identification Number ("TIN") AND CERTIFY BY (Social Security Number or
and Certification SIGNING AND DATING Employer Identification Number)
BELOW.
-----------------------------------------------------
Part 2--TIN Applied For / /
- ---------------------------------------------------------------------------------------
</TABLE>
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me).
(2) I am not subject to backup withholding either because:
(a) I am exempt from backup withholding, or
(b) I have not been notified by the Internal Revenue Service (the "IRS")
that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or
(c) the IRS has notified me that I am no longer subject to backup
withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE _______________________________________ DATE ____________, 1997
NAME _______________________________________________________________________
ADDRESS ____________________________________________________________________
CITY ______________________________ STATE _________ ZIP CODE _________
----------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been
notified by the IRS that you are subject to backup withholding because of
underreporting of interest or dividends on your tax return and you have not
been notified by the IRS that you are no longer subject to backup
withholding.
----------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
----------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered
an application to receive a taxpayer identification number to the
appropriate Internal Revenue Service Center or Social Security
Administration Office or (b) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number by the time of the exchange, 31 percent of all
reportable payments made to me thereafter will be withheld until I provide a
number.
SIGNATURE ___________________________________________ DATE ______________
----------------------------------------------------------------------------
12
<PAGE>
NOTICE OF GUARANTEED DELIVERY FOR
SUN HEALTHCARE GROUP, INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Sun Healthcare Group, Inc. (the "Company") made pursuant to
the Prospectus, dated October , 1997 (the "Prospectus"), and the enclosed
Letter of Transmittal (the "Letter of Transmittal") if certificates for Old
Notes are not immediately available or if the procedure for book-entry transfer
cannot be completed on a timely basis or time will not permit all required
documents to reach the Company prior to 5:00 P.M., New York City time, on the
Expiration Date of the Exchange Offer. Such form may be delivered or transmitted
by facsimile transmission, mail or hand delivery to First Trust National
Association (the "Exchange Agent") as set forth below. In addition, in order to
utilize the guaranteed delivery procedure to tender Old Notes pursuant to the
Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
P.M., New York City time, on the Expiration Date. Capitalized terms not defined
herein are defined in the Prospectus.
DELIVERY TO: First Trust National Association, Exchange Agent
BY MAIL: BY HAND:
First Trust National Association First Trust National Association
First Trust Center First Trust Center
180 East Fifth Street 180 East Fifth Street,
St. Paul, Minnesota 55101 4th Floor Bond-Drop Window
St. Paul, Minnesota 55101
ATTENTION: Therese Linscheid
Telephone: (612) 244-1234
Facsimile: (612) 244-1537
Delivery of this instrument to an address other than as set forth above, or
transmission of instructions via facsimile other than as set forth above, will
not constitute a valid delivery.
<PAGE>
Ladies and Gentlemen:
By execution hereof, the undersigned acknowledges receipt of the Prospectus
dated October , 1997 (as the same may be amended from time to time, the
"Prospectus") of Sun Healthcare Group, Inc., a Delaware corporation (the
"Company"), relating to the Securities of the Issuers, and the accompanying
Letter of Transmittal and the instructions thereto (the "Letter of
Transmittal"), which together constitute the Company's offer to exchange (the
"Exchange Offer") registered 9 1/2% Series B Senior Subordinated Notes due 2007
(the "New Notes") for any and all outstanding 9 1/2% Series A Senior
Subordinated Notes due 2007 (the "Old Notes"), upon the terms and subject to the
conditions described in the Prospectus.
Upon the terms and conditions set forth in the Prospectus and the
accompanying Letter of Transmittal, the undersigned hereby tenders to the
Company the principal amount of Old Notes set forth below, pursuant to the
guaranteed delivery procedure described in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under the Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives.
<TABLE>
<S> <C>
Principal Amount of Old Notes Name(s) of Record Holders(s): Tendered:
$
Certificate Nos. (if available): Address(es):
If Old Notes will be delivered by book-entry
transfer to The Depositary Trust Company,
provide account number.
Account Number Area Code and Telephone Number(s):
Signature(s):
</TABLE>
THE ACCOMPANYING GUARANTEE MUST BE COMPLETED.
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office correspondent in the United
States or any "eligible guarantor" institution within the meaning of Rule
17Ad-15 of the Exchange Act of 1934, as amended, hereby (a) guarantees to
deliver to the Exchange Agent, at one of its addresses set forth above, the
certificates representing all tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, and any other documents required by the Letter of
Transmittal within three New York Stock Exchange, Inc. trading days after the
date of execution of this Notice of Guaranteed Delivery.
<TABLE>
<S> <C>
Name of Firm:
Address: (AUTHORIZED SIGNATURE)
Title:
Area Code and Name:
Telephone Number: Date:
</TABLE>
<PAGE>
SUN HEALTHCARE, INC.
OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2001
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2001
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Upon and subject to the terms and conditions set forth in the Prospectus,
dated October , 1997 (the "Prospectus"), and the enclosed Letter of
Transmittal (the "Letter of Transmittal"), an offer to exchange (the "Exchange
Offer") the registered 9 1/2% Series B Senior Subordinated Notes due 2001 (the
"New Notes") for any and all outstanding 9 1/2% Series A Senior Subordinated
Notes due 2001 (the "Old Notes") is being made pursuant to such Prospectus. The
Exchange Offer is being made in order to satisfy certain obligations of Sun
Healthcare, Inc. (the "Company") contained in the Registration Rights Agreement,
dated as of January 8, 1997, among the Company, the Guarantors and Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston
Corporation, J.P. Morgan Securities, Inc. and Nationsbanc Capital Markets, Inc.
(the "Initial Purchasers")
We are requesting that you contact your clients for whom you hold Old Notes
regarding the Exchange Offer. For your information and for forwarding to your
clients for whom you hold Old Notes registered in your name or in the name of
your nominee, or who hold Old Notes registered in their own names, we are
enclosing the following documents:
1. Prospectus dated October , 1997;
2. The Letter of Transmittal for your use and for the information of your
clients;
3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer
if certificates for Old Notes are not immediately available or time will not
permit all required documents to reach the Exchange Agent prior to the
Expiration Date (as defined below) or if the procedure for book-entry transfer
cannot be completed on a timely basis; and
4. A form of letter which may be sent to your clients for whose account you
hold Old Notes registered in your name or the name of your nominee, with space
provided for obtaining such clients' instructions with regard to the Exchange
Offer.
Your prompt action is requested. The Exchange Offer will expire at 5:00
p.m., New York City time, on November , 1997 (the "Expiration Date") (20
business days following the commencement of the Exchange Offer), unless extended
by the Company. The Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time before the Expiration Date.
To participate in the Exchange Offer, a duly executed and properly completed
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, should be sent to the Exchange
Agent and certificates representing the Old Notes should be delivered to the
Exchange Agent, all in accordance with the instructions set forth in the Letter
of Transmittal and the Prospectus.
If holders of Old Notes wish to tender, but it is impracticable for them to
forward their certificates for Old Notes prior to the expiration of the Exchange
Offer or to comply with the book-entry transfer procedures on a timely basis, a
tender may be effected by following the guaranteed delivery procedures described
in the Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures."
Additional copies of the enclosed material may be obtained from First Trust
National Association, the Exchange Agent, First Trust Center, 180 East Fifth
Street, St. Paul, Minnesota 55101, Attention: Therese Linscheid, Telephone:
(612) 244-1234, Facsimile: (612) 244-1537.
<PAGE>
SUN HEALTHCARE GROUP, INC.
OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007,
To Our Clients:
Enclosed for your consideration is a Prospectus of Sun Healthcare Group,
Inc., a Delaware corporation (the "Company" or "Sun") and the Guarantors named
therein (the "Guarantors"), dated October , 1997 (the "Prospectus"), and the
enclosed Letter of Transmittal (the "Letter of Transmittal") relating to the
offer to exchange (the "Exchange Offer") registered 9 1/2% Series B Senior
Subordinated Notes due 2007 (the "New Notes") for any and all outstanding 9 1/2%
Series A Senior Subordinated Notes due 2007 (the "Old Notes") upon the terms and
subject to the conditions described in the Prospectus. The Exchange Offer is
being made in order to satisfy certain obligations of Sun and the Guarantors
contained in the Registration Rights Agreement, dated as of July 8, 1997, among
the Company, the Guarantors and Donaldson, Lufkin & Jenrette Securities
Corporation, Credit Suisse First Boston Corporation, J.P. Morgan Securities,
Inc. and Nationsbanc Capital Markets, Inc., (the "Initial Purchasers").
This material is being forwarded to you as the beneficial owner of the Old
Notes carried by us in your account but not registered in your name. A tender of
such Old Notes may only be made by us as the holder of record and pursuant to
your instructions.
Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Old Notes held by us for your account, pursuant to the terms and
conditions set forth in the enclosed Prospectus and Letter of Transmittal. We
also request that we may, on your behalf, make the representations and
warranties contained in the Letter of Transmittal.
Your instructions should be forwarded to us as promptly as possible in order
to permit us to tender the Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on November , 1997 (the "Expiration Date") (20 business
days following the commencement of the Exchange Offer), unless extended by the
Company. Any Old Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time before 5:00 p.m., New York City time on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Old Notes.
2. The Exchange Offer is subject to certain conditions set forth in the
Prospectus in the section captioned "The Exchange Offer--Conditions."
3. Any transfer taxes incident to the transfer of Old Notes from the holder
to the Company will be paid by the Company, except as otherwise provided in the
Instructions in the Letter of Transmittal.
4. The Exchange Offer expires at 5:00 p.m., New York City time, on the
Expiration Date unless extended by the Company. If you wish to have us tender
your Old Notes, please so instruct us by completing, executing and returning to
us the instruction form set forth below. The Letter of Transmittal is furnished
to you for information only and may not be used directly by you to tender Old
Notes.
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter enclosing the
Prospectus, dated November , 1997, of Sun Healthcare Group, Inc., a Delaware
corporation, and the related specimen Letter of Transmittal.
- --------------------------------------------------------------------------------
This will instruct you to tender the number of Old Notes indicated
below held by you for the account of the undersigned, pursuant to
the terms and conditions set forth in the Prospectus and the
related Letter of Transmittal. (CHECK ONE).
<TABLE>
<S> <C>
Box 1 / / Please tender my Old Notes held by you for my account. If I do not
wish to tender all of the Old Notes held by you for my account, I
have identified on a signed schedule attached hereto the number of
Old Notes that I do not wish tendered.
Box 2 / / Please do not tender any Old Notes held by you for my account.
</TABLE>
- --------------------------------------------------------------------------------
Date , 1997
<TABLE>
<S> <C>
--------------------------------------------
Signature(s)
--------------------------------------------
Please print name(s) here
--------------------------------------------
Area Code and Telephone No.
</TABLE>
Unless a specific contrary instruction is given in the space provided, your
signature(s) hereon shall constitute an instruction to us to tender all Old
Notes.
2
