SUN HEALTHCARE GROUP INC
S-3/A, 1997-05-12
SKILLED NURSING CARE FACILITIES
Previous: PRIMESOURCE CORP, 10-Q, 1997-05-12
Next: HMH PROPERTIES INC, 10-Q, 1997-05-12



<PAGE>
   
      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
    
                                                       REGISTRATION NO. 33-96240
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           --------------------------
   
                                AMENDMENT NO. 3
                                       TO
                                    FORM S-3
    
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
                           SUN HEALTHCARE GROUP, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                             <C>
           DELAWARE                   85-0410612
 (State or other jurisdiction      (I.R.S. Employer
              of
incorporation or organization)  Identification Number)
</TABLE>
 
   
                               101 SUN LANE, N.E.
    
                             ALBUQUERQUE, NM 87109
                                 (505) 821-3355
    (Address, including zip code and telephone number, including area code,
                  of registrant's principal executive offices)
 
   
                                ROBERT F. MURPHY
    
   
                     SENIOR VICE PRESIDENT, GENERAL COUNSEL
    
                           SUN HEALTHCARE GROUP, INC.
   
                               101 SUN LANE, N.E.
    
                             ALBUQUERQUE, NM 87109
                                 (505) 821-3355
   
          (Name and address, including zip code and telephone number,
                   including area code, of agent for service)
    
                           --------------------------
 
                                   COPIES TO:
 
                          William H. Hinman, Jr., Esq.
                              Shearman & Sterling
                             555 California Street
                            San Francisco, CA 94104
                                 (415) 616-1100
                           --------------------------
 
   APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
                                    PUBLIC:
              AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE DATE.
                           --------------------------
 
    If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
 
    If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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(c)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
                           --------------------------
 
   
    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>
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 AN 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
 
PROSPECTUS
   
                                7,146,398 SHARES
    
 
                             [SUN HEALTHCARE LOGO]
 
                          [SUN HEALTHCARE GROUP INC.]
                                  COMMON STOCK
                   OFFERED BY SUN AND BY SELLING STOCKHOLDERS
                               ------------------
 
   
    The 7,146,398 shares (the "Shares") offered by this Prospectus are comprised
of (i) 899,170 shares of Common Stock, $.01 par value (the "Common Stock")
offered by Sun Healthcare Group, Inc. ("Sun" or the "Company") which are
issuable upon conversion of the 6 1/2% Convertible Subordinated Debentures Due
2003 (the "6 1/2% Convertible Debentures") of Sun and The Mediplex Group, Inc.,
a wholly-owned subsidiary of Sun ("Mediplex"); (ii) up to 962,912 shares of Sun
Common Stock issuable upon conversion of the Company's 6% Convertible
Subordinated Debentures Due 2004 (the "6% Convertible Debentures") which are
being registered hereunder for resale by the holders thereof following
conversion and issuance; and (iii) up to 5,284,316 shares of Common Stock
offered for resale for the account of certain stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any proceeds from the
resale of Shares by Selling Stockholders or from conversion of the 6 1/2%
Convertible Debentures.
    
 
    The Selling Stockholders directly, through agents designated from time to
time, or through dealers or underwriters also to be designated, may sell the
shares of Common Stock offered hereby from time to time on terms to be
determined at the time of sale. To the extent required, the specific shares to
be sold, the terms of the offering, including price, the names of any agent,
dealer or underwriter, and any applicable commission, discount or other
compensation with respect to a particular sale will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution" and "Selling
Stockholders."
 
   
    The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "SHG." On May 8, 1997, the reported last sale price for the Common
Stock on the NYSE was $15.00 per share.
    
 
    Sun has filed a shelf registration statement with the Securities and
Exchange Commission (the "Commission") under which Sun may offer from time to
time up to $300,000,000 of debt securities or preferred stock, each of which may
be convertible into common stock. Such shelf registration statement has not yet
been declared effective by the Commission, and as of the date of this
Prospectus, Sun is not offering or preparing to offer any sales of securities
thereunder.
 
   
    SEE "RISK FACTORS", BEGINNING ON PAGE 8 OF THIS PROSPECTUS, FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
    
                             ---------------------
 
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 Selling Stockholders and any broker-dealers, agents or underwriters that
participate with the Selling Stockholders in the distribution of the Common
Stock may be deemed to be underwriters within the meaning of the Securities Act
of 1933, as amended ("Securities Act"), and any commission received by them and
any profit on the resale of the Common Stock purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act. The Company
has paid substantially all of the costs of this offering, estimated at $195,000.
    
 
   
                  THE DATE OF THIS PROSPECTUS IS MAY 9, 1997.
    
<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 Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its Regional Offices located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov. In addition, such reports and proxy statements can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
    
 
    Sun has filed with the Commission a Registration Statement on Form S-3
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Sun Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which were omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
are not necessarily complete, and, with respect to each such document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission,
reference is made to the copy of the document so filed. Each such statement is
qualified in its entirety by such reference.
 
   
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
    
 
   
    The following documents filed by the Company with the Commission (File No.
1-12040) are incorporated herein by reference:
    
 
   
    1.  Sun Healthcare Group, Inc.'s Amendment No. 1 to the Annual Report on
       Form 10-K for the fiscal year ended December 31, 1996 filed April 30,
       1997;
    
 
   
    2.  Sun Healthcare Group, Inc.'s Annual Report on Form 10-K for the fiscal
       year ended December 31, 1996;
    
 
   
    3.  Sun Healthcare Group, Inc.'s Current Reports on Form 8-K filed February
       14, 1997, February 24, 1997, March 28, 1997 and April 14, 1997; and
    
 
   
    4.  The description of Sun Healthcare Group, Inc.'s capital stock contained
       in Sun Healthcare Group, Inc.'s Registration Statement on Form 10 filed
       on June 1, 1993, and the description of Sun's Preferred Stock Purchase
       Rights contained in its Registration Statement on Form 8-A filed on June
       6, 1995, as amended by Form 8-A/A-1 filed on August 17, 1995.
    
 
   
    All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of Amendment No. 3
to the Registration Statement and prior to the date of the termination of the
offering of the Securities offered hereby shall be deemed to be incorporated
herein by reference and to be a part hereof from the date of filing of each such
document. Any statement contained herein or in a document all or a portion of
which is incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of the Registration Statement
or 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
    
 
                                       2
<PAGE>
   
herein or in a Prospectus Supplement 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 the Registration Statement or
this Prospectus.
    
 
   
    The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon the request of such person, a copy of any of the
documents incorporated by reference herein, except for the exhibits to such
documents (unless such exhibits are specifically incorporated by reference into
such documents). Requests should be directed to 101 Sun Lane, Albuquerque, New
Mexico 87109, Attention: Investor Relations (Telephone: (505) 856-2341).
    
 
                                       3
<PAGE>
                                    SUMMARY
 
   
    THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
CONTAINED OR INCORPORATED HEREIN BY REFERENCE. PROSPECTIVE PURCHASERS OF
SECURITIES 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 SPEAKS 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 SUBSIDIARIES.
    
 
   
                                  THE COMPANY
    
 
   
    Sun, through its direct and indirect subsidiaries, is a leading provider of
long-term, subacute and related specialty healthcare services. At March 31,
1997, Sun operated 173 long-term and subacute care facilities with 20,707
licensed beds in 20 states in the United States and 131 long-term care
facilities with 7,531 registered beds in the United Kingdom. In addition, Sun
provides rehabilitation therapy, respiratory therapy, temporary therapy staffing
services, and pharmaceutical products and services, to both affiliated and
nonaffiliated facilities in the United States and outpatient therapy in Canada.
    
 
   
    Sun's long-term and subacute 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 facility operations have experienced significant
growth since Sun's inception in 1989. This growth has been primarily from
acquisitions of long-term and subacute care facilities. Sun believes its
long-term and subacute care operations provide it with a platform for expanding
its therapy and pharmaceutical businesses to affiliated and nonaffiliated
long-term and subacute care facilities. In addition, 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 currently offers physical, occupational and speech therapy
("rehabilitation therapy"), through Sundance Rehabilitation Corporation
("Sundance") and respiratory therapy through SunCare (as defined), to patients
in affiliated and nonaffiliated long-term and subacute care facilities. At March
31, 1997, Sun provided rehabilitation and respiratory therapy services to 952
facilities in 42 states, 789 of which were operated by nonaffiliated parties and
163 of which were affiliated facilities.
    
 
   
    Through CareerStaff Unlimited, Inc. ("CareerStaff"), Sun is a nationwide
provider of temporary therapy staffing. CareerStaff provides therapists skilled
in the areas of physical, occupational and speech therapy primarily to hospitals
and nursing home contract service providers. At March 31, 1997, CareerStaff
provided temporary therapy staffing services in 37 states.
    
 
   
    At March 31, 1997, Sun, through Sunscript Pharmacy Corporation
("Sunscript"), operated 25 pharmacies that provided pharmaceutical products and
services to a total of 482 long-term and subacute care facilities in 23 states,
364 of which were operated by nonaffiliated parties and 118 of which were
affiliated facilities. In addition, Sun operated 11 pharmacies in the United
Kingdom at March 31, 1997.
    
 
                                       4
<PAGE>
   
    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 OFFERING
 
   
<TABLE>
<S>                                 <C>
The Offering......................  (i) up to 5,284,316 of the Shares offered hereby are
                                    being offered for resale by certain persons who received
                                    their Shares of Common Stock in consideration for the
                                    sale to Sun of businesses previously owned by such
                                    Selling Stockholders and by a person that performed
                                    advisory services in connection with one such sale, or
                                    by their assignees;
                                    (ii) 899,170 of the Shares offered hereby are offered by
                                    the Company for issuance upon conversion of $22.4
                                    million outstanding principal amount of 6 1/2%
                                    Convertible Debentures; and
                                    (iii) up to 962,912 of the Shares offered hereby are
                                    being offered for resale by certain persons owning 6%
                                    Convertible Debentures that convert such Debentures and
                                    resell the Common Stock issued upon conversion.
Common Stock Outstanding at March
 31, 1997.........................  51,160,333 Shares (1)
Use of Proceeds...................  Sun will not receive any proceeds from the issuance or
                                    resale of the Shares of Common Stock offered hereby.
New York Stock Exchange Symbol....  SHG
</TABLE>
    
 
- ------------------------
   
(1) Does not include, as of March 31, 1997, (i) 3,814,102 shares of Common Stock
    that are issuable upon conversion of $83.3 million aggregate principal
    amount of outstanding 6% Convertible Debentures, (ii) up to 3,648,062 shares
    of Common Stock issuable upon exercise of Sun stock options, (iii) 899,170
    shares of Common Stock issuable upon conversion of approximately $22.4
    million aggregate principal amount of outstanding 6 1/2% Convertible
    Debentures of Sun and Mediplex, (iv) 2,030,116 shares of Common Stock held
    by the Company as treasury stock, (v) 776,000 shares of restricted stock
    held by certain executives of the Company which shares are subject to a
    substantial risk of forfeiture and (vi) 540,000 shares of stock issuable
    upon exercise of warrants held by certain Selling Stockholders.
    
   
    120,000 of the Shares being offered hereby were issued on July 13, 1993 to
Mr. John E. Bingaman in connection with the acquisition by Sun of Honorcare
Corporation ("Honorcare"), which operated at the date of acquisition 14
long-term care facilities with 1,384 licensed beds in Texas, Oklahoma, New
Mexico and Louisiana. Mr. Bingaman was the Chairman of the Board and an
affiliate (as defined in Rule 144 of the Securities Act) of Honorcare prior to
the Honorcare acquisition. Mr. Bingaman is presently a Director and an affiliate
of the Company. Sun agreed to register Mr. Bingaman's shares for resale
following the Honorcare acquisition, and Mr. Bingaman is a Selling Stockholder
hereunder.
    
   
    76,600 of the Shares being offered hereby were issued on March 1, 1995 in
connection with the acquisition by Sun of DanRae, a pharmacy. The former
stockholders of DanRae are Selling Stockholders hereunder.
    
   
    1,553,579 of the Shares being offered hereby were issued on May 5, 1995 as
consideration for the acquisition by Sun of Golden Care, a provider of
respiratory therapy services, equipment and supplies. Golden Care was owned by
three stockholders, each of whom is a Selling Stockholder hereunder (the "Golden
Care Selling Stockholders"). Two of the Golden Care Selling Stockholders sold an
aggregate of 382,977 Shares to PaineWebber International (U.K.) Ltd.
("PaineWebber") and 594,402 Shares to Morgan Stanley & Co. ("Morgan Stanley") in
transactions exempt from the registration requirements
    
 
                                       5
<PAGE>
   
of the Securities Act. In connection with such transactions, such Golden Care
Selling Stockholders assigned to PaineWebber and Morgan Stanley their respective
rights to require Sun to register the resale of such Shares. Such Shares are
being offered hereby and PaineWebber and Morgan Stanley are Golden Care Selling
Stockholders hereunder.
    
   
    2,385,337 of the Shares being offered hereby were issued on June 21, 1995 to
certain former stockholders of CareerStaff (the "CareerStaff Selling
Stockholders") in connection with the CareerStaff Merger. The CareerStaff
Selling Stockholders consist of former stockholders of CareerStaff who either
entered into a Stockholders Agreement, dated as of March 29, 1995, with Sun
pursuant to which such CareerStaff Selling Stockholders agreed to vote their
shares of CareerStaff common stock in favor of the CareerStaff Merger, or were
affiliates (as defined in Rule 144 of the Securities Act) of CareerStaff prior
to the CareerStaff Merger.
    
   
    608,800 of the Shares being offered hereby were issued on August 16, 1995 in
connection with the merger of Sun and NHCP, a pharmacy. NHCP was owned by two
stockholders, each of whom is a Selling Stockholder hereunder (the "NHCP Selling
Stockholders").
    
   
    500,000 of the Shares being offered hereby are issuable upon exercise of
warrants (the "Columbia Warrants") to purchase shares of Common Stock at an
exercise price of $15.375 per share. The Columbia Warrants were issued on
November 30, 1995 in connection with the Columbia Acquisition. At the date of
acquisition Columbia operated 19 rehabilitation therapy centers in Ontario,
Alberta and British Columbia, Canada. Columbia Warrants were issued to eight
former shareholders of Columbia as partial payment for the sale by them of the
shares of Columbia to Sun, and to Furman Selz LLC as partial payment of its
advisory fees in connection with the Columbia Acquisition. Each holder of
Columbia Warrants is a Selling Stockholder hereunder (the "Columbia Selling
Stockholders").
    
 
   
    40,000 of the Shares being offered hereby are issuable upon exercise of a
warrant (the "Watson Warrant") to purchase shares of Common Stock at an exercise
price of $17.00 per share. The Watson Warrant was issued on February 18, 1997 in
connection with Sun's acquisition of Watson Drug Company, Inc. ("Watson"), a
pharmacy. Watson was owned by one stockholder, who is a Selling Stockholder
hereunder (the "Watson Selling Stockholder").
    
 
   
    The consideration for the acquisitions of Honorcare, DanRae, Golden Care and
NHCP by Sun were shares of Sun Common Stock issued pursuant to exemptions from
registration under the Securities Act and the Company agreed, in connection with
such issuances, to register the resale of such shares of Sun Common Stock. The
Columbia Warrants and the Watson Warrants were issued pursuant to an exemption
from registration under the Securities Act and the Company agreed, in connection
with such issuance, to register the resale of the shares of Sun Common Stock
issuable upon exercise thereof. See "Selling Stockholders."
    
 
   
    The 6% Convertible Debentures were originally issued pursuant to a Fiscal
Agency Agreement dated as of March 1, 1994 between Sun and NationsBank of Texas,
N.A., as Fiscal Agent (the "Fiscal Agency Agreement"), and are convertible into
Sun Common Stock. The 6% Convertible Debentures were issued pursuant to
exemptions from registration under the Securities Act and the Company agreed, in
connection with such issuance, to register the resale of the shares of Sun
Common Stock issuable on conversion of certain of the 6% Convertible Debentures,
to the extent necessary to provide for their free transferability, subject to
certain limitations. See "Selling Stockholders."
    
 
   
    The 6 1/2% Convertible Debentures were originally issued pursuant to an
Indenture dated as of August 6, 1992 between Mediplex and Fleet Bank of
Massachusetts, N.A., as Trustee (the "Indenture"), and were originally
convertible into the common stock of Mediplex. Under the terms of the Indenture,
in the Mediplex Merger the right of such holders to receive shares of Mediplex
common stock upon conversion became a right to receive, upon conversion, the
consideration received in the Mediplex Merger by former stockholders of Mediplex
in respect of each share of Mediplex common stock into which the 6 1/2
Convertible Debentures were convertible. Such consideration consisted of 1.28
shares of Sun Common Stock plus $11.00 in cash for each share of Mediplex common
stock into
    
 
                                       6
<PAGE>
   
which the 6 1/2% Convertible Debentures were convertible. The Company filed a
registration statement on Form S-4 under the Securities Act with respect to the
shares of Sun Common Stock issuable in exchange for the Mediplex common stock in
connection with the Mediplex Merger. Such registration statement also registered
up to 3,460,815 shares of Sun Common Stock that would be issuable to the holders
of the 6 1/2% Convertible Debentures upon conversion. However, such Form S-4 has
not been kept current and is no longer available for the Company to offer the
6 1/2% Convertible Debenture Shares. The 6 1/2% Convertible Debenture Shares are
being offered hereby by the Company. Effective October 1, 1994, Sun, Mediplex
and the Trustee entered into an Amended and Restated Indenture pursuant to which
Sun became a co-obligor with joint and several liability with Mediplex for all
obligations under the Indenture. If all of the remaining outstanding 6 1/2%
Convertible Debentures were converted, Sun would be obligated to deliver 899,170
shares of Sun Common Stock and to pay an aggregate of approximately $7.7 million
in cash to converting holders.
    
 
                                  RISK FACTORS
 
    See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock offered hereby.
 
                            ------------------------
 
   
    THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "BELIEVES,"
"ANTICIPATES," "INTENDS," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE
TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
    
 
                                       7
<PAGE>
                                  RISK FACTORS
 
   
    PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED HEREIN BEFORE PURCHASING THE
COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW.
    
 
POTENTIAL REDUCTION OF REIMBURSEMENT RATES FROM THIRD PARTY PAYORS AND
IMPACT ON FUTURE OPERATING RESULTS
 
    Sun derives a substantial percentage of its total revenues from Medicare,
Medicaid and private insurance. Sun's financial condition and results of
operations may be affected by the revenue reimbursement process, which in Sun's
industry is complex and can involve lengthy delays between the time that revenue
is recognized and the time that reimbursement amounts are settled. Net revenues
realizable under third-party payor agreements are subject to change due to
examination and retroactive adjustment by payors during the settlement process.
Payors may disallow in whole or in part requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable or because
additional supporting documentation is necessary. Sun recognizes revenues from
third-party payors and accrues estimated settlement amounts in the period in
which the related services are provided. Sun estimates these settlement balances
by making determinations based on its prior settlement experience and its
understanding of the applicable reimbursement rules and regulations. The
majority of third-party payor balances are settled two to three years following
the provision of services. Sun has experienced differences between the net
amounts accrued and subsequent settlements, which differences are recorded in
operations at the time of settlement. Sun's results of operations would be
materially and adversely effected if the amounts actually received from third-
party payors in any reporting period differs materially from the amounts accrued
in prior periods. For example, Sun's results of operations for the fourth
quarter of 1996 were materially and adversely affected by certain negative
revenue adjustments totalling approximately $23,047,000 resulting from changes
in accounting estimates of amounts realizable from third-party payors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Sun's Annual Report on Form 10-K for the year ended
December 31, 1996 incorporated by reference herein. Sun's financial condition
and results of operations may also be affected by the timing of reimbursement
payments and rate adjustments from third-party payors. Sun has from time to time
experienced delays in receiving reimbursement from intermediaries.
 
   
    In addition, accounts receivable for rehabilitation services to
nonaffiliates have increased significantly since December 31, 1995 and continue
to increase disproportionately to the growth in revenue of that line of
business. Collections of therapy services receivables from nonaffiliated
facilities have 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' therapy claims. As a result, the Company has
increased its provision for losses on accounts receivable and incurred
additional borrowing costs.
    
 
    Sun's growth strategy relies heavily on the acquisition of long-term and
subacute care facilities. Regardless of the legal form of the acquisition, the
Medicare and Medicaid programs often require that Sun assume certain obligations
relating to the reimbursement paid to the former operators of the facilities.
For example, Sun may be responsible for any final cost report settlements or
findings in the examination process which result in the recoupment from Sun of
reimbursements previously paid to the former owner if the former owner is unable
to meet its repayment obligations.
 
    Sun recently learned that a fiscal intermediary and a Medicaid agency in one
of the states in which Sun 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
 
                                       8
<PAGE>
overpayments to the predecessor operator were made, Sun, as the current operator
of such facilities, may be held financially responsible for any such
overpayments. However, at this time Sun is unable to predict the outcome of any
such examination.
 
    Various cost containment measures adopted by governmental and private pay
sources have begun to restrict the scope and amount of reimbursable healthcare
expenses and limit increases in reimbursement rates for medical services. Any
reductions in reimbursement levels under Medicaid, Medicare or private payor
programs and any changes in applicable government regulations or interpretations
of existing regulations could significantly affect Sun's profitability.
Furthermore, governmental programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and government
funding restrictions, all of which may materially affect the rate of payment to
Sun's facilities and its therapy and pharmaceutical businesses. There can be no
assurance that payments under governmental or private payor programs will remain
at levels comparable to present levels or will be adequate to cover the costs of
providing services to patients eligible for assistance under such programs.
Significant decreases in utilization and limits on reimbursement could have a
material adverse effect on Sun's financial condition and results of operations,
including the possible impairment of certain assets. See Sun's Annual Report on
Form 10-K for the year ended December 31, 1996, incorporated by reference
herein, for a summary of sources of revenues for Sun for the three most recent
fiscal years.
 
   
    In 1993, the Health Care Financing Administration ("HCFA") issued a
directive to fiscal intermediaries that administer the Medicare program to
review costs incurred by providers of occupational therapy and speech therapy
provided by contract suppliers such as Sun's rehabilitation therapy subsidiary.
Although HCFA has published salary equivalency guidelines for contract physical
therapy and respiratory therapy, guidelines for occupational therapy and speech
therapy have not yet been published in final form. Reimbursement for such
services is currently evaluated under Medicare's reasonable cost principles. On
March 28, 1997, HCFA proposed salary equivalency guidelines for speech and
occupational therapy. In addition, HCFA proposed revised salary equivalency
guidelines for physical and respiratory therapies. Implementation of the
proposed guidelines by HCFA could directly or indirectly limit the reimbursement
Sun and its customers receive for certain therapy services on a prospective
basis. If the proposals are adopted as proposed, any resulting limitations on
reimbursements could have a material adverse effect on Sun's financial condition
and results of operations. Additionally, if the proposed guidelines are adopted,
it could have an adverse effect on the cash flows of the facilities to whom Sun
provides services; thereby potentially adversely affecting the collectibility of
amounts owed to Sun. However, there can be no assurance that the proposals will
be adopted as proposed, whether any other proposals will be adopted or whether
any such proposal will be more or less favorable to Sun, than HCFA's current
reimbursement policy.
    
 
    In 1995, and periodically since then, HCFA has provided information to
intermediaries for their use in determining reasonable costs for occupational
and speech therapy. The information set forth in such directives, although not
intended to impose limits on reasonable costs for speech therapy and
occupational therapy, suggests that fiscal intermediaries should carefully
review costs which appear to be in excess of what a "prudent buyer" would pay
for those services. While the effect of these directives is still uncertain,
they are a factor considered by such intermediaries in evaluating the
reasonableness of amounts paid by providers for the services of Sun's
rehabilitation therapy subsidiary. These directives will become obsolete because
Medicare will not pay any amount in excess of that permitted under the salary
equivalency guidelines for cost reporting periods beginning after salary
equivalency guidelines for all therapies are finalized. In addition, some
intermediaries also require facilities to justify the cost of contract
therapists versus employed therapists as an aspect of the "prudent buyer"
analysis. Accordingly, the "prudent buyer" analyses could result in lower
reimbursement rates and a corresponding decrease in net revenues of Sun. With
respect to rehabilitation therapy services provided to affiliated facilities, a
retroactive adjustment of Medicare reimbursement could be made for some prior
periods. An adjustment of reimbursement rates with respect to therapy services
provided to nonaffiliated facilities could result in indemnity claims against
Sun, based on the terms of substantially all of Sun's existing contracts with
such facilities, for payments previously
 
                                       9
<PAGE>
   
made by such facilities to Sun that are reduced by Medicare in the audit
process. Sun derives a significant percentage of its net earnings from the
provision of therapy services; a change in reimbursement rates resulting from
implementation of this directive or a reduction in reimbursement as a result of
a change in application of reasonable cost guidelines could have a material
adverse affect on Sun's financial condition and results of operations, depending
on the rates adopted, Sun's costs for providing these services and customers'
ability to pay for prior and continuing services.
    
 
    Additional measures are likely to be adopted in the future as Federal and
state governments attempt to control escalating healthcare costs. Any reductions
in reimbursement levels under Medicaid, Medicare or private payor programs and
any changes in applicable government regulations or interpretations of programs
are subject to statutory and regulatory changes, retroactive rate adjustments to
incurred costs, administrative rulings and government funding restrictions, all
of which may materially affect the rate of payment to facilities and Sun's
therapy and pharmaceutical businesses. There can be no assurance that payments
under government or private payor programs will remain at levels comparable to
present levels or will be adequate to cover the costs of providing services to
patients eligible for assistance under such programs. Significant decreases in
utilization of therapy services and limits on reimbursement for therapy services
could have a material adverse effect on Sun's financial condition and results of
operations.
 
    Current Medicare regulations that apply to transactions between related
parties, such as Sun's subsidiaries, are relevant to the amount of Medicare
reimbursement that Sun is entitled to receive for the rehabilitation and
respiratory therapy and pharmaceutical services that it provides to Sun-operated
facilities. These related party regulations require that, among other things,
(i) Sun's rehabilitation and respiratory therapy services and pharmaceutical
services subsidiaries must each be a bona fide separate organization; (ii) a
substantial part of the rehabilitation and respiratory therapy services or
pharmaceutical services, as the case may be, of the relevant subsidiary must be
transacted with nonaffiliated entities, and there is an open, competitive market
for the relevant services; (iii) rehabilitation and respiratory therapy services
and pharmaceutical services, as the case may be, are services that commonly are
obtained by long-term and subacute care facilities from other organizations and
are not a basic element of patient care ordinarily furnished directly to
patients by such long-term and subacute care facilities; and (iv) the prices
charged to Sun's long-term and subacute care facilities by its rehabilitation
and respiratory therapy subsidiaries and pharmaceutical subsidiary are in line
with the charges for such services in the open market and no more than the
prices charged by its rehabilitation and respiratory therapy services and
pharmaceutical subsidiaries under comparable circumstances to nonaffiliated
long-term and subacute care facilities. The related party regulations do not
indicate a specific level of services that must be provided to nonaffiliated
entities in order to satisfy the "substantial part" requirement of such
regulations. In instances where this issue has been litigated by others, the
final determination of the appropriate threshold to satisfy the "substantial
portion" requirement has varied.
 
    Sun's net revenues from rehabilitation therapy services provided to
nonaffiliated facilities represented 66%, 64% and 67% of total rehabilitation
services net revenues for the years ended December 31, 1996, 1995 and 1994,
respectively. Respiratory therapy services provided to nonaffiliated facilities
represented 55% and 64% of total respiratory therapy services net revenues for
the year ended December 31, 1996 and the period from the date of acquisition of
Golden Care, Inc. (presently known as SunCare Respiratory Services, Inc.
("SunCare")) on May 5, 1995 to December 31, 1995, respectively. Sun's
respiratory therapy operations did not provide services to affiliated facilities
prior to the acquisition of SunCare on May 5, 1995. Net revenues from
pharmaceutical services billed to nonaffiliated facilities represented 78%, 78%
and 81% of total pharmaceutical services revenues for the years ended December
31, 1996, 1995 and 1994. Sun believes that it satisfies the requirements of
these regulations regarding nonaffiliated business. Consequently, it has claimed
and received reimbursement under Medicare for rehabilitation and respiratory
therapy and pharmaceutical services provided to patients in its own facilities
at a higher rate than if it did not satisfy these requirements. If Sun were
deemed to not have satisfied these regulations, the reimbursement that Sun
receives for rehabilitation and respiratory therapy and pharmaceutical services
provided to its own facilities
 
                                       10
<PAGE>
   
would be significantly reduced, as a result of which Sun's financial condition
and results of operations would be materially and adversely affected. If, upon
audit by Federal or state reimbursement agencies, such agencies find that these
regulations have not been satisfied, and if, after appeal, such findings are
sustained, Sun could be required to refund some or all of the difference between
its cost of providing these services and the higher amount actually received.
While Sun believes that it has satisfied and will continue to satisfy these
regulations, there can be no assurance that its position would prevail if
contested by relevant reimbursement agencies. The foregoing statements with
respect to Sun's ability to satisfy these regulations are forward looking and
could be affected by a number of factors, including the interpretation of
Medicare regulations by Federal or state reimbursement agencies and Sun's
ability to provide services to nonaffiliated facilities.
    
 
ADVERSE EFFECT OF CHANGE IN REVENUE SOURCES
 
    Changes in the mix of patients among the Medicaid, Medicare and private pay
categories, and among different types of private pay sources, can significantly
affect the revenues and the profitability of Sun's operations. There can be no
assurance that Sun will continue to attract and retain private pay patients or
maintain its current payor or revenue mix.
 
   
    In addition, there can be no assurance that the facilities operated by Sun,
or the provision of services and products by Sun, now or in the future, will
initially meet or continue to meet the requirements for participation in the
Medicare and Medicaid programs, or that Sun will continue to qualify for the
levels of reimbursement it has in the past with respect to reimbursement for
rehabilitation therapy and institutional pharmaceutical services provided by
Sun-operated facilities. A loss of Medicare or Medicaid certification or a
change in Sun's reimbursement could have an adverse effect on its financial
condition and results of operations. See "Potential Reduction of Reimbursement
Rates From Third Party Payors and Impact on Future Operating Results," "-- Risk
of Adverse Effect of Future Health Care Reform," "-- Government Investigations;
Uncertain Impact on Future Operating Results."
    
 
   
GOVERNMENT INVESTIGATIONS; UNCERTAIN IMPACT ON FUTURE OPERATING RESULTS
    
 
    In January 1995, Sun learned that it was the subject of a pending Federal
investigation. The investigating agencies are the United States Department of
Health and Human Services' Office of Inspector General ("OIG") and the United
States Department of Justice. The government is still in the process of
collecting information. Sun has cooperated and continues to cooperate with the
investigation.
 
    At this time, Sun understands that the investigation includes a review of
whether Sun'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. Sun understands that the
investigation also includes a review of whether its long-term care subsidiary
properly disclosed its relationship with Sun's rehabilitation therapy subsidiary
and properly sought reimbursement for services provided by that subsidiary.
 
    Sun 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 Sun 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 Sun. From time to time the negative publicity surrounding the
investigation has slowed Sun's success in obtaining additional outside contracts
in the rehabilitation therapy business, which has resulted in higher than
required therapist staffing levels, and has affected the private pay enrollment
in certain inpatient facilities. Based on its current understanding of the
investigation, however, Sun does not believe that the outcome of the
investigation will have a material adverse effect on Sun's financial condition
or results of operations. See "Risks Associated with the Development and
Expansion of Ancillary Services; Diversification" and "Outstanding Litigation."
The foregoing statements with respect to the outcome of the investigation
 
                                       11
<PAGE>
are forward looking and could be affected by a number of factors, including the
actual scope of the investigation, the government's factual findings and the
interpretation of Federal statutes and regulations by the government and Federal
courts.
 
    In 1996, the Connecticut Attorney General's office and the Connecticut
Department of Social Services ("DSS") began investigating whether Medicaid cost
reports for 1993 and 1994 submitted to the DSS by Sun's long-term care
subsidiary contained false and misleading fiscal information. Based on its
current understanding of the investigation, Sun believes the investigation will
not have a material adverse effect on Sun's financial condition or results of
operations. The foregoing statement with regard to the outcome of this
investigation is forward looking and could be affected by a number of factors,
including the factual findings and interpretation of applicable laws and
regulations by the Attorney General and the DSS.
 
   
DIFFICULTY OF INTEGRATING RECENTLY ACQUIRED OPERATIONS
    
 
   
    Sun's growth strategy relies heavily on the acquisition of long-term and
subacute care facilities. Acquisitions present problems of integrating the
acquired operations with existing operations, including the loss of key
personnel and institutional memory of the acquired business, difficulty in
integrating corporate, accounting, financial reporting and management
information systems and strain on existing levels of personnel to operate such
acquired businesses. In addition, certain assumptions regarding the financial
condition of an acquired business may later prove to be incorrect. For example,
a significant percentage of the receivables of the acquired company may
ultimately prove to be uncollectible, which may result in significant
write-offs. Sun's net earnings for the years ended December 31, 1995 and 1994
were adversely impacted by problems associated with integrating the operations
of The Mediplex Group, Inc. ("Mediplex"), which was acquired by Sun in June
1994, including the write-off during 1995 and 1994 of certain Mediplex
receivables from periods prior to the acquisition and an impairment loss during
1995 related to the goodwill associated with six of the forty facilities
acquired in the Mediplex acquisition. In addition, net earnings for the year
ended December 31, 1996 were adversely affected by certain negative revenue
adjustments and write-offs of certain accounts receivables associated with
Mediplex. These adjustments were primarily the result of changes in accounting
estimates based on events occurring in 1996. Mediplex is the most significant
acquisition undertaken by Sun to date, and the acquisition of Mediplex allowed
Sun to expand its long-term and subacute care businesses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Sun's Annual Report on Form 10-K for the year ended December 31,
1996 incorporated by reference herein. Sun's ability to manage its growth
effectively will require it to continue to improve its corporate accounting,
financial reporting and management information systems, and to attract, train,
motivate and manage its employees effectively. See "-- Management of Growth."
There can be no assurance that Sun will be able to successfully integrate
acquired operations or to successfully manage any growth; failure to do so
effectively and on a timely basis could have a material adverse effect upon
Sun's financial condition and results of operations.
    
 
    If Sun is unable to effectively integrate the operations of an acquired
entity with Sun's existing operations, Sun may elect to divest some or all of
the acquired operations. In the second quarter of 1996, Sun sold its ambulatory
surgery subsidiary. Sun's decision to sell its ambulatory surgery subsidiary was
influenced in part by the market place's resistance to the integration of
subacute care with ambulatory surgery. In addition, in May 1997 Sun announced
that it had elected to implement a plan for the sale and divestiture of its
outpatient rehabilitation therapy clinics in the United States, which were
acquired as part of Sun's acquisition of Mediplex in 1994, and in Canada, which
were acquired through the acquisition of Columbia Health Care, Inc. in 1995.
Sun's decision to sell its outpatient clinics was based on Sun's conclusion that
the operations of the clinics are not sufficiently synergistic with Sun's
long-term and subacute care facilities or with its ancillary services business.
The sale of the outpatient rehabilitation therapy clinics is expected to be
completed by the end of 1997.
 
   
    The Company has entered into an Agreement and Plan of Merger and
Reorganization, dated as of February 17, 1997 (the "RCA Merger Agreement"),
among Sun, Retirement Care Associates, Inc., a
    
 
                                       12
<PAGE>
   
Colorado corporation ("RCA"), and Peach Acquisition Corporation, a Colorado
corporation and a direct wholly-owned subsidiary of Sun and an Agreement and
Plan of Merger and Reorganization, dated as of February 17, 1997 (the "Contour
Merger Agreement"), among Sun, Contour Medical, Inc., a Nevada corporation
("Contour"), and Nectarine Acquisition Corporation, a Nevada corporation and a
direct wholly-owned subsidiary of Sun (either or both such mergers pursuant to
these agreements being referred to herein as the "Mergers"). The integration of
operations following the Mergers will require the dedication of management
resources which will detract attention from Sun's day-to-day business. The
difficulties of integration may be increased by the necessity of coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures. Following the
Mergers, Sun is expected to seek to reduce expenses by eliminating duplicative
or unnecessary personnel, corporate functions and other expenses. There can be
no assurance that Sun will be able to reduce expenses in this fashion, that
there will not be high costs associated with such activities or that there will
not be other material adverse effects of such activities. Such events could
materially and adversely effect Sun's financial condition and results of
operations. In addition, there can be no assurance that the integration of the
retirement facilities of Sun and RCA will not have material adverse effects on
results of operations. Costs to be incurred in connection with the Mergers are
expected to be significant and will be charged against earnings of the combined
company. These charges will reflect the acquisition and integration of RCA,
including the elimination of redundant corporate functions, severance costs
relating to headcount reductions, the write-off of certain intangibles and
property and equipment, and transaction and other costs. In addition, there can
be no assurance that Sun will not incur additional charges in subsequent
quarters to reflect costs associated with the Mergers.
    
 
MANAGEMENT OF GROWTH
 
    Sun's success will depend in part on its ability to manage the growth of its
operations. Any such growth is expected to place a significant strain on Sun's
managerial, operational and financial resources. Sun's ability to manage growth
effectively will require it to continue to improve its corporate accounting,
financial reporting and management information systems, and to attract, train,
motivate and manage its employees effectively. These demands are expected to
require further expenditures for the addition of new management personnel and
the development of additional expertise by existing management personnel. There
can be no assurance that Sun will be able to manage effectively the expansion of
its operations, that its systems, procedures or controls will be adequate to
support Sun's operations or that Sun's management will be able to exploit
opportunities for its services and products. An inability to manage growth, if
any, could have a material adverse effect on Sun's business, results of
operations, financial condition and cash flow.
 
   
SUBSTANTIAL LEVERAGE; NEED FOR ADDITIONAL FINANCING
    
 
   
    Sun has substantial indebtedness. At March 31, 1997, Sun had, on a
consolidated basis, approximately $788.7 million of outstanding indebtedness,
including $420.9 million of indebtedness under its $490 million revolving credit
facility (the "Credit Facility"). Sun also had $24.6 million of outstanding
standby letters of credit under the Credit Facility as of March 31, 1997. 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 March 31, 1997, eight assisted
living facilities were under development which would require funding by the
Company totaling approximately $40,800,000, of which $16,636,000 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 $86,700,000. 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. At March 31, 1997, Sun had
outstanding commitments for construction and
    
 
                                       13
<PAGE>
   
development costs of approximately $10.4 million, including various contracts
related to improvements to existing facilities in the U.S. In addition, as of
such date Sun had commitments for construction and development costs of
approximately L13.7 million ($22.4 million as of March 31, 1997) million related
to the construction of nine long-term care facilities in the United Kingdom.
Sun's consolidated indebtedness will also increase as a result of the Mergers.
The ability of Sun to satisfy its debt obligations will be dependent upon its
future performance, which will be subject to prevailing economic conditions and
to financial, business and other factors, including factors beyond Sun's control
such as Federal and state health care reform. The amount of indebtedness makes
Sun more vulnerable to adverse economic and regulatory requirements than less
leveraged competistors, and may also limit Sun's ability to make additional
acquisitions or capital expenditures or to obtain additional financing in the
future.
    
 
    Sun believes that its current borrowing capacity under the Credit Facility
and cash from operations will be sufficient to satisfy its working capital
needs, capital commitments of its facilities under construction, routine capital
expenditures, current debt service obligations and required cash payments of up
to $7.7 million in connection with potential conversions by debenture holders of
Sun's 6 1/2% Convertible Debentures. Sun anticipates that it will fund its
construction commitments as well as its requirements relating to future growth
through (i) the available borrowing capacity under the Credit Facility, (ii) the
use of operating leases and common stock in the future as a means of acquiring
facilities and new operations, (iii) the availability of sale-leaseback
financing through real estate investment trusts and other financing sources and
(iv) the sale of securities in the public or private capital markets. However,
there can be no assurance that the Sun may not require additional sources of
financing, particularly if it pursues acquisitions requiring significant cash
consideration. Even if Sun does not have an immediate need for additional
financing, it may seek to access the public or private capital markets if it
believes that conditions are favorable. Sun has filed a shelf registration
statement with the Commission under which Sun may offer from time to time up to
$300 million of debt securities or preferred stock, each of which may be
convertible into Sun Common Stock. An equity-linked financing may have a
short-term negative effect on the market price of the Sun Common Stock, but Sun
does not believe that, absent other factors, the issuance of an equity-linked or
debt security would have a long-term material adverse effect on Sun. However,
Sun's access to the public or private markets may be adversely affected by the
status of the OIG investigation. See "-- Government Investigations; Uncertain
Impact on Future Operating Results." In addition, such additional financings may
require approval of the various lenders under the Credit Facility. There can be
no assurance that if additional sources of external financing are required, Sun
will be successful in obtaining such additional financing in the amounts and on
terms acceptable to Sun, or that Sun's financial condition will not deteriorate,
leading to covenant or payment defaults. If such additional sources of financing
are not available, Sun may not be able to pursue growth opportunities as
actively as it has in the past, and may be required to alter certain of its
operating strategies.
 
NO ASSURANCE OF CONTINUED RAPID GROWTH
 
    Since its formation in 1989, Sun has implemented an aggressive program of
expansion of its business through the acquisition of additional long-term and
subacute care facilities and other operations. From January 1994 through
December 31, 1996, Sun acquired or assumed the operations or management of 173
long-term and subacute care facilities with a total of 15,895 licensed beds in
the United States and the United Kingdom. During this same period, Sun opened 10
facilities with a capacity of 866 licensed beds. During such period, Sun has
also acquired pharmacies, temporary therapy staffing providers, outpatient
rehabilitation clinics, ambulatory surgery centers and a respiratory therapy
company, and has experienced significant internal growth, particularly in its
therapy operations. Sun's total net revenues increased from $135.7 million for
the year ended December 31, 1992 to $1,316 million for the year ended December
31, 1996. Similarly, net earnings increased from $4.4 million for the year ended
December 31, 1992 to $21.5 million for the year ended December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Sun's Annual Report on Form 10-K for the year ended
December 31, 1996, incorporated by reference herein. Sun intends to continue to
pursue its acquisition strategy in the future. In making
 
                                       14
<PAGE>
   
such acquisitions, Sun competes with other providers, many of which have greater
financial resources than Sun. There can be no assurance that suitable
acquisitions will be identified or completed in the future. Sun has undertaken
significant borrowing to finance the acquisition of Mediplex and other
transactions and to support expanded operations (including the assumption or
guarantee by Sun of $338.6 million of Mediplex indebtedness as of the date of
the acquisition of Mediplex). In addition, through January 1996 Sun has been
successful in utilizing Sun Common Stock as consideration in many of its
significant acquisitions, issuing or reserving for issuance approximately
21,286,000 shares of Sun Common Stock in acquisitions since January 1, 1994.
However, Sun did not utilize Sun Common Stock as acquisition consideration from
February 1996 through February 1997. Sun also has been able to fund cash
obligations of operations and acquisitions through the public issuance of equity
or equity-linked securities, resulting in net cash proceeds of $276.1 million in
1994. The ability to utilize Sun Common Stock for acquisition or financing
purposes will depend on the market price of the Sun Common Stock, which has in
the past been subject to heightened volatility resulting primarily from
uncertainties regarding certain Medicare reimbursement policies and a government
investigations of Sun's rehabilitation therapy subsidiary. See "-- Potential
Reduction of Reimbursement Rates From Third Party Payors and Impact on Future
Operating Results" and "-- Government Investigations; Uncertain Impact on Future
Operating Results." Because of operating and financing constraints resulting
from acquisitions and internal growth, there can be no assurance that Sun will
have adequate cash or borrowing capacity and other resources to compete
effectively for future acquisitions or will be able in the future to continue to
engage as actively in acquisitions as it has in the past, and uncertainties
regarding reimbursement rates for therapy, the outcome of the government
investigations of Sun's rehabilitation therapy subsidiary or a material
reduction in such rates could limit internal growth of Sun's therapy business.
Pursuant to the Credit Facility, Sun will be required to obtain the consent of
its principal bank lenders in connection with significant future acquisitions.
In addition, to the extent Sun's operational, administrative and financial
resources are strained by its acquisition program, Sun's ability to integrate
acquired operations may become more protracted. See "-- Difficulty of
Integrating Recently Acquired Operations." Although Sun is continuously engaged
in discussions regarding future acquisitions, there can be no assurance that any
acquisitions will be completed, or that Sun's historic rate of growth in assets,
revenues or net revenues will be sustained.
    
 
   
RISKS ASSOCIATED WITH THE DEVELOPMENT AND EXPANSION OF ANCILLARY SERVICES
    
 
   
    A significant aspect of Sun's operating strategy is to expand its therapy,
temporary therapy staffing and pharmacy services and, in particular, to offer
these services to nonaffiliated facilities. Therapy, temporary therapy staffing
and pharmaceutical services provided to nonaffiliated facilities, while
representing 28% and 31% of Sun's revenues for the twelve months ended December
31, 1995 and 1996, respectively, comprise a much more significant percentage of
its profitability. This profitability is the result of favorable reimbursement
rates and the limited capital requirements necessary to provide these services.
The higher profitability of these services makes Sun's profitability more
vulnerable if regulatory changes are made which affect reimbursement for these
services. See "-- Potential Reduction of Reimbursement Rates From Third Party
Payors and Impact on Future Operating Results." From time to time the negative
publicity surrounding the government investigations of Sun's rehabilitation
therapy subsidiary has slowed Sun's success in obtaining additional outside
contracts in the rehabilitation therapy business, which has resulted in higher
than required therapist staffing levels and has affected the private pay
enrollment in certain inpatient facilities. In addition, if the government
investigations have a negative impact on the future billing practices related to
Sun's rehabilitation therapy subsidiary, the profitability of the services
provided by such subsidiary would be reduced from current levels. See "--
Government Investigations; Uncertain Impact on Future Operating Results."
    
 
   
OUTSTANDING LITIGATION
    
 
    On or about January 23, 1996, two former stockholders of Golden Care, Inc.
filed a lawsuit (the "Golden Care Litigation") against Sun 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 Sun did not
disclose material facts concerning the investigation by the OIG and that Sun's
financial results
 
                                       15
<PAGE>
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 a registration rights agreement pursuant to which Sun agreed to register the
shares of Sun Common Stock issued to such former stockholders of Golden Care,
Inc. in the acquisition. Plaintiffs purport to seek rescission, 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. Sun believes it has meritorious defenses to the Golden Care Litigation.
There can be no assurance that the Golden Care Litigation will not have an
impact on Sun's accounting for the acquisition of Golden Care, Inc.
 
    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 Sun's directors and officers based on substantially the same events as
those set forth in the above described securities class actions was filed and
subsequently served on the defendants. On August 5, 1996, the District Court
dismissed this action without prejudice for failure to serve the defendants
within the required time period. Brickell Partners filed a new complaint,
alleging the same claims, on August 19, 1996. Defendants have moved to dismiss
the new complaint. Sun believes it has meritorious defenses to the new
complaint.
 
    Sun believes the Golden Care 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 Sun's results of
operations for that period. The foregoing statements with respect to the
possible outcomes of the Golden Care Litigation and the derivative action are
forward looking and could be affected by a number of factors, including judicial
interpretations of applicable law, the uncertainties and risks inherent in any
litigation, particularly a jury trial, the existence, scope and number of any
subsequently filed complaints, and the outcome of the OIG investigation and all
factors that could affect that outcome. See "-- Government Investigations;
Uncertain Impact on Future Operating Results."
 
RISK OF ADVERSE EFFECT OF FUTURE HEALTH CARE REFORM
 
    In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, changes in reimbursement by federal and state payors such as Medicare
and Medicaid, limitations on the ability of Sun to maintain or increase the
level of services it provides, insurance market reforms to increase the
availability of group health insurance to small businesses and the requirement
that all businesses offer health insurance coverage to their employees. Some of
the leading proposals would extend temporary reductions in Medicare
reimbursement imposed under current law, impose additional cuts in Medicare
reimbursement and substantially restructure Medicaid. Such reductions in
Medicare reimbursement may include, but are not limited to, some or all of the
following: reductions in capital reimbursement; reductions in certain laboratory
reimbursement; limitations on ancillary costs of skilled nursing facilities;
bundling of ancillary services into nursing home payments; imposition of salary
equivalency for occupational and speech therapy services; and imposition of a
prospective payment system for skilled nursing facility services and home health
services. It is not clear at this time what proposals will be adopted, or, if
adopted, what effect, if any, such proposals would have on Sun's business. There
can be no assurance that currently proposed or future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on Sun's financial
condition or results of operations. See "-- Potential Reduction of Reimbursement
Rates From Third Party Payors; Uncertain Impact on Future Operating Results."
 
RISK OF EXPANSION OF INTERNATIONAL OPERATIONS; FOREIGN EXCHANGE RISK
 
    Sun currently conducts business outside of the United States, in the United
Kingdom and Canada. The foreign operations accounted for 4% of Sun's total net
revenues during the year ended December 31, 1996 and 16% of Sun's consolidated
total assets as of December 31, 1996. Sun intends to
 
                                       16
<PAGE>
expand its international operations both in the United Kingdom and in selected
markets in Europe and Australia. However, in May 1997 Sun announced that it had
elected to divest its outpatient rehabilitation therapy clinics in Canada. See
"--Difficulty of Acquiring Recently Acquired Operations." Sun expects its
revenues and operations attributable to international operations to increase and
substantially contribute to Sun's growth and earnings in the future. However, as
Sun's international operations grow to account for a larger percentage of Sun's
total net revenues, adverse results from Sun's international operations could
adversely effect Sun's financial condition and results of operations. Sun
intends to expand its international operations through the acquisition of
operational facilities and the construction and development of new facilities;
however, Sun expects the construction and development of new facilities to be a
more significant factor in its international expansion than it has in the United
States, where Sun's growth has been primarily due to the acquisition of
operational facilities. In addition to the capital expenditures involved in the
construction and development of new facilities, Sun expects to incur substantial
losses in the first year of operation of a new facility. As a result, the
financial condition and results of operations of Sun's international could be
adversely affected in any period in which a significant number of facilities are
being constructed or developed or are in their first year of operation. The
success of Sun's operations in and expansion into international markets depends
on numerous factors, many of which are beyond its control. Such factors include,
but are not limited to, economic conditions and healthcare regulatory systems in
the foreign countries in which Sun operates. In addition, international
operations and expansion may increase Sun's exposure to certain risks inherent
in doing business outside the United States, including slower payment cycles,
unexpected changes in regulatory requirements, potentially adverse tax
consequences, currency fluctuations, restrictions on the repatriation of profits
and assets, compliance with foreign laws and standards and political risks.
 
   
    Sun's financial condition and results of operations are subject to foreign
exchange risk. Because of Sun's foreign growth strategies, Sun does not expect
to repatriate funds invested overseas and, therefore, foreign currency
transaction exposure is not normally hedged. Exceptional planned foreign
currency cash flow requirements, such as acquisitions overseas, are hedged
selectively to prevent fluctuations in the anticipated foreign currency value.
Changes in the net worth of Sun's foreign subsidiaries arising from currency
fluctuations are accumulated in the translation adjustments component of
stockholders' equity.
    
 
GEOGRAPHIC PAYOR CONCENTRATION
 
   
    A significant portion of Sun's historical revenues from its long-term care
facility operations is derived from its operations in Massachusetts, Connecticut
and Washington and, in particular, from such states' Medicaid programs. Net
revenues attributable to Sun's long-term care facility business in these states
accounted for approximately 59% of its net revenues from long-term care facility
operations in the United States, and 37% of its total net revenues during the
year ended December 31, 1996. Net revenues from these states' Medicaid programs
accounted for approximately 18% of Sun's total net revenues from its long-term
care facility operations in the United States, and 11% of Sun's total net
revenues during the year ended December 31, 1996. Any adverse change in the
regulatory environment, Sun's qualification for reimbursement under the Medicaid
program, the reimbursement rates paid under the Medicaid programs, or in the
supply of or demand for services, in any of such states, could have a material
adverse effect on Sun's financial condition and results of operations.
    
 
INCREASED LABOR COSTS AND AVAILABILITY OF PERSONNEL
 
    In recent years Sun has experienced increases in its labor costs primarily
due to higher wages and greater benefits required to attract and retain
qualified personnel, increased staffing levels in its long-term and subacute
care facilities due to greater patient acuity and the hiring and retention of
staff therapists. Although Sun expects labor costs to continue to increase in
the future, it is anticipated that any increase in costs will generally result
in higher patient rates in subsequent periods, subject to the
 
                                       17
<PAGE>
time lag in most states between increases in reimbursable costs and the receipt
of related reimbursement rate increases. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Effects From
Changes in Reimbursement" included in Sun's Annual Report on Form 10-K for the
year ended December 31, 1996, incorporated by reference herein.
 
    In the past, the health care industry, including Sun's long-term and
subacute care facilities, has experienced a shortage of nurses to staff health
care operations and, more recently, the health care industry has experienced a
shortage of therapists. Sun is not currently experiencing a nursing or therapist
shortage, but it competes with other health care providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Sun in other capacities, such as certified nursing assistants. A
nursing, therapist or certified nursing assistant shortage could force Sun to
pay even higher salaries and make greater use of higher cost temporary
personnel. A lack of qualified personnel might also require Sun to reduce its
census or admit patients requiring a lower level of care, both of which could
adversely affect operating results.
 
EXTENSIVE REGULATION
 
    Sun is subject to extensive Federal, state and local government regulation
relating to licensure, conduct of operations, ownership of facilities, expansion
of facilities and services and reimbursement for services. As such, in the
ordinary course of business, Sun's operations are continuously subject to state
and Federal regulatory scrutiny, supervision and control. Such regulatory
scrutiny often includes inquiries, investigations, examinations, audits, site
visits and surveys, some of which may be non-routine. All of the facilities
operated or managed by Sun are required to be licensed in accordance with the
requirements of state and local agencies having jurisdiction over their
operations. Most of Sun's facilities are also certified as providers under the
Medicaid and Medicare programs. The long-term care facilities, as well as Sun's
rehabilitation therapy and pharmacy operations, are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with regulatory procedures and licensing under state law and certification under
the Medicare and Medicaid programs. While Sun has not failed to obtain such
approvals or licenses in the past, the failure to obtain or renew any required
regulatory approvals or licenses or to comply with applicable regulations in the
future could adversely affect Sun's financial condition and results of
operations. See "-- Government Investigations; Uncertain Impact on Future
Operating Results." To the extent that Certificates of Need ("CONs") or other
similar approvals are required for expansion of Sun's operations, either through
acquisitions or additions to or provision of new services at such facilities,
such expansion could be adversely affected by the failure to obtain such CONs or
approvals.
 
    Medicare and Medicaid antifraud and abuse amendments (the "Fraud and Abuse
Provisions") prohibit certain business practices and relationships that might
affect the provision and cost of health care services reimbursable under
Medicare and Medicaid. Sanctions for violating the Fraud and Abuse Provisions
include criminal penalties and civil sanctions, including fines and possible
exclusion from the Medicare and Medicaid programs. In addition, certain states
have adopted fraud and abuse statutes that prohibit specified business
practices.
 
    In many states, the temporary therapy staffing industry is regulated and
CareerStaff must be registered or qualify for an exemption from registration.
While these regulations have had no material effect on the conduct of
CareerStaff's business to date, there can be no assurance that future
regulations will not have such an effect. In addition, the health care industry
to which CareerStaff provides therapists is subject to numerous Federal, state
and local regulations. The majority of states require therapists practicing in
such states to be licensed or certified. CareerStaff has occasionally
experienced difficulties in moving therapists from one state to another because
of state licensing requirements. Sun does not believe this has had a material
adverse effect on its financial condition or results of operations; however,
there can be no assurance that its business in the future will not be materially
adversely affected by licensing requirements of state and Federal authorities
and by amendments to the Omnibus Budget Reconciliation Act of 1987, which
mandated that nursing homes provide rehabilitation therapy services to their
patients and authorized Medicare reimbursement for such services, or
 
                                       18
<PAGE>
by new reimbursement rates proposed by HCFA. See "Business -- Government
Regulation" included in Sun's Annual Report on Form 10-K for the year ended
December 31, 1996, incorporated by reference herein.
 
SUBSTANTIAL COMPETITION
 
    Sun operates in a highly competitive industry. The nature of competition
varies by location. Sun's facilities generally operate in communities that are
also served by similar facilities operated by others. Some competing facilities
are located in buildings that are newer than those operated by Sun and provide
services not offered by Sun, and some are operated by entities having greater
financial and other resources and longer operating histories than Sun. In
addition, some facilities are operated by nonprofit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other resources not available to Sun. Some hospitals that either currently
provide long-term and subacute care services or are converting their
under-utilized facilities into long-term and subacute care facilities are also a
potential source of competition to Sun. Sun also competes with other companies
in providing rehabilitation therapy services and pharmaceutical products and
services to the long-term care industry and in employing and retaining qualified
therapists and other medical personnel. Many of these competing companies have
greater financial and other resources than Sun. There can be no assurance that
Sun will not encounter increased competition in the future that would adversely
affect its financial condition and results of operations. See "Business --
Competition" included in Sun's Annual Report on Form 10-K for the year ended
December 31, 1996, incorporated by reference herein.
 
POTENTIAL CONFLICTS OF INTEREST FROM RELATED PARTY TRANSACTIONS
 
    At March 31, 1997, 56 of Sun's 173 long-term and subacute care facilities in
the United States were leased or subleased from John E. Bingaman or Zev Karkomi,
two of Sun's directors, or from partnerships or corporations in which such
directors are general or limited partners, directors or stockholders or
otherwise have a significant equity holding. Sun believes the terms of all of
the foregoing leases and subleases to which it is a party are as favorable to
Sun as those that could have been obtained in arms' length transactions with
non-affiliated parties at the time of such transactions. However, contractual
relationships with entities affiliated with members of Sun's board of directors
create the potential for conflicts of interest. Sun will likely continue to
enter into leases and subleases with members of its board of directors and their
affiliates. There can be no assurance that these contractual relationships with
members of Sun's board of directors and their affiliates will not create actual
conflicts of interest. See "Sun Related Party Transactions."
 
ADEQUACY OF CERTAIN INSURANCE
 
    As is typical in the healthcare industry, Sun is subject to claims by
patients and others in the ordinary course of its business. Sun maintains
general liability and medical malpractice insurance, in each case in amounts and
with such coverages and deductibles that are deemed appropriate by management.
There can be no assurance that such insurance will continue to be available at
acceptable costs or that claims in excess of the current insurance coverage or
claims not covered by insurance will not be asserted against Sun.
 
HEALTH INSURANCE AND WORKERS' COMPENSATION INSURANCE
 
    Sun has self-insured the healthcare risks of its employees who select
coverage under certain Sun-sponsored plans. Workers' compensation coverage is
effected through self-insurance or retrospective/ high deductible insurance
programs, except that Sun's long-term and subacute care subsidiary is a
non-subscriber to the workers' compensation programs in Texas. Substantially all
of the risk of workers' compensation claims under the high deductible programs
are assumed by Sun and such risks are comparable to those of an insurance
carrier for retrospective policies. The retrospective high deductible program
provides coverage in all states in which Sun operates with the exception of
Arizona, Illinois, Massachusetts, Washington and Connecticut (which are
self-insured), Texas (in which Sun is a non-subscriber) and Rhode Island, Ohio,
Maine, Nevada and Wyoming (in which Sun is required to utilize the specific
programs offered by those states). The costs of paying for health care
 
                                       19
<PAGE>
and workers' compensation claims can fluctuate depending on the type and number
of claims in any given period. There can be no assurance that the amounts Sun
will be required to pay for these types of claims will not increase.
 
   
CONCENTRATION OF OWNERSHIP
    
 
   
    As of March 31, 1997, Mr. Turner beneficially owned approximately 14% of the
outstanding Sun Common Stock. While Mr. Turner's percentage ownership is not
sufficient to enable him to control the outcome on matters submitted to
stockholders, his stock ownership, along with his position as Chairman of the
Board of Directors, President and Chief Executive Officer of Sun, enables him to
exert significant influence on Sun's operations. Mr. Turner's level of ownership
may have the effect of hindering a change of control of Sun.
    
 
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
 
    Sun's certificate of incorporation and by-laws contain provisions that may
make it more difficult for a third party to acquire, or discourage acquisition
bids for, Sun. These provisions could limit the price that certain investors
might be willing to pay in the future for shares of Sun Common Stock. In
addition, shares of Sun's preferred stock may be issued in the future without
further stockholder approval and upon such terms and conditions and having such
rights, voting powers, preferences and relative, participating, optional and
other special privileges as the board of directors may determine. The rights of
the holders of Sun Common Stock will be subject to, and may be adversely
affected by, the rights of any holders of preferred stock that may be issued in
the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from acquiring, a majority of the
outstanding voting stock of Sun. Sun has no present plans to issue any shares of
preferred stock, other than the shares of Sun Preferred Stock to be issued in
the RCA Merger. In addition, Sun has adopted a stockholder rights plan that,
along with certain provisions of Sun's certificate of incorporation, have the
effect of discouraging certain transactions involving a change of control of
Sun.
 
POTENTIAL VOLATILITY OF STOCK PRICE
 
   
    There has been significant volatility in the market prices of securities of
healthcare companies. In particular, the market price of the Sun Common Stock
has in the past been subject to heightened volatility resulting primarily from
uncertainties regarding certain Medicare reimbursement policies and government
investigations of Sun's rehabilitation therapy subsidiary. See "-- Potential
Reduction of Reimbursement Rates From Third Party Payors and Impact on Future
Operating Results" and "-- Government Investigations; Uncertain Impact on Future
Operating Results." Sun believes factors such as legislative and regulatory
developments, continuing uncertainties regarding certain Medicare reimbursement
policies and a government investigations of Sun's rehabilitation therapy
subsidiary and quarterly variations in financial results could cause the market
price of the Sun Common Stock to fluctuate substantially. In addition, the stock
market has experienced volatility that has particularly affected the market
prices of many healthcare service companies' stocks and that often has been
unrelated to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Sun Common Stock.
    
 
                                USE OF PROCEEDS
 
   
    Sun will not receive any of the net proceeds from the sale of the shares of
Sun Common Stock offered hereby, all of which proceeds will be received by the
Selling Stockholders.
    
 
                                       20
<PAGE>
                              SELLING STOCKHOLDERS
 
   
    The following table sets forth certain information regarding the beneficial
ownership of Sun Common Stock as of April 30, 1997, as reported to Sun by each
Selling Stockholder, the number of Shares which is being offered by each of the
Selling Stockholders and the number and percentage of currently outstanding
shares to be owned by each of the Selling Stockholders following this Offering,
assuming that all Shares offered hereby are sold.
    
 
   
<TABLE>
<CAPTION>
                                                                                            NUMBER OF
                                                                      SHARES OF           SHARES OFFERED         SHARES OF
                                                                    COMMON STOCK            HEREBY FOR          COMMON STOCK
                                                                 BENEFICIALLY OWNED       STOCKHOLDER'S      BENEFICIALLY OWNED
                                                                  PRIOR TO OFFERING          ACCOUNT         AFTER THE OFFERING
                                                              -------------------------   --------------   ----------------------
NAME OF BENEFICIAL OWNER                                       NUMBER    PERCENTAGE (1)                    NUMBER  PERCENTAGE (1)
- ------------------------------------------------------------  ---------  --------------                    ------  --------------
<S>                                                           <C>        <C>              <C>              <C>     <C>
Honorcare Selling Stockholder:
  John E. Bingaman (2)......................................    182,500      *                120,000      62,500      *
Golden Care Selling Stockholders:
  Susan Bird................................................    342,000      *                342,000           0      *
  Tom R. Futch..............................................    234,300      *                234,200         100      *
  PaineWebber International (U.K.) Ltd......................    382,977      *                382,977           0      *
  Morgan Stanley & Co.......................................    594,402        1.2%           594,402           0      *
DanRae Selling Stockholders:
  Daniel J. Jacob and Rae Ann Jacob, Trustees of the Jacob
   Family Revocable Trust...................................     76,600      *                 76,600           0      *
CareerStaff Selling Stockholders:
  J. Livingston Kosberg, Trustee of the Livingston Kosberg
   Trust (3)................................................    866,933        1.7%           727,797           0      *
  J. Livingston Kosberg, Trustee of the Lewis E. Wilkenfeld
   Trust (3)................................................    866,933      *                133,481           0      *
  Saranne Kosberg (3).......................................    866,933        1.7%             5,655           0      *
  Brad Brookner, Trustee of the Dolores Wilkenfeld Trust....    238,742      *                238,742           0      *
  Michael Weinholtz.........................................    238,266      *                238,266           0      *
  Brookner Family Partnership, Ltd..........................     19,365      *                 19,365           0      *
  Andrew and Wendy Starr....................................     85,793      *                 85,793           0      *
  Clarence E. Mayer (4).....................................    918,878        1.8%           837,488           0      *
  Jefferson Guaranty Bank, Custodian of the Clarence E.
   Mayer IRA (4)............................................    918,878        1.8%            40,695           0      *
  Jefferson Guaranty Bank, Custodian of the Carol F. Mayer
   IRA (4)..................................................    918,878        1.8%            40,695           0      *
  Daniel C. Arnold (5)......................................     26,040      *                  8,680       8,680      *
  Beverly B. Arnold (5).....................................     26,040      *                  8,680       8,680      *
NHCP Selling Stockholders:
  T. Edward Childress III (6)...............................    304,400      *                304,400           0      *
  John P. O'Brien, Jr. (6)..................................    304,400      *                304,400           0      *
</TABLE>
    
 
                                       21
<PAGE>
   
<TABLE>
<CAPTION>
                                                                                            NUMBER OF
                                                                      SHARES OF           SHARES OFFERED         SHARES OF
                                                                    COMMON STOCK            HEREBY FOR          COMMON STOCK
                                                                 BENEFICIALLY OWNED       STOCKHOLDER'S      BENEFICIALLY OWNED
                                                                  PRIOR TO OFFERING          ACCOUNT         AFTER THE OFFERING
                                                              -------------------------   --------------   ----------------------
NAME OF BENEFICIAL OWNER                                       NUMBER    PERCENTAGE (1)                    NUMBER  PERCENTAGE (1)
- ------------------------------------------------------------  ---------  --------------                    ------  --------------
Columbia Selling Stockholders (7):
<S>                                                           <C>        <C>              <C>              <C>     <C>
  3C Rehabilitation Technologies Limited....................    170,845      *                170,845           0      *
  MDS Health Ventures Inc...................................    104,122      *                104,122           0      *
  Canada Trust Company, Trustee for the Prudential Insurance
   Company of America.......................................     86,747      *                 86,747           0      *
  MDS Health Group Limited..................................     38,325      *                 38,325           0      *
  The Health Care & Biotechnology Venture Fund..............     38,325      *                 38,325           0      *
  Ontario Hydro in Trust for the Pension Fund...............     38,325      *                 38,325           0      *
  ABN AMRO Canadian Small Cap Fund..........................     10,007      *                 10,007           0      *
  Louis Probst..............................................      3,304      *                  3,304           0      *
  Furman Selz LLC...........................................     10,000      *                 10,000           0      *
Watson Selling Stockholder:
  Charles M. Watson (8).....................................     40,000      *                 40,000           0
6% Convertible Debenture Resale Selling Stockholders:
  New Hampshire Retirement System (9).......................     24,038      *                 24,038           0      *
  The Museum of Fine Art, Boston (9)........................      4,120      *                  4,120           0      *
  Boston College Endowment (9)..............................      9,157      *                  9,157           0      *
  Putnam Convertible Opportunities and Income Trust (10)....     22,893      *                 22,893           0      *
  Putnam Convertible Income-Growth Trust (10)...............    145,833      *                145,833           0      *
  D.G. Associates...........................................      1,373      *                  1,373           0      *
  Smith Barney & Co.........................................    165,842      *                165,842           0      *
  Other 6% Convertible Debenture Resale Selling Stockholders
   (11).....................................................    589,656        1.2%           589,656           0      *
                                                              ---------                   --------------
    Total...................................................  6,318,508                     6,247,228
                                                              ---------                   --------------
                                                              ---------                   --------------
</TABLE>
    
 
- ------------------------
  * Less than 1%.
 
   
 (1) Based on the number of shares outstanding on April 30, 1997.
    
 
   
 (2) Includes 42,500 shares of Common Stock issuable upon exercise of options
    that are currently exercisable or exercisable within 60 days of April 30,
    1997.
    
 
   
 (3) Mr. Kosberg has voting and investment power over the Livingston Kosberg
    Trust (as trustee therefor and beneficiary thereof) and the Lewis E.
    Wilkenfeld Trust (as trustee thereof), and the shares held by each of the
    Lewis E. Wilkenfeld Trust and the Livingston Kosberg Trust may be deemed to
    be beneficially owned by Mr. Kosberg. Mr. Kosberg and Ms. Kosberg are also
    married to each other and the shares held by each of them may be deemed
    beneficially owned by the other. As to each of the Livingston Kosberg Trust
    and Ms. Kosberg, share numbers include 727,797 shares held of record by the
    Livingston Kosberg Trust, 133,481 shares held of record by the Lewis E.
    Wilkenfeld Trust and 5,655 shares held of record by Ms. Kosberg
    individually. Mr. Kosberg and Ms. Kosberg each disclaim beneficial ownership
    of the shares held by the other and by the Lewis E. Wilkenfeld Trust.
    
 
                                       22
<PAGE>
   
 (4) Mr. Mayer has voting and investment power over the Clarence E. Mayer IRA
    and Ms. Mayer has voting and investment power over the Carol F. Mayer IRA.
    Mr. Mayer and Ms. Mayer are also married to each other and the shares held
    by each of them may be deemed beneficially owned by the other. As to each of
    Mr. Mayer, the Clarence E. Mayer IRA and the Carol F. Mayer IRA, share
    numbers include 837,488 shares held by Mr. Mayer individually, 40,695 held
    by the Clarence E. Mayer IRA and 40,695 held by the Carol F. Mayer IRA. Mr.
    Mayer disclaims beneficial ownership of the shares held by the Carol F.
    Mayer IRA and Ms. Mayer disclaims beneficial ownership of the shares held by
    Mr. Mayer and by the Clarence E. Mayer IRA.
    
 
   
 (5) Mr. Arnold has voting and investment power over the Bintliff 1990 Limited
    Partnership ("Bintliff 1990 LP") (as general partner thereof) and the shares
    held by the Bintliff 1990 LP may be deemed to be beneficially owned by Mr.
    Arnold. Mr. Arnold and Ms. Arnold are also married to each other and the
    shares held by each of them may be deemed beneficially owned by the other.
    As to each of Mr. Arnold and Ms. Arnold, share numbers include 8,680 shares
    issuable pursuant to immediately exercisable stock options held of record by
    Mr. Arnold individually, 8,680 shares issuable pursuant to immediately
    exercisable stock options held of record by Ms. Arnold individually and
    8,680 shares issuable pursuant to immediately exercisable stock options held
    by the Bintliff 1990 LP. The 8,680 shares issuable pursuant to immediately
    exercisable stock options held by the Bintliff 1990 LP are not being offered
    hereunder. Mr. Arnold and Ms. Arnold each disclaim beneficial ownership of
    the shares issuable pursuant to the options held by the other and by the
    Bintliff 1990 LP.
    
 
   
 (6) As to each of Mr. Childress and Mr. O'Brien, share numbers include 296,153
    shares held by each of them individually and 8,247 shares as to which
    investment power is shared with Boatmen's Trust Company pursuant to a
    Post-Closing Escrow Agreement dated August 16, 1995 (the "Escrow
    Agreement"). Pursuant to the Escrow Agreement, such shares are to be
    delivered to the NHCP Selling Shareholders over an eighteen month period
    commencing February 16, 1996, unless such shares are used to satisfy the
    NHCP Selling Shareholders' contingent obligation to indemnify Sun for
    certain losses.
    
 
   
 (7) Shares beneficially owned by the Columbia Selling Stockholders consist of
    500,000 shares of Common Stock issuable upon exercise of immediately
    exercisable warrants at an exercise price of $15.375 per share.
    
 
   
 (8) Shares beneficially owned by the Watson Selling Stockholder consist of
    40,000 shares of Common Stock which are issuable upon exercise of a warrant
    which is exercisable one year after grant at an exercise price of $17.00 per
    share.
    
 
 (9) Voting and investment power is shared with the Putnam Advisory Company,
    Inc.
 
(10) Voting and investment power is shared with Putnam Investment Management,
    Inc.
 
(11) Information concerning other 6% Convertible Debenture Resale Selling
    Stockholders will be set forth in Prospectus Supplements from time to time,
    if required.
 
   
    From 1984 to July 1993 Mr. Bingaman was the Chairman of the Board and a
shareholder of Honorcare. Mr. Bingaman received the 120,000 Shares offered
hereby for his account as consideration for the sale by him and the other
shareholders of Honorcare to Sun, effective July 13, 1993, of the shares of
Honorcare. In connection with such sale, Sun agreed to register Mr. Bingaman's
Shares for resale at Sun's expense. Sun and Mr. Bingaman have agreed to
indemnify each other for certain liabilities arising out of material
misstatements and omissions made by the other party in the Registration
Statement and Prospectus. Currently, Mr. Bingaman is a director of Sun. In
addition, Sun is a lessee or assignee of seven facilities from partnerships in
which Mr. Bingaman has an equity interest of greater than 10%.
    
 
   
    Daniel and Rae Jacob received the Shares owned by the Jacob Family Revocable
Trust as consideration in the merger of a subsidiary of Sun on March 1, 1995
with DanRae. In the merger agreement, Sun agreed to register the Shares for
resale. Daniel Jacob continues to be employed by Sun following the acquisition.
Daniel and Rae Jacob are offering 76,600 of these Shares hereby.
    
 
                                       23
<PAGE>
   
    The Golden Care Selling Stockholders received the 1,553,579 Shares owned by
them as consideration for the sale by them to Sun, effective May 5, 1995, of the
shares of Golden Care. In connection with such sale, Sun entered into a
Registration Rights Agreement providing for the registration for resale of such
Shares at Sun's expense. Sun and the Golden Care Selling Stockholders agreed to
indemnify each other for certain liabilities arising out of material
misstatements and omissions made by the other party in the Registration
Statement and Prospectus. Ms. Bird was an officer and owner of Golden Care from
November 1990 to May 1995, and Mr. Futch was an officer and owner of Golden Care
from August 1994 to May 1995. Mr. Futch continues to be employed by Golden Care
following the acquisition. Ms. Bird terminated her employment with Golden Care
effective in July of 1995. On or about January 23, 1996, another former
shareholder of Sun and Ms. Bird filed a lawsuit against the Company and certain
of its officers and directors alleging among other things, a breach of the
Registration Rights Agreement. See "Risk Factors -- Outstanding Litigation."
    
 
   
    From October 1995 to January 1997, a former shareholder of Sun sold an
aggregate of 936,402 Shares to PaineWebber International (U.K.) Ltd.
("PaineWebber"), and from June 1996 to January 1997, Ms. Bird sold an aggregate
of 594,402 Shares to Morgan Stanley & Co. ("Morgan Stanley"), in each case in
transactions exempt from the registration requirements of the Securities Act. In
connection with such transactions, the former shareholder assigned to
PaineWebber, and Ms. Bird assigned to Morgan Stanley, their respective rights to
require Sun to register the resale of such Shares. In connection therewith,
PaineWebber and Morgan Stanley have each agreed to be bound by the provisions of
the Registration Rights Agreement as a Golden Care Selling Stockholder. Certain
of such Shares are being offered hereby, and PaineWebber and Morgan Stanley are
Golden Care Selling Stockholders hereunder.
    
 
   
    The CareerStaff Selling Stockholders received the 2,597,734 Shares owned by
them as consideration in the merger of a subsidiary of Sun on June 21, 1995 with
CareerStaff. In connection with the CareerStaff Merger, Sun entered into a
Stockholders Agreement with certain of the CareerStaff Selling Stockholders
pursuant to which such CareerStaff Selling Stockholders agreed to vote their
shares of CareerStaff common stock in favor of the CareerStaff Merger. Sun also
entered into a Registration Rights Agreement with those CareerStaff Selling
Stockholders that were either affiliates of CareerStaff or parties to the
Stockholders Agreement providing for the registration for resale of such shares
at Sun's expense. Sun and the CareerStaff Selling Stockholders agreed to
indemnify each other for certain liabilities arising out of material
misstatements and omissions made by the other party in the registration
statement.
    
 
   
    From prior to 1992 to June 1995, Mr. Kosberg was the Chairman of the Board
of CareerStaff and its predecessor. From March 1992 to June 1995, Mr. Weinholtz
was the President and Chief Executive Officer of CareerStaff and its
predecessor. From June 1994 to June 1995, Mr. Arnold was a Director of
CareerStaff. From August 1991 to April 1994, Mark Brookner, the president of the
general partner of Brookner Family Partnership, Ltd., was the Vice President and
Treasurer of the predecessor to CareerStaff.
    
 
   
    The NHCP Selling Stockholders received the 608,800 Shares owned by them as
consideration in the merger of NHCP on August 15, 1995 with Sunscript Pharmacy
Corporation ("Sunscript"), a wholly-owned subsidiary of Sun. In connection with
the NHCP Merger, Sun entered into a Registration Rights Agreement with the NHCP
Selling Stockholders providing for the registration for resale of such Shares at
Sun's expense. Sun and the NHCP Selling Stockholders agreed to indemnify each
other for certain liabilities arising out of material misstatements and
omissions made by the other party in the registration statement. For more than
three years prior to January 1997, each of the NHCP Selling Stockholders was an
officer and owner of NHCP. Each of the NHCP Selling Stockholders entered into
employment agreements with Sun's institutional pharmacy subsidiary effective
August 16, 1995 and continue to be employed by such subsidiary.
    
 
    The Columbia Selling Stockholders received the warrants (the "Columbia
Warrants") held by them on November 30, 1995 in connection with the acquisition
by Sun of Columbia. The Columbia
 
                                       24
<PAGE>
   
Warrants are exercisable for an aggregate of 500,000 Shares at an exercise price
of $15.375 per Share. Columbia Warrants were issued to eight former shareholders
of Columbia as partial consideration for the sale of their shares of Columbia to
Sun, and to Furman Selz LLC as partial payment of its advisory fees in
connection with the Columbia Acquisition. The Columbia Warrants provide for the
registration for resale of the Shares issuable upon exercise of the Columbia
Warrants at Sun's expense. Sun and the Columbia Selling Stockholders have agreed
to indemnify each other for certain liabilities arising out of material
misstatements and omissions made by the other party in the registration
statement.
    
 
   
    The Watson Selling Stockholder received the warrant (the "Watson Warrant")
held by him on February 18, 1997 in connection with the acquisition by Sun of
Watson. The Watson Warrant is exercisable for 40,000 Shares at an exercise price
of $17.00 per Share. The Watson Warrant was issued to the former shareholder of
Watson as partial consideration for the sale of his shares to Sun. The Watson
Warrant provides for the registration for resale of the Shares issuable upon
exercise of the Watson Warrant at Sun's expense. Sun and the Watson Selling
Stockholder agreed to indemnify each other for certain liabilities arising out
of material misstatements and omissions made by the other party in the
registration statement. For more than three years prior to January 1997, the
Watson Selling Stockholder was the chief executive officer and sole stockholder
of Watson. The Watson Selling Stockholder entered into an employment agreement
with Sun's pharmacy subsidiary effective February 18, 1997 and continues to be
employed by such subsidiary.
    
 
   
    The Selling Stockholders registering their stock for resale upon conversion
of the 6% Convertible Debentures (the "6% Convertible Debenture Resale Selling
Stockholders") are among the persons who bought 6% Convertible Debentures in a
private placement in March 1994. The 6% Convertible Debentures are convertible
at any time into Common Stock, but no 6% Convertible Debentures have been
converted to date. The 6% Convertible Debentures were sold pursuant to a Fiscal
Agency Agreement dated as of March 1, 1994 between Sun and NationsBank of Texas,
N.A., as fiscal agent. The total outstanding principal amount of 6% Convertible
Debentures sold was $83,300,000 all of which remains outstanding at the date of
this Prospectus. Approximately $62.3 million of the 6% Convertible Debentures
were sold pursuant to the exemption from registration provided by Regulation S
promulgated under the Securities Act (the "Regulation S Debentures"), which
regulation governs the resale of the 2,851,191 shares of Common Stock issuable
on conversion of the Regulation S Debentures. The remaining approximately $21.0
million of the 6% Convertible Debentures were sold pursuant to an exemption from
registration under the Securities Act for transactions not involving a public
offering (the "Private Placement Debentures"), and the resale of Common Stock
issuable upon conversion of the Private Placement Debentures is subject to
registration hereunder. In the Fiscal Agency Agreement, Sun agreed to register
for resale the Common Stock issuable on conversion of the Private Placement
Debentures.
    
 
    Based on information provided to the Company, the total number of shares of
Common Stock that may be offered by persons that purchased Private Placement
Debentures is 962,912, all of which may be offered hereunder. Additional selling
stockholders or other information concerning certain 6% Convertible Debenture
Resale Selling Stockholders may be set forth in Prospectus Supplements from time
to time.
 
    The Company is not a party to any agreements, arrangements or understandings
with respect to the sale of any of the 6% Convertible Debentures or shares of
Common Stock by any Selling Stockholder.
 
    Other than as set forth above or as a result of the sales of shares to Sun
referred to above, none of the Selling Stockholders listed above has had any
material relationship with Sun within the past three years.
 
                                       25
<PAGE>
                              PLAN OF DISTRIBUTION
 
    The Shares of Common Stock offered hereby by the Selling Stockholders may be
sold from time to time to purchasers directly by the Selling Stockholders. Such
sales may be made at prices and at terms then prevailing or at prices related to
the then current market price, or in negotiated transactions. The Selling
Stockholders may from time to time offer the Shares of Common Stock in ordinary
brokerage transactions or through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom they may act as agent. The Selling Stockholders and any underwriters,
dealers or agents that participate in the distribution of Shares of Common Stock
may be deemed to be underwriters and any profit on the sale of Shares by them
and any discounts, commissions or concessions received by any such underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. At the time a particular offer of Shares is made, to
the extent required, a Prospectus Supplement will be distributed which will set
forth the specific Shares to be sold and the terms of the offering, including
the name or names of any additional Selling Stockholders, the name or names of
any underwriters, dealer-agents, any discounts, commissions and other items
constituting compensation from the Selling Stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers.
 
    The Shares of Sun Common Stock offered hereby by the Company are being
offered for issuance upon the conversion of $22.4 million outstanding principal
amount of 6 1/2% Convertible Debentures. The Company will not receive any
proceeds from the conversion of the 6 1/2% Convertible Debentures. All shares of
Sun Common Stock received upon conversion of the 6 1/2% Convertible Debentures
will be freely transferable, except shares of Sun Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined in the
Securities Act) of Sun at the time of conversion, which shares may be resold by
them only in certain permitted circumstances.
 
    Any Shares covered by this Prospectus which qualify for sale pursuant to
Rule 144 or Rule 145 under the Securities Act may be sold under Rule 144 or Rule
145, as applicable, rather than pursuant to this Prospectus.
 
    Sun has paid substantially all of the expenses incident to the offering of
the Shares of Sun Common Stock offered hereby, other than commissions and
discounts of underwriters, dealers or agents and the fees and expenses of
counsel to the Selling Stockholders. The Selling Stockholders may agree to
indemnify any broker-dealer or agent that participates in transactions involving
sales of the Shares against certain liabilities, including liabilities arising
under the Securities Act. The Company and certain of the Selling Stockholders
have agreed to indemnify each other for certain liabilities arising out of
material misstatement and omissions made by the other party in the Registration
Statement and Prospectus. See "Selling Stockholders."
 
                                 LEGAL MATTERS
 
    The validity of the shares of Sun Common Stock offered by this Prospectus
will be passed upon by Shearman & Sterling, San Francisco, California.
 
                                    EXPERTS
 
   
    The consolidated financial statements and schedules of Sun Healthcare Group,
Inc. and subsidiaries included in Sun's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated by reference in this Prospectus and
elsewhere in the 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
accounting and auditing.
    
 
                                       26
<PAGE>
- -------------------------------------------
                                     -------------------------------------------
- -------------------------------------------
                                     -------------------------------------------
 
    NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
 
                            ------------------------
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                                    PAGE
                                                    -----
<S>                                              <C>
Available Information..........................           2
Incorporation of Certain Documents by
 Reference.....................................           2
Summary........................................           4
Risk Factors...................................           8
Use of Proceeds................................          20
Selling Stockholders...........................          21
Plan of Distribution...........................          26
Legal Matters..................................          26
Experts........................................          26
</TABLE>
    
 
   
                                7,146,398 SHARES
    
 
                             [SUN HEALTHCARE LOGO]
 
                          [SUN HEALTHCARE GROUP INC.]
 
                                  COMMON STOCK
                                ($.01 PAR VALUE)
 
                             ---------------------
 
                                   PROSPECTUS
 
                             ---------------------
 
   
                                  MAY 9, 1997
    
 
- -------------------------------------------
                                     -------------------------------------------
- -------------------------------------------
                                     -------------------------------------------
<PAGE>
                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 14.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
    The expenses in connection with the issuance and distribution of the
securities being registered, other than commissions and discounts of
underwriters, dealers or agents and the fees and expenses of counsel to the
Selling Stockholders, are as follows:
 
   
<TABLE>
<S>                                                                        <C>
SEC registration fee.....................................................  $  44,713
Legal fees and expenses..................................................     50,000
Accounting fees and expenses.............................................     75,000
Miscellaneous............................................................     25,287
                                                                           ---------
                                                                           $ 195,000
                                                                           ---------
                                                                           ---------
</TABLE>
    
 
    All of the above expenses, other than the SEC registration fee, are
estimates.
 
    The Company has paid substantially all of the expenses of the issuance and
distribution of the securities being registered, other than commissions and
discounts of underwriters, dealers or agents and the fees and expenses of
counsel to the Selling Stockholders.
 
ITEM 15.  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 Registration Rights Agreements with certain of the
Selling Stockholders. Such agreements provide for indemnification by such
Selling Stockholders of the Company and its officers and directors, and by the
Company of such Selling Stockholders, for certain liabilities arising under the
Act or otherwise.
 
                                      II-1
<PAGE>
ITEM 16.  EXHIBITS
 
   
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                            DESCRIPTION OF EXHIBITS
- -----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
   2.1(1)    Merger Agreement dated as of February 20, 1995 between DanRae Corporation, Daniel and Rae Jacob, Sun
              Healthcare Group, Inc. and Sunscript Pharmacy Corporation
   2.2(2)    Plan of Reorganization and Merger Agreement by and between Honorcare Corporation, Don A. Karchmer,
              Thomas E. Stewart, John E. Bingaman and James W. Campbell, Sun Healthcare Group, Inc. and Sunrise
              Healthcare Corporation
   2.3(3)    Agreement and Plan of Merger dated as of April 27, 1995 by and between Golden Care, Inc., Golden
              Acquisition Corporation and Sun Healthcare Group, Inc.
   2.4(3)    First Amendment to Agreement and Plan of Merger dated as of May 4, 1995 by and between Golden Care,
              Inc., Golden Acquisition Corporation and Sun Healthcare Group, Inc.
   2.5(4)    Agreement and Plan of Merger dated March 30, 1995 by and between Sun Healthcare Group, Inc., Sun
              Acquisition Corporation and CareerStaff Unlimited, Inc.
   2.6(4)    First Amendment to Agreement and Plan of Merger dated April 7, 1995 by and between Sun Healthcare
              Group, Inc., Sun Acquisition Corporation and CareerStaff Unlimited, Inc.
   2.7(3)    Second Amendment to Agreement and Plan of Merger dated May 11, 1995 by and between Sun Healthcare
              Group, Inc., Sun Acquisition Corporation and CareerStaff Unlimited, Inc.
   2.9(10)   Plan of Reorganization and Merger dated August 15, 1995 by and among Nursing Home Consultant
              Pharmacy, Inc., T. Edward Childress, III, John P. O'Brien, Jr., Sun Healthcare Group, Inc., and
              Sunscript Pharmacy Corporation
   2.10(10)  Share Purchase Agreement dated as of November 30, 1995 among Sun Healthcare Group, Inc., Columbia
              Health Care Inc. and the Vendors named therein
   2.11(9)   Form of Purchase and Sale Agreement between Sunscript Pharmacy Corporation and Watson Drug Company
   4.1(5)    Fiscal Agency Agreement dated as of March 1, 1994 between Sun Healthcare Group, Inc. and NationsBank
              of Texas, N.A., as Fiscal Agent
   4.2(6)    Amended and Restated Indenture, dated October 1, 1994, among Sun Healthcare Group, Inc., The Mediplex
              Group, Inc. and Fleet Bank of Massachusetts, N.A. as Trustee
   4.3(6)    Amended and Restated First Supplemental Indenture to Amended and Restated Indenture, dated October 1,
              1994, among Sun Healthcare Group, Inc., The Mediplex Group, Inc. and Fleet Bank of Massachusetts,
              N.A. as Trustee (6 1/2% Convertible Subordinated Debentures due 2003)
   4.4(7)    Form of Rights Agreement, dated as of June 2, 1995, between Sun Healthcare Group, Inc. and Boatmen's
              Trust Company, which includes the form of Certificate of Designations for the Series A Preferred
              Stock as Exhibit A, the form of Right Certificate as Exhibit B and the form of Summary of Preferred
              Stock Purchase Rights as Exhibit C
</TABLE>
    
 
                                      II-2
<PAGE>
   
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                            DESCRIPTION OF EXHIBITS
- -----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
   4.5(8)    First Amendment to Rights Agreement, dated as of August 11, 1995, amending the Rights Agreement,
              dated as of June 2, 1995, between Sun Healthcare Group, Inc. and Boatmen's Trust Company
   5.1(10)   Opinion of Shearman & Sterling regarding legality of securities
  23.1(9)    Consent of Arthur Andersen LLP
  24.4(9)    Powers of Attorney for Andrew L. Turner, Robert D. Woltil, John E. Bingaman, Lois E. Silverman,
              Martin G. Mand and Warren C. Schelling.
</TABLE>
    
 
- ------------------------
 (1) Incorporated by reference from exhibits to the Company's Registration
    Statement (No. 33-90248) on Form S-1.
 
   
 (2) Incorporated by reference from exhibits to the Company's Registration
    Statement (No. 33-62670) on Form S-1.
    
 
   
 (3) Incorporated by reference from exhibits to the Company's Form 10-Q for the
    quarter ended March 31, 1995.
    
 
   
 (4) Incorporated by reference to the Company's Form 8-K filed April 22, 1995.
    
 
   
 (5) Incorporated by reference from exhibits to the Company's Form 8-K filed
    March 11, 1994.
    
 
   
 (6) Incorporated by reference from exhibits to the Company's Form 10-Q for the
    quarter ended September 30, 1994.
    
 
   
 (7) Incorporated by reference from exhibit 5 to the Company's Form 8-A filed
    June 6, 1995.
    
 
   
 (8) Incorporated by reference from exhibits to the Company's Form 8-A/A-1 filed
    August 17, 1995.
    
 
   
 (9) Filed herewith.
    
 
   
(10) Previously filed.
    
 
ITEM 17.  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
 
                                      II-3
<PAGE>
       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.
 
    (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.
 
                                      II-4
<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-3 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 9th day of May, 1997.
    
 
                                          SUN HEALTHCARE GROUP, INC.
 
   
                                          By: _________________*________________
                                                      Andrew L. Turner
                                                President and Chief Executive
                                                         Officer
    
 
    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.
 
   
<TABLE>
<CAPTION>
          SIGNATURE                                TITLE                               DATE
- ------------------------------------------------------------------------------  ------------------
<C>                           <S>                                               <C>
 
              *               Chairman of the Board,
       Andrew L. Turner        President and Chief Executive Officer                   May 9, 1997
 
              *               Senior Vice President Financial Services and
       Robert D. Woltil        Chief Financial Officer and Director (Principal
                               Financial Officer)                                      May 9, 1997
 
      WILLIAM C. WARRICK      Vice President, Corporate Controller (Principal
      William C. Warrick       Accounting Officer)                                     May 9, 1997
 
              *
       John E. Bingaman       Director                                                 May 9, 1997
 
         Zev Karkomi          Director                                                 May 9, 1997
 
       Robert A. Levin        Director                                                 May 9, 1997
 
        Mark G. Wimer         Director                                                 May 9, 1997
 
       James R. Tolbert       Director                                                 May 9, 1997
 
              *
      Lois E. Silverman       Director                                                 May 9, 1997
 
       R. James Woolsey       Director                                                 May 9, 1997
 
              *
        Martin G. Mand        Director                                                 May 9, 1997
 
              *
     Warren C. Schelling      Director                                                 May 9, 1997
 
    *ByWILLIAM C. WARRICK
      William C. Warrick
      (Attorney-in-fact)
</TABLE>
    
 
                                      II-5
<PAGE>
                                 EXHIBIT INDEX
 
   
<TABLE>
<CAPTION>
  EXHIBIT                                                                                                  PAGE
  NUMBER                                            DESCRIPTION                                           NUMBER
- -----------  ------------------------------------------------------------------------------------------  ---------
<C>          <S>                                                                                         <C>
   2.1(1)    Merger Agreement dated as of February 20, 1995 between DanRae Corporation, Daniel and Rae
              Jacob, Sun Healthcare Group, Inc. and Sunscript Pharmacy Corporation.....................
   2.2(2)    Plan of Reorganization and Merger Agreement by and between Honorcare Corporation, Don A.
              Karchmer, Thomas E. Stewart, John E. Bingaman and James W. Campbell, Sun Healthcare
              Group, Inc. and Sunrise Healthcare Corporation...........................................
   2.3(3)    Agreement and Plan of Merger dated as of April 27, 1995 by and between Golden Care, Inc.,
              Golden Acquisition Corporation and Sun Healthcare Group, Inc.............................
   2.4(3)    First Amendment to Agreement and Plan of Merger dated as of May 4, 1995 by and between
              Golden Care, Inc., Golden Acquisition Corporation and Sun Healthcare Group, Inc..........
   2.5(4)    Agreement and Plan of Merger dated March 30, 1995 by and between Sun Healthcare Group,
              Inc., Sun Acquisition Corporation and CareerStaff Unlimited, Inc.........................
   2.6(4)    First Amendment to Agreement and Plan of Merger dated April 7, 1995 by and between Sun
              Healthcare Group, Inc., Sun Acquisition Corporation and CareerStaff Unlimited, Inc.......
   2.7(3)    Second Amendment to Agreement and Plan of Merger dated May 11, 1995 by and between Sun
              Healthcare Group, Inc., Sun Acquisition Corporation and CareerStaff Unlimited, Inc.......
   2.9(10)   Plan of Reorganization and Merger dated August 15, 1995 by and among Nursing Home
              Consultant Pharmacy, Inc., T. Edward Childress, III, John P. O'Brien, Jr., Sun Healthcare
              Group, Inc., and Sunscript Pharmacy Corporation..........................................
   2.10(10)  Share Purchase Agreement dated as of November 30, 1995 among Sun Healthcare Group, Inc.,
              Columbia Health Care Inc. and the Vendors named therein..................................
   2.11(9)   Form of Purchase and Sale Agreement between Sunscript Pharmacy Corporation and Watson Drug
              Company..................................................................................
   4.1(5)    Fiscal Agency Agreement dated as of March 1, 1994 between Sun Healthcare Group, Inc. and
              NationsBank of Texas, N.A., as Fiscal Agent..............................................
   4.2(6)    Amended and Restated Indenture, dated October 1, 1994, among Sun Healthcare Group, Inc.,
              The Mediplex Group, Inc. and Fleet Bank of Massachusetts, N.A. as Trustee................
   4.3(6)    Amended and Restated First Supplemental Indenture to Amended and Restated Indenture, dated
              October 1, 1994, among Sun Healthcare Group, Inc., The Mediplex Group, Inc. and Fleet
              Bank of Massachusetts, N.A. as Trustee (6 1/2% Convertible Subordinated Debentures due
              2003)....................................................................................
   4.4(7)    Form of Rights Agreement, dated as of June 2, 1995, between Sun Healthcare Group, Inc. and
              Boatmen's Trust Company, which includes the form of Certificate of Designations for the
              Series A Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B and the
              form of Summary of Preferred Stock Purchase Rights as Exhibit C..........................
</TABLE>
    
<PAGE>
   
<TABLE>
<CAPTION>
  EXHIBIT                                                                                                  PAGE
  NUMBER                                            DESCRIPTION                                           NUMBER
- -----------  ------------------------------------------------------------------------------------------  ---------
<C>          <S>                                                                                         <C>
   4.5(8)    First Amendment to Rights Agreement, dated as of August 11, 1995, amending the Rights
              Agreement, dated as of June 2, 1995, between Sun Healthcare Group, Inc. and Boatmen's
              Trust Company............................................................................
   5.1(10)   Opinion of Shearman & Sterling regarding legality of securities...........................
  23.1(9)    Consent of Arthur Andersen LLP............................................................
  23.9(10)   Consent of Shearman & Sterling (contained in Exhibit 5.1).................................
  24.4       Powers of Attorney for Andrew L. Turner, Robert D. Woltil, John E. Bingaman, Lois E.
              Silverman, Martin G. Mand and Warren C. Schelling........................................
</TABLE>
    
 
- ------------------------
 
 (1) Incorporated by reference from exhibits to the Company's Registration
    Statement (No. 33-90248) on Form S-1.
 
   
 (2) Incorporated by reference from exhibits to the Company's Registration
    Statement (No. 33-62670) on Form S-1.
    
 
   
 (3) Incorporated by reference from exhibits to the Company's Form 10-Q for the
    quarter ended March 31, 1995.
    
 
   
 (4) Incorporated by reference to the Company's Form 8-K filed April 22, 1995.
    
 
   
 (5) Incorporated by reference from exhibits to the Company's Form 8-K filed
    March 11, 1994.
    
 
   
 (6) Incorporated by reference from exhibits to the Company's Form 10-Q for the
    quarter ended September 30, 1994.
    
 
   
 (7) Incorporated by reference from exhibit 5 to the Company's Form 8-A filed
    June 6, 1995.
    
 
   
 (8) Incorporated by reference from exhibits to the Company's Form 8-A/A-1 filed
    August 17, 1995.
    
 
   
 (9) Filed herewith.
    
 
   
(10) Previously filed.
    


<PAGE>
                           PURCHASE AND SALE AGREEMENT

     This Agreement is made and entered into this ___ day of February, 1997 by
and between Watson Drug Company, Inc., a North Carolina corporation ("Seller")
and Sunscript Pharmacy Corporation, a New Mexico corporation ("Purchaser").

PURCHASE AND SALE

     1.   On the terms and conditions set forth herein, Seller shall sell to
Purchaser and Purchaser shall purchase from Seller all of the assets,
properties, rights and claims used in connection with the operation of Seller's
institutional pharmacy operations in Pink Hill, North Carolina (the "Pharmacy
Business"), including, but not limited to the following (collectively, the
"Seller's Assets"):

          (a)  All of Seller's inventory used in connection with the operation
of the Pharmacy Business (the "Inventory");

          (b)  All of Seller's operating supplies, including, but not limited
     to, unit dose  supplies, pharmacy labels, pharmacy forms and packaging
     supplies used and usable in connection with the operation of the Pharmacy
     Business (the "Operating Supplies");

          (c)  All motor vehicles, listed on Exhibit A hereto (the "Motor
Vehicles");

          (d)  All outstanding and uncollected accounts receivable of Seller
generated by the Pharmacy Business, as the same exist as the close of business
on the last business day prior to the Closing Date (the "Receivables"), subject
to the provisions hereinafter set forth;

          (e)  All of Seller's rights in, to and under the "Rx Contracts" as
defined in Paragraph 8(h) hereof;

          (f)  All of Seller's rights in, to and under any contracts or leases,
other than the Rx Contracts, relating to the operation of the Pharmacy Business
(the "Contracts");

          (g)  All service marks, trademarks or trade names owned or employed by
Seller in conjunction with the Pharmacy Business, specifically including the
name "Tar Heel Consultants" (the "Trade Name") and any trademarks related
thereto; provided Purchaser acknowledges and agrees that Seller claims no legal
right to the use or exclusive use of the Trade Name and any sale shall be
limited to any rights which Seller may have therein and thereto;

          (h)  All of Seller's intangible property, including any going concern
systems and institutional goodwill associated with the Pharmacy Business (the
"Intangible Property"); and

                                     -1-
<PAGE>


          (i)  All of the equipment, furniture, fixtures and other tangible
personal property used in connection with the operation of the Pharmacy Business
and not described above, including, but not limited to, entitlements and
telephone numbers (the "Personal Property");

          (j)  Any items of prepaid expenses relating to the operation of the
Pharmacy Business for the sixty (60) day period immediately preceding the
Closing Date;

provided, however, the Seller's Assets shall not include Seller's cash on hand
or in banks, bank accounts of any kind, prepaid insurance or personal items
belonging to Seller and set forth on Exhibit B hereto (collectively, the
"Excluded Assets").

     In addition to Purchaser's purchase of the Seller's Assets, at Closing
Purchaser shall assume all of Seller's liabilities and obligations for the Trade
Payables and arising under the Rx Contracts and the Contracts, provided in each
case Seller is not in breach thereof.  As used herein, "Trade Payables" shall
mean the reasonable expenses incurred in the ordinary course of operating the
Pharmacy Business for the sixty (60) day period immediately preceding the
Closing Date, for Inventory, Operating Supplies, advertising, utilities,
insurance, postage and shipping, rental, repair and maintenance of property,
travel expenses, commissions and fees paid to third parties for their services,
and all other ordinary and necessary expenses of the Pharmacy Business, but
excluding wages, employee benefits, employee taxes, debt service, depreciation
and amortization, income taxes, and any and all extraordinary items.

AGGREGATE CONSIDERATION

2.   The aggregate consideration payable by Purchaser shall be One Million Eight
Hundred Fifty Thousand and no/100 Dollars ($1,850,000) (the "Aggregate
Consideration") and shall be payable by certified or  cashier's check or wire
transfer at Closing, Seven Hundred Fifty Thousand and no/100 ($750,000) of -
Compete Agreement (as defined below) and the Watson Employment Agreement (as
defined below); and the balance of which, i.e., One Million One Hundred Thousand
and no/100 Dollars ($1,100,000), shall be paid to Seller in consideration for
the Seller's Assets. In addition, at Closing Purchaser shall cause to be issued
to Charles Watson non-transferrable Warrants to acquire an aggregate of 40,000
shares of the common stock of Sun Healthcare Group, Inc. ("Sun"), at an exercise
price per share of $3.00 above the closing trading price of Sun's common stock
on the trading day immediately preceding the Closing Date, which Warrants shall
be in substantially the form attached hereto as Exhibit C.  For good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Charles Watson is hereby granted an option to sell to Sun and
require Sun to purchase the Warrants for a purchase price of $100,000 (the "Put
Option").  The Put Option may be exercised only by giving written notification
to that effect to Sun and only within the thirty day period following Closing.

     (a)  The Aggregate Consideration assumes that at Closing the Receivables
will be equal to the Trade Payables (as hereinafter defined). Accordingly, in
the event the Receivables are more

                                     -2-
<PAGE>


than the Trade Payables, the Aggregate Consideration shall be increased on a 
dollar for dollar basis by such excess and in the event the Receivables are 
less than the Trade Payables, the Aggregate Consideration shall be reduced on 
a dollar for dollar basis by such shortfall. In order to implement the 
foregoing provision, the following procedures shall apply:

     (i)  Seller shall close its books as of the close of business on the last
     business day prior to the Closing Date and shall cause Seller's Accountants
     (as hereinafter defined) to prepare and deliver to Purchaser, not more than
     thirty (30) days after the Closing Date, a written Closing Date Balance
     Sheet of Seller (the "Closing Date Balance Sheet"). The Closing Date
     Balance Sheet shall reflect, among other assets and liabilities of Seller,
     the amounts of  Inventory, Operating Supplies, Receivables and Trade
     Payables, each as of the close of business on the last business day prior
     to the Closing Date. The Closing Date Balance Sheet shall be certified by
     Seller's Accountants as having been prepared in accordance with appropriate
     rules and standards for compiled financial statements applied on a
     consistent basis.  As used herein, the term "Seller's Accountants" shall
     mean the firm of certified public accountants then providing accounting
     services to Seller, and the term "Purchaser's Accountants" shall mean the
     corporate accounting department of the Purchaser or Sun.


     (ii) After review by Purchaser and, if desired by Purchaser, by Purchaser's
     Accountants, Purchaser shall notify Seller, within thirty (30) business
     days following receipt by Purchaser of the Closing Date Balance Sheet, as
     to whether it accepts or proposes changes to the Closing Date Balance
     Sheet, or both. 

          (A)  If Purchaser shall notify Seller that it accepts the Closing Date
          Balance Sheet prepared by Seller's Accountants, such Closing Date
          Balance Sheet, and the amounts reflected therein for Seller's
          Receivables and Trade Payables, shall become final and binding as of
          the date of such notification by Purchaser to Seller (the "Final
          Closing Date Balance Sheet").

          (B)  If Purchaser shall notify Seller that it proposes changes to the
          Closing Date Balance Sheet and if Purchaser and Seller reach agreement
          on such changes, then the Closing Date Balance Sheet with the agreed
          changes shall become the Final Closing Date Balance Sheet as of the
          date upon which such agreement is reached.  

          (C)  If Purchaser shall notify Seller that it proposes changes to any
          of the amounts for Receivables or Trade Payables reflected in the
          Closing Date Balance Sheet prepared by Seller's Accountants, and if
          Purchaser and Seller do not reach agreement on such proposed changes
          (the "Disputed Amount(s)") within ten (10) business days thereafter,
          then Seller's Accountants and Purchaser's Accountants shall jointly
          select a firm of certified public accountants (the "Independent
          Accountants") which has no prior business relationship with either
          Seller or Purchaser. The Independent Accountants shall then review
          each of the Disputed Amount(s). 

                                     -3-
<PAGE>


               (1)  If the Independent Accountants shall determine that any of
               the Disputed Amount(s) should be modified in any respect, the
               Independent Accountants will make such changes therein as they
               deem necessary and forward the Closing Date Balance Sheet, as so
               modified, to Purchaser and Seller.  

               (2)  If the Independent Accountants shall determine that each of
               the Disputed Amount(s) is correct as is, they shall so notify
               Purchaser and Seller. 

               (3)  The Independent Accountants shall reach their determination
               and either notify Purchaser and Seller that each of the Disputed
               Amount(s) is correct as is or shall forward the modified Closing
               Date Balance Sheet to Purchaser and Seller within thirty (30)
               business days after having been engaged to perform such work. 
               Such determination of the Independent Accountants shall be final
               and binding. 
     
     (b)  The Aggregate Consideration also assumes that within the first twelve
months after the Closing Date Purchaser will, exercising its reasonable efforts,
collect no less than 90% of the Receivables reflected on the Closing Balance
Sheet.  Accordingly, within thirty (30) days after the first anniversary of the
Closing Date, Purchaser shall advise Seller in writing as to the amount of the
Receivables actually collected by it and whether any payment is due from Seller
to Purchaser and, if so, the amount thereof.  In the event a payment is owing
from Seller to Purchaser, Purchaser shall include an accounting which reflects
the Receivables on the Closing Balance Sheet and the collection history with
respect thereto.  Any payment due from Seller to Purchaser shall be payable
within thirty (30) days after Seller's receipt of a written demand therefor and
shall bear interest at the rate of 10% per annum from the date due to the date
paid if not paid within said ten (10) day period.  Seller shall have the right
to audit, at its sole cost and expense, the books and records of Purchaser in
order to verify the collection history provided by Purchaser to Seller.

     (c)  The Aggregate Consideration payable to Seller shall be allocated among
the Seller's Assets as shown on Exhibit D hereto.  Purchaser and Seller make
this allocation with the knowledge and understanding that it will be used by
them for all purposes including tax purposes.  Each party agrees that it will
report this transaction in accordance with such allocation and in accordance
with Section 1060 of the Internal Revenue code of 1986, and that neither will
maintain a position inconsistent with such allocation except with the written
consent of the other party hereto.

     (d)  Seller and Purchaser agree that the estimated value of the Inventory
as of January 7, 1997 is $161,125.96 and that such Inventory value as of May
___, 1996 was $119,118.44, with a difference of $42,007.52.  Purchaser and Selrm
this figure in accordance with the reconciliation procedure to be followed under
Paragraph 2(a) for the Receivables and Trade Payables.  Purchaser and Seller
further agree that Inventory value approximating $42,007.52 shall be offset
against the Receivables/Trade Payables reconciliation.  Purchaser shall remit
a positive difference to Seller within the time period 


                                     -4-
<PAGE>

contemplated in Paragraph 2(a), and Seller shall remit any deficiency to 
Purchaser within the time period contemplated in Paragraph 2(a).  In the 
event of any disagreement between Purchaser and Seller as to the Inventory 
value, the parties shall follow the dispute procedures set forth in Paragraph 
2(a).

Except as specifically provided in this Agreement, Purchaser does not hereby or
in connection herewith assume any liability of Seller whatsoever in relation to
the Pharmacy Business or Seller's Assets.

CLOSING

3.   The Closing of the purchase and sale under this Agreement (the "Closing")
shall take place on February 14, 1997  (the "Closing Date") (provided all of the
conditions to Closing set forth in Paragraph(s) 14 and 15 have been satisfied or
waived) or on such later date as soon thereafter as possible to which the
parties may mutually agree but in no event later than February 28, 1997. Closing
shall occur at such place as Purchaser and Seller may mutually agree.  Time is
of the essence hereto.

CONVEYANCES

4.   Conveyance of the Seller's Assets to Purchaser shall be effected by Bill of
Sale with respect to the Personal Property, the Inventory and the Operating
Supplies and by Assignment and Assumption Agreement with respect to the Trade
Name, the Receivables and the Trade Payables, all of which shall be in the forms
attached hereto as Exhibits E and F.  Title to the Personal Property, the
Operating Supplies, the Inventory and the Receivables shall be conveyed from
Seller to Purchaser free and clear of all liens, charges, easements and
encumbrances of any kind or nature.

COSTS AND PRORATIONS. 

5.   The costs of the transaction described herein shall be allocated among
Seller and Purchaser as follows:

     (a)  Seller shall pay any state, county, or local transfer tax or sales tax
     due and payable as a result of the sale hereunder of Seller's Assets,
     including any transfer taxes due upon the sale to Purchaser of any vehicles
     included in Seller's Assets (the "Vehicle Taxes").

     (b)  Purchaser and Seller shall each pay their own attorney's fees.

6.   The revenues and expenses associated with the ownership and operation of
the Pharmacy Business shall be allocated between Purchaser and Seller as
provided below:
     
     (a)  Except as otherwise specifically provided herein with respect to the
     Receivables and the Trade Payables, all ordinary operating expenses of the
     Pharmacy Business, such as real

                                     -5-
<PAGE>

     and personal property taxes and all revenues generated by the Pharmacy
     Business shall be prorated and allocated as of the Closing Date so that
     such expenses and revenues are for the account of the Seller for the period
     prior to the Closing Date, and for the account of the Purchaser from and
     after the Closing Date.  Except as otherwise provided herein, any
     adjustments and payments between Seller and Purchaser by reason of the
     foregoing provisions hereof shall be made upon the completion of the
     Closing Date Balance Sheet and related income statement.

     (b)  In furtherance of the foregoing, the parties acknowledge and agree
     that except as otherwise specifically provided herein:

          (i)  Seller shall be responsible and shall remain liable for all costs
          and expenses, obligations, liabilities, occurrences and/or claims of
          every kind and nature whatsoever attributable to or incurred in
          connection with the possession, operation, management, and maintenance
          of the Seller's Assets, the Pharmacy Premises and the Pharmacy
          Business prior to the Closing Date other than the Trade Payables as
          provided for herein; and

          (ii)      At Closing,  Purchaser shall assume and be responsible for
          all costs and expenses, obligations, liabilities, occurrences and/or
          claims of every kind and nature whatsoever attributable to or incurred
          in connection with the possession, operation, management and
          maintenance of the Seller's Assets, the Pharmacy Premises and the
          Pharmacy Business, including the Trade Payables as provided for
          herein, but excluding any state or federal income taxes due and
          payable by Seller.
     
POSSESSION

7.   At Closing, Purchaser shall be entitled to possession of the Seller's
     Assets and to all records located at the pharmacy operated by Seller and
     used or developed by Seller in connection with the Pharmacy Business.

REPRESENTATIONS AND WARRANTIES

8.   Seller hereby warrants and represents to Purchaser that:

     (a)  STATUS OF SELLER.  Seller is a duly organized and validly existing
     North Carolina corporation and is in good standing under the laws thereof.

     (b)  AUTHORITY.  Seller has full power and authority to execute and to
     deliver this Agreement and all related documents, and to carry out the
     transactions contemplated herein.  This Agreement is valid, binding and
     enforceable against Seller in accordance with its terms and Seller has not
     previously agreed to sell the Seller's Assets to anyone other than
     Purchaser.  Subject to Purchaser obtaining licensure approval from the
     North Carolina Board

                                     -6-
<PAGE>

     of Pharmacy and a controlled substances number from the federal Drug
     Enforcement Agency or securing from Seller the right to operate the
     Pharmacy Business under Seller's license and DEA number until the same
     are issued to Purchaser, the execution of this Agreement and the
     consummation of the transactions contemplated herein do not result in a
     breach of the terms and conditions of nor constitute a default under or
     violation of Seller's Articles of Incorporation or Bylaws or any law,
     regulation, court order, mortgage, note, bond, indenture, agreement,
     license or other instrument or obligation to which Seller is now a party or
     by which Seller or any of the Seller's Assets may be bound or affected.

     (c)  TITLE.  The items listed in Paragraph 1 of this Agreement and the
     items listed on Exhibit G of this Agreement are all of the items of
     tangible and intangible personal property used by Seller in connection with
     the Pharmacy Business. Seller has good and marketable title to the Seller's
     Assets, subject to liens and encumbrances identified in Exhibit H that will
     be paid and discharged as of the Closing Date and subject to property taxes
     not yet due and payable.  Seller is the owner of all of the Personal
     Property described in  D other than the Personal Property specifically
     identified therein as leased by Seller (the "Leased Personal Property"). As
     of the Closing Date, Seller will have and will deliver to Purchaser good
     and marketable title to the Seller's Assets free and clear of all liens and
     encumbrances, except for the lien for property taxes not yet due and
     payable and the lessor's interest in the Leased Personal Property;
     provided, however, to the extent certain software conveyed as a part of the
     Seller's Assets may be subject to the terms of license agreements, and
     certain leasehold interests or the Contracts may be subject to provisions
     restricting assignment thereof, Seller shall proceed with all due diligence
     to secure any consents required thereunder in accord with section 8(j)
     below.  The Seller's Assets are being conveyed "AS IS" and "WHERE IS";
     provided, however, that as of the Closing Date Seller's Assets shall be in
     the same condition as existed as of the Purchaser's inspection thereof,
     ordinary wear and tear excepted.

     (d)  THE PHARMACY PREMISES.  A true and correct copy of the lease with
     respect to the premises from which Seller currently conducts the Pharmacy
     Business, which are commonly known as 111 West Broadway, Pink Hill, North
     Carolina, formerly known as 104 West Broadway, (the "Pharmacy Premises")
     has been provided by Seller to Purchaser prior to the execution of this
     Agreement (the "Pharmacy Premises Lease"). 

     (e)  LICENSURE.  Seller currently maintains all local, state and federal
     licenses necessary for the lawful operation of the Pharmacy Business,
     including, but not limited to, its license issued by the North Carolina
     Board of Pharmacy and a controlled substances number issued by the federal
     Drug Enforcement Agency (the "Licenses") and currently meets all
     requirements necessary for re-licensure as of, or as soon as practicable
     after, the Closing Date.  Seller has not received notice of any action
     pending or, to the best knowledge of Seller, recommended by the appropriate
     local, state or federal agency having jurisdiction thereof, to terminate or
     rescind or not to renew any of the Licenses or any action of any other type
     which would have a material adverse effect on the Pharmacy Business or the
     Seller's Assets.

                                     -7-
<PAGE>

     
     (f)  EMPLOYEES; UNIONS.  

          (i)  Set forth in Exhibit I (the "Employee Schedule") is a schedule of
          all persons presently employed by Seller (including without limitation
          any "casual employees") in the operation of the Pharmacy Business and
          the wages and other benefits presently paid to such employees, all
          earned and accrued vacation, holiday and sick pay and retirement and
          severance benefits and earned bonuses due to and/or coming due to the
          employees of the Pharmacy Business as of _____________, 19__. Exhibit
          I also separately lists the independent contractors who assist in the
          operation of the Pharmacy Business with a brief description of the job
          of each such independent contractor. 

          (ii) Except as set forth on Exhibit I,  there are no agency,
          employment or consulting agreements, union contracts, or pension,
          profit sharing, retirement, deferred compensation, bonus, stock
          purchase, hospitalization, insurance or other plans, agreements,
          otherwise affecting the Pharmacy Business, and, except as set forth on
          Exhibit I, the employment of any or all of such persons may be
          terminated at the option of Seller, without penalty or additional
          payment of any nature, upon not more than thirty (30) days' prior
          written notice. 

          (iii)     Except as set forth on Exhibit I,  (A) Seller's operation of
          the Pharmacy Business is in compliance in all material respects with
          all applicable local, state and federal laws respecting employment and
          employment practices, terms and conditions of employment and wages and
          hours, and Seller is not engaged in any unfair labor practice;  (B) 
          there is no unfair labor practice charge or complaint against Seller
          pending or, to Seller's best knowledge, threatened before the National
          Labor Relations Board; (C) there is not now, nor has there been in the
          last three (3) years, any labor strike, dispute, request for
          representation, work slowdown or work stoppage actually pending or, to
          Seller's best knowledge, threatened against or affecting the Pharmacy
          Business; (D) Seller is not a party to any collective bargaining
          agreement or other contract or commitment to or with any labor union
          and, to the best knowledge of Seller, no representative of any labor
          union has made any attempt to organize or represent all or any part of
          the employees of Seller; and (E) there are no pending grievance
          proceedings by any employee of Seller against Seller, or against any
          agent, representative or employee of Seller, and, to the best
          knowledge of Seller, there are no existing facts which would provide a
          basis for any such grievance proceedings.

     (g)  COMPLIANCE WITH LAW.

          (i)  The Pharmacy Business, Seller's Assets and the Pharmacy Premises
          are in compliance with all currently applicable municipal, county,
          state and federal laws, 


                                     -8-
<PAGE>

          regulations, ordinances, standards and orders and with all municipal 
          and health regulations where the failure to comply therewith or to 
          obtain a waiver therefrom could have a material adverse effect on the 
          business, property, condition (financial or otherwise) or operation of
          the Seller's Assets, the Pharmacy Premises or the Pharmacy Business.

          (ii)  Seller has no knowledge of nor has Seller received any notice,
          verbal or written, of any outstanding deficiencies or work orders of
          any authority having jurisdiction over the Pharmacy Business, the
          Pharmacy Premises or the Seller's Assets requiring conformity to any
          applicable statute, regulation, ordinance or by-law pertaining
          thereto; and

          (iii)  Seller is not aware of any claim, requirement or demand of any
          licensing or certifying agency supervising or having authority over
          the Pharmacy Premises to rework or redesign it or to provide
          additional furniture, fixtures or equipment so as to conform to or
          comply with any existing law, code or standard which has not been
          fully satisfied prior to the date hereof or which will not be
          satisfied prior to the Closing Date. 

     (h) CONTRACTS.  Attached hereto as Exhibit J is a true and correct copy of
     each of the Pharmaceutical and Consulting Pharmacist Agreements between
     Seller and the institutional providers currently serviced by it (the "Rx
     Contracts").  Each of the Rx Contracts is in full force and effect and none
     of the Rx Contracts has been modified or amended except as set forth in
     Exhibit J.  Seller is not in default of any of its obligations under the Rx
     Contracts nor is Seller aware of any default or any action which, with the
     passage or time or the giving of notice or both would constitute a default,
     under the Rx Contracts by any other party thereto.  At Closing Seller shall
     deliver to Purchaser either duly executed assignments of the Seller Rx
     Contracts or new contracts between Purchaser and each of the facilities
     which are parties to the Rx Contracts (the "New Rx Contracts"). 

     (i)   ACCOUNTS RECEIVABLE.  Attached hereto as Exhibit K is a true and
     correct accounts receivable aging (the "AR Aging Report") with respect to
     the Pharmacy Business as of December 31, 1996 and a Trade Payables report
     (the "Trade Payables Report") with respect to the Pharmacy Business as of
     December 31, 1996.  The AR Aging Report and the Trade Payables Report shall
     be updated as of the Closing Date. 

     (j)  NECESSARY ACTION.  Seller will proceed with all due diligence to take
     all action and obtain all consents prior to Closing necessary for it to
     lawfully enter into and carry out the terms of this Agreement, including,
     but not limited to, obtaining the approval of its Board of Directors and
     shareholders.  

                                        -9-

<PAGE>

     (k)       INVENTORY/OPERATING SUPPLIES.  All of the Inventory to be
     transferred by Seller to Purchaser on Closing is salable and is not out-of-
     date.  As of the Closing Date, the Operating Supplies shall be consistent
     with Seller's customary practices.

     (l)       TAXES AND TAX RETURNS.   All tax and other returns, reports and
     filings of any kind or nature, required to be filed by Seller prior to date
     of execution of this Agreement have been properly completed and timely
     filed, or extensions for the filing thereof have been timely secured, with
     all such filings being in material compliance with all applicable
     requirements and all taxes due and payable by Seller have been or will be
     paid on a timely basis before the same become delinquent.  On or prior to
     the Closing Date, Seller will pay all state, federal and local taxes (the
     "Taxes") due or overdue as of the Closing Date, including, but not limited
     to, the Vehicle Taxes.


     (m)       LITIGATION.  Except as provided in Exhibit L, Seller has no
     knowledge of nor has Seller received any notice, verbal or written, of any
     litigation, investigation or other proceeding pending or threatened against
     or relating to Seller, its properties or business, which is material to the
     Seller's Assets, the Pharmacy Premises or the Pharmacy Business or to this
     Agreement.  The transaction contemplated herein has not been challenged by
     any governmental agency or any other person, nor does Seller know or have
     reasonable grounds to know, of any basis for any such litigation,
     investigation or other proceeding.

     (n)       LIENS.  Seller has no knowledge of nor has Seller received any
     notice, verbal or written, of any mechanics', materialmen's or similar
     claims or liens presently claimed or, to the best of Seller's knowledge,
     which will be claimed against the Pharmacy Premises or the Seller's Assets
     for work performed or commenced prior to the date hereof at the request of
     Seller or of which Seller has knowledge, Seller having made or caused to be
     made arrangements for payment of all any improvements now under
     construction or development.

     (o)   ENVIRONMENTAL MATTERS.  Except in accordance with, and in full
     compliance with, any and all applicable governmental laws, regulations and
     requirements (collectively, the "Environmental Laws") relating to
     environmental and occupational health and safety matters and hazardous
     materials, substances or wastes (as defined from time to time under any
     applicable federal, state or local laws, regulations or ordinances), Seller
     has not released into the environment, or discharged, placed or disposed of
     any such hazardous materials, substances or wastes or caused the same to be
     so released into the environment or discharged, placed or disposed of at,
     on or under the Pharmacy Premises.  To the best of Seller's knowledge, no
     hazardous materials, substances or wastes are located on the Pharmacy
     Premises or have been released into the environment or discharged, placed
     or disposed of in, on or under the Pharmacy Premises; to the best of
     Seller's knowledge, no underground storage tanks are or have been located
     on the Pharmacy Premises; to the best of Seller's knowledge, the real
     property on which the Pharmacy Premises are located has never been used as
     a dump for waste material; and to the best of Seller's knowledge, the

                                        -10-

<PAGE>

     Pharmacy Premises and its prior uses comply with, and at all times have
     complied with, all Environmental Laws.  

     (p)  SELLER'S FINANCIALS, BOOKS AND RECORDS, TAXES.  

          (i)  True and correct copies of the Balance Sheet and Income Statement
          of the Seller as at October 31, 1996 and for the periods ended October
          31, 1996 have been previously delivered to Purchaser.  All such
          financial statements are consistent with the books and records of
          Seller and fairly present the assets and liabilities and the financial
          condition of Seller, and accurately set forth in all material respects
          the results of the operations of Seller for the periods covered
          thereby, and as to any such statements prepared by Seller's
          Accountants, such financial statements have been prepared in
          accordance with the appropriate rules and standards for compiled
          financial statements applied on a consistent basis. 

          (ii) Since October 31, 1996, there has been no material adverse change
          in the business, assets, properties, operations, or condition
          (financial or otherwise) of the Pharmacy Business or Seller's
          operation thereof and to Seller's actual knowledge (without any
          independent investigation) there has not been any development or
          threatened development of a nature that is or may be materially
          adverse thereto. For purposes of this Agreement, price changes and
          other changes affecting the institutional pharmacy industry generally
          shall not be deemed to be material adverse changes. 

          (iii) Any financial statements of Seller prepared with respect to
          any periods between October 31, 1996 and the Closing Date have been
          prepared or will be prepared consistent with the books and records of
          Seller, will fairly present the assets and liabilities and the
          financial condition of Seller, and will accurately set forth in all
          material respects the results of the  operations of Seller for the
          periods covered thereby and will be provided to Purchaser within ten
          (10) days after the completion thereof. 

          (iv) All of the books and records of the Pharmacy Business are true
          and correct in all material respects.  

     (q)  INSURANCE.  Set forth in Exhibit M is a true and complete schedule of
     current insurance coverage, the premiums payable therefor and a brief
     description of all policies or binders of fire, extended coverage,
     liability, professional liability, bonding, crime, workmen's compensation,
     vehicular and other insurance maintained by Seller with respect to Seller's
     Assets.   All such policies are in full force and effect and Seller has not
     received any notices or threats of cancellation, change or modification of
     coverage.  All premiums covering all periods up to and including the date
     hereof have been paid on such policies.  Seller has no actual knowledge of
     any state of facts, or of the occurrence of any event, which, with notice

                                         -11-

<PAGE>

     or lapse of time or both, reasonably might form the basis for any claim
     against Seller not fully covered by the policies referred to on Exhibit M,
     and Seller has received no notice regarding any increase in the insurance
     premiums to be paid by Seller or that the insurance coverage listed on
     Exhibit M will no longer be available on substantially the same terms as
     are now in effect.  Seller has not been refused any insurance with respect
     to Seller's Assets, nor has its coverage been limited by any insurance
     carrier to which it has applied for any such insurance or with which it has
     carried insurance during the last five (5) years.

     (r)  DISCLOSURE.  No representation or warranty of Seller set forth herein
     or in the exhibits hereto and no statement contained in any certificate,
     list, exhibit or other instrument furnished or to be furnished to Purchaser
     pursuant hereto contains or will contain an untrue statement of a material
     fact or omits or will omit to state any material facts necessary to make
     the statements contained  herein or therein not misleading.

9.   Purchaser hereby warrants and represents to Seller that:

     (a)  STATUS OF PURCHASER.  Purchaser is a duly organized, validly existing
     New Mexico corporation and is, or prior to Closing will be, duly qualified
     to do business in the State of North Carolina.  

     (b)  AUTHORITY.  Purchaser has, or shall have as of Closing, obtained the
     approval of its Board of Directors (the "Board Approval"), Purchaser has
     full corporate power and authority to execute and to deliver this Agreement
     and all related documents, and to carry out the transactions contemplated
     herein.  This Agreement is valid, binding and enforceable as against
     Purchaser in accordance with its terms.  Subject to Purchaser obtaining
     licensure approval from the North Carolina Board of Pharmacy, a controlled
     substances number from the federal Drug Enforcement Agency, and the Board
     Approval, the execution of this Agreement and the consummation of the
     transaction contemplated herein do not result in a breach of the terms and
     conditions of, nor constitute a default under or violation of, Purchaser's
     Articles of Incorporation or Bylaws or any law, regulation, court order,
     mortgage, note, bond, indenture, agreement, license or other instrument or
     obligation to which Purchaser is a party or by which Purchaser or any of
     the assets of Purchaser may be bound or affected.

     (c)  LITIGATION.  To the best of Purchaser's knowledge there is no
     litigation, investigation or other proceeding pending or threatened against
     or relating to Purchaser, its properties or business which is material to
     this Agreement, nor does Purchaser know or have reasonable grounds to know
     of any basis for any such action.

     (d)  NECESSARY ACTION.  Purchaser will proceed with all due diligence to
     take all action and obtain all consents prior to Closing necessary for it
     to lawfully enter into and carry out the terms of this Agreement,
     including, but not limited to, securing the Board Approval.

                                       -12-

<PAGE>

     (e)  DISCLOSURE.  No representation or warranty of Purchaser set forth
     herein or in the exhibits hereto and no statement contained in any
     certificate, list, exhibit or other instrument furnished or to be furnished
     to Seller pursuant hereto contains or will contain an untrue statement of a
     material fact or omits or will omit to state any material facts necessary
     to make the statements contained  herein or therein not misleading.

10.  BROKER.

     Each party hereby represents, covenants, and warrants to the other that it
has employed no broker or finder in connection with the transaction contemplated
herein, and each party agrees to pay any commission or finder's fee which may be
due on account of the transaction contemplated herein to any broker or finder
employed by it, and to indemnify the other party hereto against any claim for
any commission made by any broker allegedly employed by it.

COVENANTS

11.  SELLER.

     (a)  PRE-CLOSING.  Between the date hereof and the Closing Date, except as
     contemplated by this Agreement or with the consent of Purchaser:

          (i)       Seller will conduct the Pharmacy Business only in the
          ordinary course and with due regard to the proper maintenance and
          repair of the Pharmacy Premises and tangible components of the
          Personal Property;

          (ii)      Seller will take all reasonable action to preserve the
          goodwill of the institutional clients currently serviced by Seller
          under the terms of the Rx Contracts;

          (iii)     Seller will make no material change in the operation of the
          Pharmacy Business nor sell or agree to sell any of the items which
          comprise the Personal Property nor otherwise enter into an agreement
          materially affecting the Pharmacy Business or the Pharmacy Premises;

          (iv)      Seller will use its reasonable efforts to retain the
          services and goodwill of the employees of Seller located at or
          connected with the operation of the Pharmacy Business;

          (v)       Seller will maintain in force the existing hazard and 
          liability insurance policies, or comparable coverage, for the 
          Personal Property, the Inventory and the Pharmacy Premises as now in 
          effect;

          (vi)      Seller will maintain the Inventory in substantially the same
          condition and quantities as presently being maintained;

                                            -13-

<PAGE>

          (vii)     Seller will not increase the compensation or other benefits
          or bonuses payable or to become payable to any of Seller's employees
          connected with the operation of the Pharmacy Business, including but
          not limited to, Charles Watson, except for increases substantially in
          accordance with existing employment practices disclosed to and
          approved by Purchaser, if any;

          (viii)    Seller will not enter into any contract or commitment
          affecting the Seller's Assets, the Pharmacy Business or the Pharmacy
          Premises except in the ordinary course of business and Seller will
          advise Purchaser of any contracts or commitments into which it enters,
          whether in the ordinary course of business or otherwise;

          (ix)     Seller will satisfy and discharge all claims, liens, security
          interests, tenancies, and encumbrances on Seller's Assets and the
          Pharmacy Premises; provided, however, that Seller shall have the right
          to discharge the same at the time of, and from the proceeds due from
          Purchaser to Seller at, Closing;

          (x)       During normal business hours, Seller will provide Purchaser 
          with access on 24 hours notice to the Pharmacy Premises and Seller's
          corporate offices, provided Purchaser does not interfere with the
          operation of the Pharmacy Business and Seller's corporate offices and
          at such times Seller shall permit Purchaser to inspect the books and
          records of the Pharmacy Business in order to ascertain that the same
          are true and accurate and have been kept in accordance with generally
          accepted accounting principles; provided, however, that any agreements
          between Seller and Purchaser with respect to confidential information
          or trade secrets provided to Purchaser shall survive termination of
          this Agreement in the event the transaction provided for herein fails
          to close for any reason whatsoever. 

          (xi)      Except as otherwise provided for herein with respect to the 
          Trade Payables, Seller will timely pay all obligations which are due 
          and payable with respect to the Pharmacy Premises and the Seller's 
          Assets;

          (xii)     Seller will cause the Pharmacy Business to be operated in
          substantial compliance with all applicable municipal, county, state
          and federal laws, regulations, ordinances, standards and orders as now
          in effect (including without limitation, the building and zoning codes
          as currently applied and waived with respect to the Pharmacy Premises)
          and with the Environmental Laws, where the failure to comply therewith
          could have a material adverse effect on the business, property,
          condition (financial or otherwise) or operation of the Pharmacy
          Business, the Seller's Assets or the Pharmacy Premises;

          (xiii)    Seller will take all reasonable action to achieve
          substantial compliance with any laws, regulations, ordinances,
          standards and orders applicable to the Seller's 

                                       -14-

<PAGE>

          Assets, the Pharmacy Business or the Pharmacy Premises which are
          enacted after execution of this Agreement and prior to Closing;

          (xiv)     Seller will not take any action inconsistent with its
          obligations under this Agreement or which could hinder or delay the
          consummation of the transactions contemplated by this Agreement; 

          (xv)      Seller will take such action as is reasonably necessary to
          maintain the continued goodwill of the owner of the Pharmacy Premises
          and that the Pharmacy Premises are in good condition and repair, on
          the Closing Date, ordinary wear and tear excepted; and

          (xvi)     Seller will proceed with all due diligence to secure any
          consents which may be necessary for the assignment and assumption of
          the Rx Contracts or the execution of the New Rx Contracts and to
          secure the approval of Seller's Board of Directors and shareholders. 

     (b)  CLOSING.  On the Closing Date, Seller agrees that it will:

          (i)   Execute and deliver to Purchaser a good and sufficient Bill of
          Sale for the Personal Property, Operating Supplies and Inventory and
          Assignment and Assumption Agreement for the Trade Name, Receivables
          and Trade Payables and such endorsements, assignments and other
          instruments of transfer, including motor vehicle titles, and
          conveyance as shall be necessary to transfer and assign the Seller's
          Assets and the Pharmacy Business to Purchaser as herein provided;

          (ii)   Deliver to Purchaser a certificate of a responsible officer
          dated as of the Closing Date, certifying in such detail as Purchaser
          may reasonably specify the fulfillment of the conditions to be
          fulfilled by Seller set forth in Paragraph(s) 14(a) and (b) and the
          incumbency of the officer(s) signing this Agreement and any documents
          executed pursuant hereto on behalf of Seller;

          (iii)  Deliver the Pharmacy Premises and Personal Property to
          Purchaser in good condition and repair, ordinary wear and tear
          excepted;

          (iv)   Provide Purchaser with a resolution of Seller's Board of
          Directors and a resolution of Seller's shareholders, each certified by
          the Secretary of Seller as being true and correct and in full force
          and effect, authorizing Seller to enter into this Agreement, to
          execute the documents described herein and to consummate the
          transaction provided for herein;

          (v)    Deliver to Purchaser either (i) duly executed assignments of
          the Rx Contracts or (ii) the New Rx Contracts; 

                                           -15-

<PAGE>

          (vi)      Cause Charles Watson to execute and deliver the Employment
          Agreement attached hereto as Exhibit K (the "Watson Employment
          Agreement"); 

          (vii)     Cause each of the shareholders of Seller to execute and
          deliver a Non-Competition Agreement in the form attached hereto as
          Exhibit O (the "Non-Competition Agreements"); and

          (viii)    Cause Charles Watson to execute and deliver an
          Acknowledgement Letter with respect to the risks associated with, and
          the disclosure by Sun of certain matters in connection with, the
          issuance of the Warrant in the form attached hereto as Exhibit P (the
          "Warrant Acknowledgement Letter"). 

          (ix)      Cause Charles Watson to execute and deliver a sublease 
          agreement with respect to the Pharmacy Premises in the form of 
          Exhibit Q attached hereto (the "Pharmacy Sublease").

     (c)  POST-CLOSING.  After the Closing of this Agreement, Seller agrees that
          it will:

          (i)       Take such actions and properly execute and deliver to
          Purchaser such further instruments of assignment, conveyance and
          transfer as, in the reasonable opinion of counsel for Purchaser, may
          be necessary to assure, complete and evidence the full and effective
          transfer and conveyance of the Seller's Assets and the Pharmacy
          Business; provided, however, Seller shall not be responsible for the
          collection of any Receivables; and

          (ii)      Not use the Trade Name.

12.  PURCHASER.

     (a)  PRE-CLOSING.  Between the date hereof and the Closing Date, except as
contemplated by this Agreement or with the consent of Seller, Purchaser agrees
that:

          (i)       Purchaser will not take any action inconsistent with its
          obligations under this Agreement or which could hinder or delay the
          consummation of the transaction contemplated by this Agreement; and

          (ii)      Purchaser will proceed with all due diligence to obtain all
          consents, approvals and licenses necessary to permit the consummation
          of the transaction contemplated by this Agreement and/or necessary to
          permit Purchaser to own and to operate the Pharmacy Business,
          including, but not limited to, the Board Approval and licensure
          approval from the North Carolina Board of Pharmacy and the issuance of
          a controlled substance number from the federal Drug Enforcement
          Agency.

                                           -16-

<PAGE>


     (b)  CLOSING.  On the Closing Date, Purchaser agrees that it will:

          (i)    Pay the portion of the Aggregate Consideration which is due
          at Closing pursuant to Paragraph 2(a); 

          (ii)   Deliver to Seller a certificate of a responsible officer
          dated as of the Closing Date certifying in such detail as Seller may
          reasonably specify the fulfillment of the conditions set forth in
          Paragraph 15(a) and (b) and the incumbency of the officers executing
          this Agreement and any agreements executed pursuant hereto on behalf
          of Purchaser; 

          (iii)  Provide Seller with a resolution of Purchaser's Board of
          Directors, certified by the Secretary of Purchaser as being true and
          correct, authorizing Purchaser to enter into this Agreement, to
          execute the documents described herein and to consummate the
          transaction provided for herein; and

          (iv)   Deliver the fully executed Watson Employment Agreement.

          (v)    Deliver the Warrant Agreement fully executed by Sun.

          (vi)   Deliver the fully executed Assignment and Assumption
          Agreement.

          (vii)  Deliver the fully executed Pharmacy Sublease.

     (c)  POST-CLOSING.  After the Closing of this Agreement, Purchaser agrees
that it will:

          (i)    Provide Seller with access during normal business hours to
          any books or records which Seller may need to file or to defend tax
          returns or other filings filed prior or subsequent to the Closing Date
          or litigation filed against Seller either before or after the Closing
          Date which, in either case, relates to periods prior to the Closing
          Date;

          (ii)   Fulfill its obligations under the Watson Employment
          Agreement;

          (iii)  Participate in good faith and with reasonable diligence in
          the Lease Negotiation Process; 

          (iv)   Take such actions and properly execute and deliver such
          further instruments as Seller may reasonably request to assure,
          complete and evidence the transactions provided for in this Agreement;

          (v)    Pay the Trade Payables assumed by Purchaser hereunder as 
          and when due; and


                                        -17-
<PAGE>


          (vi)   Collect the Receivables as provided for herein.

13.  MUTUAL. Following the execution of this Agreement, Purchaser and Seller
agree:

     (a)  If any event should occur, either within or without the knowledge or
     control of Purchaser or Seller, which would prevent fulfillment of the
     conditions to the obligations of any party hereto to consummate the
     transaction contemplated by this Agreement, to use its or their reasonable
     efforts to cure the same as expeditiously as possible;

     (b)  To cooperate fully with each other in preparing, filing, prosecuting,
     and taking any other actions which are or may be reasonable and necessary
     to obtain the consent of any governmental instrumentality or any third
     party or to accomplish the transaction contemplated by this Agreement; 

     (c)  To pay or effect in a timely fashion all costs and prorations
     contemplated in Paragraphs 5 and 6; and

     (d)  To the extent any exhibits referenced herein are not attached at the
     time of the execution of this Agreement, to use their best efforts to agree
     upon the terms of, and to attach, said exhibits prior to the Closing Date.

CONDITIONS

14.  All obligations of Purchaser under this Agreement are subject to and
contingent upon fulfillment, prior to or at Closing, of each of the following
conditions, any one or all or which may be waived in writing by Purchaser:

     (a)  SELLER'S REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING.  Seller's
     representations and warranties contained in this Agreement or in any
     certificate or document delivered in connection with this Agreement or the
     transactions contemplated herein shall be true in all material respects at
     and as of the date of Closing as though such representations and warranties
     were then again made.

     (b)  SELLER'S PERFORMANCE.  Seller shall have performed all of its
     obligations under this Agreement that are to be performed prior to or at
     Closing.

     (c)  APPROVALS.  Purchaser shall have received all consents, approvals,
     certifications and licenses, including, but not limited to, the Board
     Approval, as may be necessary to own the Seller's Assets and to operate the
     Pharmacy Business or, in the event Purchaser has received its licenses but
     not its DEA number, shall have entered into an agreement with Seller to
     operate the Pharmacy Business under Seller's DEA number until Purchaser's
     DEA number is issued.


                                        -18-
<PAGE>


     (d)  DAMAGE AND CONDEMNATION.  Prior to the Closing Date, no material
     portion of the Pharmacy Premises or the Personal Property, Operating
     Supplies or Inventory shall have been damaged or destroyed by fire or other
     casualty, or shall have been taken or condemned by any public or quasi-
     public authority under the power of eminent domain.  If the Personal
     Property, the Inventory, the Operating Supplies or the Pharmacy Premises
     shall have been so damaged or destroyed and Purchaser waives this
     condition, Seller shall assign to Purchaser all its rights to any insurance
     proceeds and all claims in the connection therewith. 

     (e)  NO DEFAULTS.  Seller shall not be in default, where said default
     cannot be cured by Closing, under any mortgage, contract, lease or other
     agreement affecting or relating to the Seller's Assets, the Pharmacy
     Premises and the Pharmacy Business including, but not limited to, the Rx
     Contracts.

     (f)  WARRANT ACKNOWLEDGMENT LETTER.  Charles Watson shall have executed and
     delivered to Sun the Warrant Acknowledgement Letter.

     (g)  PHARMACY SUBLEASE.  Seller and Purchaser shall have entered into the
     Pharmacy Sublease in form of Exhibit Q.

     In the event any of the foregoing conditions is not satisfied by Seller or
Purchaser, as appropriate, or waived by Purchaser prior to Closing, Purchaser
shall have the right to terminate this Agreement in accordance with the
provisions of Paragraph 18.

15.  CONDITIONS TO SELLER'S OBLIGATIONS.

     All obligations of Seller under this Agreement are subject to and
contingent upon the fulfillment, prior to or at Closing, of each of the
following conditions, any one or all of which may be waived by Seller in
writing:

     (a)  PURCHASER'S REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. 
     Purchaser's representations and warranties contained in this Agreement or
     in any certificate or document delivered in connection with this Agreement
     or the transactions contemplated herein shall be true  in all material
     respects at and as of the date of Closing as though such representations
     and warranties were then again made;

     (b)  PURCHASER'S PERFORMANCE.  Purchaser shall have performed its
     obligations under this Agreement that are to be performed prior to or at
     Closing; and

     (c)  WARRANT AGREEMENT.  Purchaser shall have delivered the Warrant
     Agreement fully executed by Sun.


                                        -19-
<PAGE>


     In the event any of the foregoing conditions is not satisfied by Purchaser
or waived by Seller prior to Closing, Seller shall have the right to terminate
this Agreement in accordance with the provisions of Paragraph 18.

INDEMNIFICATION

16.  Seller shall indemnify, defend and hold Purchaser harmless from and
against:

     (a)  Any and all damages, losses, settlement payments, obligations,
     liabilities, claims, actions, or causes of action, encumbrances and
     reasonable costs and expenses suffered, sustained, incurred, borne or paid
     by Purchaser because of (i) the claims of any broker or finder engaged by
     Seller; (ii) the failure of any representation or warranty of Seller
     contained in this Agreement to be true and correct in all respects as of
     the Closing Date; (iii) the failure of Seller to perform and comply in all
     material respects with all agreements, obligations and conditions when and
     as required by this Agreement; and (iv) claims or litigation or potential
     claims or litigation against Seller's Assets or the Pharmacy Business with
     respect to incidents or other matters which occurred prior to the Closing
     Date, even if such claim or litigation is not asserted until after the
     Closing Date; and

     (b) All reasonable costs and expenses (including, without limitation,
     attorney's fees, interest and penalties) incurred or borne by Purchaser in
     connection with any action, suit, proceeding, demand, assessment or
     judgment incident to any of the matters indemnified against in this
     Paragraph 16.

17.  Purchaser shall indemnify, defend and hold Seller harmless from and
against:

     (a)  Any and all damages, losses, settlement payments, obligations,
     liabilities, claims, actions, or causes of action, encumbrances and
     reasonable costs and expenses suffered, sustained, incurred, borne or paid
     by Seller because of (i) the claims of any broker or finder engaged by
     Purchaser; (ii) the failure of any representation or warranty of Purchaser
     contained in this Agreement to be true and correct in all respects as of
     the Closing Date; (iii) the failure of Purchaser to perform and comply in
     all material respects with all agreements, obligations and conditions when
     and as required by this Agreement; and (iv) claims or litigation or
     potential claims or litigation against Seller's Assets or the Pharmacy
     Business with respect to incidents or other matters which occur after the
     Closing Date; and

     (b) All reasonable costs and expenses (including, without limitation,
     attorney's fees, interest and penalties) incurred or borne by Seller in
     connection with any action, suit, proceeding, demand, assessment or
     judgment incident to any of the matters indemnified against in this
     Paragraph 17.

With respect to each specific claim for indemnification under Paragraph 16, the
indemnification of the Purchaser by the Seller shall be net of any recovery of
the Purchaser with respect to such specific 


                                        -20-

<PAGE>

claim under any insurance policy. Purchaser shall use its bests efforts to 
have its insurance companies waive in writing and for the express benefit of 
the Seller any right of subrogation that the insurance company may have 
against the Seller.  Notwithstanding the foregoing, nothing herein shall be 
construed as obligating Purchaser to make any claim under any insurance 
policy with respect to such specific claim.

Neither party hereto shall have any liability under Paragraphs 16 or 17 
unless and until the aggregate amount of any costs, losses, expenses, 
liabilities or damages (collectively, a "Loss") which is the subject of any 
or all of the foregoing indemnity provisions exceeds Fifteen Thousand Dollars 
($15,000.00) (the "Indemnity Threshold"), but once the Indemnity Threshold 
has been met, each party's liability obligation to the other shall be for the 
full amount of such Loss.

Notwithstanding anything contained herein to the contrary, neither party 
hereto shall have an obligation to indemnify the other party in an aggregate 
amount in excess of One Million Seven Hundred Thousand ($1,700,000) (the 
"Indemnity Ceiling"); provided, however, the parties understand and agree 
that any amount owing under the post Closing Receivables reconciliation (as 
provided for in Section 2 herein) shall not be counted toward nor subject to 
the Indemnity Ceiling.

Each party entitled to indemnification under this Section 5 (the "Indemnified 
Party") will give notice to the party required to provide indemnification 
(the "Indemnifying Party") promptly after such Indemnified Party has actual 
knowledge of any claim as to which indemnity may be sought, and will permit 
the Indemnifying Party to assume the defense of any such claim or any 
litigation resulting therefrom, PROVIDED that counsel for the Indemnifying 
Party, who will conduct the defense of such claim or litigation, will be 
approved by the Indemnified Party (whose approval will not unreasonably be 
withheld), and the Indemnified Party may participate in such defense at such 
party's expense, and PROVIDED, FURTHER, that the failure of any Indemnified 
Party to give notice as provided herein will not relieve the Indemnifying 
Party of its obligations under this Agreement unless the failure to give 
notice is materially prejudicial to an Indemnifying Party's ability to defend 
such action and, PROVIDED, FURTHER, that the Indemnifying Party will not 
assume the defense for matters as to which there is a conflict of interest or 
separate and different defenses.

No Indemnifying Party, in the defense of any such claim or litigation, will, 
except with the consent of each Indemnified Party, consent to entry of any 
judgement or enter into any settlement which does not include as an 
unconditional term thereof the giving by the claimant or plaintiff to such 
Indemnified Party of a release from all liability in respect of such claim or 
litigation.

Except as herein expressly provided, the remedies provided in this Agreement 
shall be cumulative.

TERMINATION

18.  (a)  Purchaser and Seller shall have the right to terminate this Agreement
     prior to Closing in accordance with the terms hereof:

                                     -21-


<PAGE>

     (i)  By mutual consent of the parties;

     (ii) By Purchaser if the conditions to Closing set forth in Paragraph 14
     have not been satisfied or waived by the Outside Closing Date through no
     fault of Purchaser;

     (iii)     By Seller if the conditions to Closing set forth in Paragraph 15
     have not been satisfied or waived by the Outside Closing Date through no
     fault of Seller; and/or

     (iv) By either party if the Closing has not occurred by February 28, 1997
     (the "Outside Closing Date").

     (b)  Neither party to this Agreement may claim termination or pursue any
     other remedy referred to above on account of a breach of a condition ,
     covenant or warranty by the other without first giving such other party
     written notice of such breach and not less than ten (10) days within which
     to cure such breach.  The Closing Date shall be postponed if necessary to
     afford such opportunity to cure, provided, however, in no event shall the
     Closing Date be later than the Outside Closing Date. 

     (c)  In the event of the termination of this Agreement under either
     Paragraph 18(iii) or (iv) where, in either case the Closing has failed to
     occur as a result of a material breach by Purchaser of its obligations
     hereunder, Seller shall be entitled to seek compensation for any damages
     suffered as a result thereof.

     (d)  In the event of the termination of this Agreement by Purchaser under
     either Paragraph 18(ii) or (iv) where, in either case, the Closing has
     failed to occur as a result of a material breach by Seller of its
     obligations hereunder, Purchaser shall have the right either (A) to seek
     specific performance of Seller's obligations hereunder or (B) to terminate
     this Agreement and to sue for damages suffered as a result thereof, which
     damages shall include the costs incurred by Purchaser in negotiating and
     preparing this Agreement and preparing to consummate the transaction
     provided for herein.

EMPLOYEE BENEFITS

19.  Seller will terminate the employment of all current employees of the
Pharmacy Business on or prior to the close of business on the last business day
prior to the Closing Date.  Seller acknowledges and confirms to Purchaser that
Seller will be solely responsible for all payroll, payroll taxes, accrued
vacation (or compensation in lieu thereof) and other employee benefits and other
payments to which current employees of the Pharmacy Business are entitled up to
and including the respective termination dates of such employees and any to
which such employees are entitled thereafter to the extent arising out of
Seller's employment of such employees and that Seller shall pay the same to its
employees within such period of time as may be specified by North Carolina wage
and hour laws.  From and after the Closing Date, Purchaser acknowledges and
confirms to Seller that Purchaser intends to rehire all of the employees and
that Purchaser shall be solely

                                     -22-

<PAGE>

responsible for all payroll, payroll taxes, vacation time and other employee 
benefits to which any current employee of the Pharmacy Business becomes 
entitled by reason of becoming an employee of Purchaser.  For purposes of 
clarification, such employee benefits shall be determined based upon the 
number of years of employment  with the Pharmacy Business.  Purchaser further 
acknowledges and confirms to Seller that Seller shall ever arising out of or 
based upon the employment of any current employees of the Pharmacy Business 
by Purchaser.

NOTICES

20.  Any notice, request or other communication to be given by any party
hereunder shall be in writing and shall be sent by registered or certified mail,
postage prepaid, by overnight courier guaranteeing overnight delivery or by
facsimile transmission, to the following address:

     To Seller:     Mr. Charles Watson
                    Tar Heel Consultants
                    Watson Drug Company, Inc.
                    106 West Broadway
                    Pink Hill, NC  28572
                    Phone:         919-568-3163
                    Facsimile:     919-568-4922

     with copy to:  Sally Nan Barber, Esq.
                    Parker, Poe, Adams & Bernstein L.L.P.
                    2500 Charlotte Plaza
                    Charlotte, NC 28244
                    Phone:         704-335-9026
                    Facsimile:     704-334-4706


     To Purchaser:  Sunscript Pharmacy Corporation
                    101 Sun Lane, NE
                    Albuquerque, NM  87109
                    Phone:         505-821-3355
                    Facsimile:     505-821-3670
                    Attn: John W. Driscoll

     with copy to:  Randi S. Nathanson, Esq.
                    The Nathanson Group
                    1411 Fourth Avenue
                    Suite 905
                    Seattle, WA  98101
                    Phone:         206-623-6239
                    Facsimile:     206-623-1738

                                     -23-


<PAGE>

     Notice shall be deemed given three (3) business days after deposit in the
mail, on the next day if sent by overnight courier and on receipt if sent by
facsimile.

SOLE AGREEMENT

21.  This Agreement may not be amended or modified in any respect whatsoever
except by instrument in writing signed by the parties hereto.  This Agreement
constitutes the entire agreement between the parties hereto and supersedes all
prior negotiations, discussions, writings and agreements between them.

SUCCESSORS

22.  Purchaser shall not have the right to assign this Agreement without the
prior written consent of Seller, which shall not be unreasonably withheld. 
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of and be enforceable by and against the heirs, successors and assigns
of the parties hereto.

CAPTIONS

23.  The captions of this Agreement are for convenience of reference only and
shall not define or limit any of the terms or provisions hereof.

SURVIVAL

24.  All covenants, warranties and representations of Purchaser and Seller
herein shall survive for a period of one year after the Closing; provided,
however, that as to any claims brought within said one year period, the same
shall survive until the final and non-appealable resolution thereof.

GOVERNING LAW

25.  This Agreement shall be deemed to be a contract made under the laws of the
State of North Carolina, and for all purposes shall be governed by, and
construed in all respects (including matters of construction, validity and
performance) in accordance with, the laws of the State of North Carolina,
without regard to the conflicts of law rules of such state.

SEVERABILITY

26.  Should any one or more of the provisions of this Agreement be determined to
be invalid, unlawful or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions hereof shall not in any way be
affected or impaired thereby.

                                    -24-

<PAGE>

COUNTERPARTS

27.  This Agreement may be executed in any number of counterparts, each of which
shall be an original; but such counterparts shall together constitute but one
and the same instrument.

CONFIDENTIALITY

28.  In the event the transaction contemplated by this Agreement fails to close
for any reason, Purchaser and Seller agree to keep confidential any proprietary
information disclosed to them by the other party during the course of this
transaction.

THIRD PARTY BENEFICIARY

29.  Except as specifically set forth herein with respect to the employment of
Charles Watson, and with respect to the issuance of the Warrants to Charles
Watson, the provisions of this Agreement are not intended to confer any benefits
upon any person or entity not a party to this Agreement.

     IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day
and year first set forth above.

     SELLER:             WATSON DRUG COMPANY, INC.

                         By:______________________________
                         Its:_____________________________




     PURCHASER:          SUNSCRIPT PHARMACY CORPORATION


                         By:______________________________
                         Its:_____________________________


                                   -25-
<PAGE>

                                EXHIBIT INDEX


EXHIBIT A  MOTOR VEHICLES

EXHIBIT B EXCLUDED ASSETS

EXHIBIT C WARRANTS

EXHIBIT D AGGREGATE CONSIDERATION ALLOCATION

EXHIBIT E BILL OF SALE

EXHIBIT F ASSIGNMENT AND ASSUMPTION AGREEMENT

EXHIBIT G PERSONAL PROPERTY INVENTORY

EXHIBIT H LIENS AND ENCUMBRANCES

EXHIBIT I EMPLOYEE SCHEDULE

EXHIBIT J Rx CONTRACTS

EXHIBIT K AR AGING REPORTS

EXHIBIT L LITIGATION

EXHIBIT M INSURANCE

EXHIBIT N WATSON EMPLOYMENT AGREEMENT

EXHIBIT O SHAREHOLDER NON-COMPETE AGREEMENTS

EXHIBIT P WARRANT ACKNOWLEDGEMENT LETTER

EXHIBIT Q PHARMACY SUBLEASE


                                   -26-
<PAGE>


                                  EXHIBIT A
                                MOTOR VEHICLES



                                   -27-
<PAGE>

                                  EXHIBIT B
                                EXCLUDED ASSETS



                                   -28-


<PAGE>

                                   EXHIBIT C
                           FORM OF WARRANT AGREEMENT

                               -----------------

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN 
REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR REGISTERED OR QUALIFIED UNDER 
THE SECURITIES OR BLUE SKY LAWS OF ANY STATE.  THE SECURITIES ISSUABLE UPON 
EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION THEREIN, MAY NOT BE SOLD, 
ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER 
TRANSFERRED OR DISPOSED OF UNLESS (I) REGISTERED UNDER AN EFFECTIVE 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND IN FULL 
COMPLIANCE WITH THE APPLICABLE RULES AND REGULATIONS THEREUNDER AND 
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR (II) UNLESS SUN HEALTHCARE 
GROUP, INC. RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES, 
REASONABLY SATISFACTORY TO SUN HEALTHCARE GROUP, INC., STATING THAT SUCH 
SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR OTHER MANNER OF 
TRANSFER OR DISPOSITION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS 
DELIVERY REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE 
SECURITIES OR BLUE SKY LAW.  THIS WARRANT IS SUBJECT TO RESTRICTIONS ON 
TRANSFER AS SET FORTH IN SECTION 5(B) HEREOF, WHICH PROVIDES THAT THIS 
WARRANT MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR ENCUMBERED IN ANY 
MANNER EXCEPT SUCH ASSIGNMENTS AS MAY BE SPECIFICALLY PERMITTED BY THE TERMS 
HEREOF UPON THE DEATH OF THE HOLDER OF THE WARRANT.

                           SUN HEALTHCARE GROUP, INC.

                            WARRANT FOR THE PURCHASE
                           OF SHARES OF COMMON STOCK

                                                                  40,000 Shares

          FOR VALUE RECEIVED, SUN HEALTHCARE GROUP, INC., a Delaware 
corporation (the "Company"), hereby certifies that Charles Watson (the 
"Holder") is entitled, subject to the provisions of this Warrant, to purchase 
from the Company, at any time or from time to time during the applicable 
Exercise Period (as hereinafter defined) the number of fully paid and 
nonassessable shares of common stock of the Company, par value $.01 per share 
("Common Stock"), set forth above at the applicable Exercise Price (as 
hereinafter defined).  


                                     -29-

<PAGE>

          The number and character of shares of Common Stock or other 
securities to be received upon exercise of this Warrant are subject to 
adjustment in accordance with the provisions herein (including without 
limitation Sections 7 and 8).

          For purposes of this Warrant, "Warrant Shares" means the shares of 
Common Stock deliverable upon exercise of this Warrant, as adjusted from time 
to time.  Unless the context requires otherwise all references to Common 
Stock and Warrant Shares in this Warrant shall, in the event of an adjustment 
pursuant to Section 7 hereof, be deemed to refer also to any securities or 
property then issuable upon exercise of this Warrant as a result of such 
adjustment.

          Section 1.   EXERCISE OF WARRANT.  This Warrant may be exercised, 
as a whole or in part, at any time or from time to time during the applicable 
Exercise Period (as hereinafter defined) or, if such day is a day on which 
banking institutions in New York City are authorized by law to close, then on 
the next succeeding day that shall not be such a day, by presentation and 
surrender hereof to the Company at its principal office at the address set 
forth on the signature page hereof (or at such other address as the Company 
may hereafter notify the Holder in writing), or at the office of its stock 
transfer agent or warrant agent, if any, with the Purchase Form annexed 
hereto duly executed and accompanied by proper payment of the aggregate 
applicable Exercise Price in lawful money of the United States of America in 
the form of a certified or cashier's check to the order of Sun Healthcare 
Group, Inc., for the number of Warrant Shares specified in such form.  If 
this Warrant should be exercised in part only, the Company shall, upon 
surrender of this Warrant, execute and deliver a new Warrant evidencing the 
rights of the Holder thereof to purchase the balance of the Warrant Shares 
purchasable hereunder.  Upon receipt by the Company of this Warrant and such 
Purchase Form, together with the aggregate applicable Exercise Price (as 
hereinafter defined) for the number of Warrant Shares specified in such 
Purchase Form, at such office, or by the stock transfer agent or warrant 
agent of the Company, if any,  at its office, the Company or the stock 
transfer agent or warrant agent, if any, shall issue and deliver to or upon 
the written order of the Holder and in such name or names as the Holder may 
designate, a certificate or certificates for the Warrant Shares.  Such 
certificate or certificates shall be deemed to have been issued and any 
person so designated to be named therein shall be deemed to have become the 
holder of record of such Warrant Shares as of the date of the surrender of 
this Warrant and reto duly executed and payment of the Exercise Price, 
notwithstanding that the stock transfer books of the Company shall then be 
closed or that certificates representing such Warrant Shares shall not then 
be actually delivered to the Holder or its designee.  The Company shall pay 
any and all documentary stamp or similar issue or transfer taxes payable in 
respect of the issue or delivery of the Warrant Shares.


                                     -30-

<PAGE>

          Section 2.  EXERCISE PERIOD AND EXERCISE PRICE.

                 (a)    This Warrant shall be exercisable during the period 
(the "Exercise Period") beginning on the date of execution of this Warrant 
Agreement (the "Initial Exercise Date") and ending at 5:00 p.m. (New York 
City time) on a date forty eight (48) months from the execution of this 
Warrant Agreement (the "Termination Date"); provided, however, this Warrant 
shall not be exercisable during the period beginning on the date three months 
from the execution of this Warrant Agreement and ending at 5:00 p.m. (New 
York City time) on the date twelve months from the execution of this Warrant 
Agreement.

                 (b)   "Exercise Price" means $17.00 per Share.

          Section 3.  RESERVATION OF SHARES.  The Company hereby agrees that 
at all times there shall be reserved for issuance and delivery upon exercise 
of this Warrant all shares of its Common Stock or other shares of capital 
stock of the Company or other property from time to time issuable upon 
exercise of this Warrant.  All such shares shall be duly authorized and, when 
issued upon such exercise in accordance with the terms of this Warrant, shall 
be validly issued, fully paid and nonassessable, free and clear of all liens, 
security interests, charges and other encumbrances or restrictions on sale 
(other than any restrictions on sale pursuant to applicable federal and state 
securities laws) and free and clear of all preemptive rights.

          Section 4.  FRACTIONAL SHARES.  The Company shall not be required 
to issue fractional shares of Common Stock on the exercise of this Warrant.  
If any fraction of a share of Common Stock would, except for the provisions 
of this Section 4, be issuable on the exercise of this Warrant (or specified 
portion thereof), the Company shall pay an amount in cash calculated by it to 
be equal to the then Current Market Value (as hereinafter defined) per share 
of Common Stock multiplied by such fraction computed to the nearest whole 
cent.  For the purposes of any computation under this Warrant, the Current 
Market Value per share of Common Stock or of any other equity security 
(herein collectively referred to as a "security") at the date herein 
specified shall be:

          (i)    if the security is not registered under the Securities Exchange
     Act of 1934, the Current Market Value per share of the security shall be
     determined in good faith by the Board of Directors of the Company, or

          (ii)   if the security is registered under the Securities Exchange Act
     of 1934, the Current Market Value per share of the security shall be deemed
     to be the average of the daily market prices of the security for the 10
     consecutive trading days immediately preceding the day as of which Current
     Market Value is being determined or, if the security has been registered
     under the Securities Exchange Act of 1934 for less than 10 consecutive
     trading days before such date, then the average of the daily market prices
     for all of the trading days before such date for which daily market prices
     are available.


                                     -31-

<PAGE>

     The market price for each such trading day shall be: (A) in the case of 
     a security listed or admitted to trading on any securities exchange, the 
     closing price on the primary exchange on which the Common Stock is then 
     listed, on such day, or if no sale takes place on such day, the average 
     of the closing bid and asked prices on such day, (B) in the case of a 
     security not then listed or admitted to trading on any securities 
     exchange, the last reported sale price on such day, or if no sale takes 
     place on such day, the average of the closing bid and asked prices on 
     such day, as reported by a reputable quotation source designated by the 
     Company, (C) in the case of a security not then listed or admitted to 
     trading on any securities exchange and as to which no such reported sale 
     price or bid and asked prices are available, the average of the reported 
     high bid and low asked prices on such day, as reported by a reputable 
     quotation service, or a newspaper of general circulation in the Borough 
     of Manhattan, City and State of New York, customarily published on each 
     business day, designated by the Company, or if there shall be no bid and 
     asked prices on such day, the average of the high bid and low asked 
     prices, as so reported, on the most recent day (not more than 10 days 
     prior to the date in question) for which prices have been so reported, 
     and (D) if there are no bid and asked prices reported during the 10 days 
     prior to the date in question, the Current Market Value of the security 
     shall be determined as if the security were not registered under the 
     Securities Exchange Act of 1934.

          Section 5.  EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT.

                 (a)    This Warrant is exchangeable, without expense, at the 
option of the Holder, upon presentation and surrender hereof to the Company 
or at the office of its stock transfer agent or warrant agent, if any, for 
other warrants of different denomination, entitling the Holder thereof to 
purchase in the aggregate the same number of Warrant Shares and otherwise 
carrying the same rights as this Warrant.

                 (b)    The Holder of this Warrant shall not be entitled to 
sell, assign, pledge, hypothecate, encumber or in any other manner transfer 
or dispose of its interest in this Warrant as a whole or in part to any 
person or persons except at death by transfer by the terms of the Holder's 
will or the laws governing intestate succession. 

                 (c)    This Warrant may be divided or combined by the Holder 
with other warrants that carry the same rights upon presentation hereof at 
the office of the Company or at the office of its stock transfer agent or 
warrant agent, if any, together with a written notice specifying the names 
and denominations in which new warrants are to be issued and signed by the 
Holder hereof.  The term "Warrant" as used herein includes any warrants into 
which this Warrant may be divided or for which it may be exchanged.

                 (d)    Upon receipt by the Company of evidence satisfactory 
to it of the loss, theft, destruction or mutilation of this Warrant, and (in 
the case of loss, theft or 


                                     -32-

<PAGE>

destruction) of reasonably satisfactory indemnification, and upon surrender 
and cancellation of this Warrant, if mutilated, the Company shall execute and 
deliver a new Warrant of like tenor and date.

          Section 6.  RIGHTS OF THE HOLDER.  The Holder shall not, by virtue 
hereof, be entitled to any rights of a stockholder in the Company, either at 
law or in equity, and the rights of the Holder are limited to those expressed 
in this Warrant.

          Section 7.  ANTIDILUTION PROVISIONS AND OTHER ADJUSTMENTS.  The 
number of Warrant Shares which may be purchased upon the exercise hereof 
shall be subject to change or adjustment from time to time as follows:

                 (a)    STOCK DIVIDENDS; STOCK SPLITS; REVERSE STOCK SPLITS; 
RECLASSIFICATIONS.  In case the Company shall (i) pay a dividend or make any 
other distribution with respect to its Common Stock in shares of its capital 
stock, (ii) subdivide its outstanding Common Stock, (iii) combine its 
outstanding Common Stock into a smaller number of shares, or (iv) issue any 
shares of its capital stock in a reclassification of the Common Stock 
(including any such reclassification in connection with a merger, 
consolidation or other business combination in which the Company is the 
continuing corporation) the number of shares of Common Stock issuable upon 
exercise of this Warrant immediately prior to the record date for each such 
dividend or distribution or the effective date of each such subdivision or 
combination shall be adjusted so that the Holder shall thereafter be entitled 
after the completion of each such event to receive the kind and number of 
shares of Common Stock or other securities of the Company that the Holder 
would have owned or have been entitled to receive after the happening of each 
such event, had this Warrant been exercised immediately prior to the 
happening of each such event or any record date with respect thereto.  Each 
adjustment made pursuant to this Section 7(a) shall become effective 
immediately after the effective date of the applicable event retroactive to 
the record date, if any, for such event.

                 (b)    RIGHTS; OPTIONS; WARRANTS.  In case the Company shall 
issue rights, options, warrants or convertible or exchangeable securities 
(other than a transaction subject to Section 7(a)) to all holders of its 
Common Stock, entitling them to subscribe for or purchase Common Stock at a 
price per share that is lower (at the record date for such issuance) than 
ninety-five percent (95%) of the Current Market Value (as defined in Section 
4 hereof) per share of Common Stock, the number of shares of Common Stock 
thereafter issuable upon exercise of this Warrant shall be determined by 
adding the number of shares of Common Stock theretofore issuable upon 
exercise of this Warrant to the product of (x) the Cheap Stock Issued (as 
hereinafter defined), multiplied by (y) the Ownership Ratio (as hereinafter 
defined).  Such adjustment shall be made whenever such rights, options, 
warrants or convertible or exchangeable securities are issued, and shall 
become effective retroactively immediately after the record date for the 
determination of stockholders entitled to receive such rights, options, 
warrants or convertible or exchangeable securities.


                                     -33-

<PAGE>

                 For purposes of this Section 7(b), (i) the "Cheap Stock 
Issued" shall be the number of additional shares of any Common Stock offered 
by the Company for subscription or purchase as described above minus the 
number of shares of Common Stock that the aggregate offering price of the 
total number of shares of Common Stock so offered would purchase at the then 
Current Market Value per share of Common Stock and (ii) the "Ownership Ratio" 
shall be a fraction, the numerator of which shall be the number of shares of 
Common Stock theretofore issuable upon exercise of this Warrant, and the 
denominator of which shall be the fully diluted shares of Common Stock then 
outstanding on the date of issuance of such rights, options, warrants or 
convertible or exchangeable securities minus the number of shares of Common 
Stock theretofore issuable upon the exercise of this Warrant. 

                 (c)    DISTRIBUTIONS OF DEBT, ASSETS, SUBSCRIPTION RIGHTS OR 
CONVERTIBLE SECURITIES.  In case the Company shall fix a record date for the 
making of a distribution to all holders of shares of its Common Stock of 
evidences of indebtedness of the Company, assets (other than cash dividends 
payable out of retained earnings or securities (excluding those referred to 
in Sections 7(a) and 7(b)) (any such evidences of indebtedness, assets, or 
securities being referred to in this Section 7(c) as the "assets or 
securities"), then in each case the Holder, upon the exercise of this 
Warrant, shall be entitled to receive in addition to the shares of Common 
Stock issuable upon exercise of this Warrant, (i) the assets or securities to 
which the Holder would have been entitled as a holder of Common Stock if the 
Holder had exercised this Warrant immediately prior to the record date for 
such distribution and (ii) any income earned on the assets or securities 
distributed from the distribution date to the date of exercise.  At the time 
of any such distribution, the Company shall either (A) deposit the assets or 
securities payable to the Holder pursuant hereto in trust for the Holder with 
an eligible institution (as hereinafter defined) with instructions as to the 
investment of such property and any proceeds therefrom so as to protect the 
value of such property for the Holder or (B) distribute to the Holder the 
assets or securities to which it would be entitled upon exercise and, upon 
any such distribution pursuant to this Clause (B), the provisions of this 
Section 7(c) shall no longer apply to such event.  Such election shall be 
made by the Company by giving written notice thereof to the Holder.

                 For purposes of this Section 7(c), the term "eligible 
institution" shall mean a corporation organized and doing business under the 
laws of the United States of America or of any state thereof, authorized 
under such laws to exercise corporate trust powers, having a combined capital 
and surplus of at least $50,000,000, and subject to supervision or 
examination by Federal or state authority.

                 (d)    DE MINIMIS ADJUSTMENTS.  Except as provided in 
Section 7(e) with reference to adjustments required by such Section 7(e), no 
adjustment in the number of shares of Common Stock issuable hereunder shall 
be required unless such adjustment would require an increase or decrease of 
at least one percent (1%) in the number of shares of Common Stock issuable 
upon the exercise of each Warrant; PROVIDED, HOWEVER, that any 


                                     -34-

<PAGE>

adjustments which by reason of this Section 7(d) are not required to be made 
shall be carried forward and taken into account in any subsequent adjustment. 
All calculations shall be made to the nearest one-thousandth of a share.

                 (e)    ADJUSTMENTS.  In case the Company after the date 
hereof shall take any action affecting the Warrant Shares, other than any 
action described in subsections (a), (b) or (c) of this Section 7 or in 
Section 8 hereof, which the Company's board of directors, acting in the good 
faith exercise of their reasonable judgement, determines would have a 
material adverse effect on the rights of the Holder, the Exercise Price, the 
number of Warrant Shares and/or the character of the securities receivable 
upon exercise of this Warrant shall be adjusted in such manner, if any, and 
at such time, by action of the directors, in their sole discretion as they 
may determine to be equitable in the circumstances, subject to obtaining all 
necessary approvals to such adjustment, including, without limitation, any 
necessary approvals of any stock exchange or over-the-counter market on which 
securities of the Company are then listed or quoted.

                 (f)    NOTICE OF ADJUSTMENT.  Whenever the number of shares 
of Common Stock or other stock or property issuable upon the exercise of this 
Warrant is adjusted, as herein provided, the Company shall promptly cause to 
be mailed by first class mail, postage prepaid, to the Holder notice of such 
adjustment or adjustments.

          Section 8.  RECLASSIFICATION, REORGANIZATION, CONSOLIDATION OR 
MERGER. In the event of any reclassification, capital reorganization or other 
change of outstanding shares of Common Stock of the Company (other than a 
subdivision or combination of the outstanding Common Stock and other than a 
change in the par value of the Common Stock) or in the event of any 
consolidation or merger of the Company with or into another corporation 
(other than a merger in which merger the Company is the continuing 
corporation and that does not result in any reclassification, capital 
reorganization or other change of outstanding shares of Common Stock of the 
class issuable upon exercise of this Warrant) or in the event of any sale, 
lease, transfer or conveyance to another corporation of the property and 
assets of the Company as an entirety or substantially as an entirety, the 
Company shall, as a condition precedent to such transaction, cause effective 
provisions to be made so that such other corporation shall assume all of the 
obligations of the Company hereunder and the Holder shall have the right 
thereafter, by exercising this Warrant, to purchase the kind and amount of 
shares of stock and other securities and property (including cash) receivable 
upon such reclassification, capital reorganization and other change, 
consolidation, merger, sale, lease or conveyance by a holder of the number of 
shares of Common Stock that might have been received upon exercise of this 
Warrant immediately prior to such reclassification, capital reorganization, 
change, consolidation, merger, sale, lease or conveyance.  Any such provision 
shall include provision for adjustments in respect of such shares of stock 
and other securities and property that shall be as nearly equivalent as may 
be practicable to the adjustments provided for in this Warrant.  The 
foregoing provisions of this Section 8 shall similarly apply to successive 
reclassification, 


                                     -35-

<PAGE>

capital reorganizations and changes of shares of Common Stock and to 
successive consolidations, mergers, sale lease, transfers or conveyances.  In 
the event that in connection with any such capital reorganization, or 
reclassification, consolidation, merger, sale, lease, transfer or conveyance, 
additional shares of Common Stock shall be issued in exchange, conversion, 
substitution or payment, as a whole or in part, for, or of, a security of the 
Company other than Common Stock, any such issue shall be treated as an issue 
of Common Stock covered by the provisions of Section 7(a).

          Section 9.  TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.  
This Warrant may not be sold, assigned, pledged, hypothecated, encumbered or 
in any other manner transferred or disposed of except in accordance with 
Section 5(b) hereof.  This Warrant may not be exercised and none of the 
Warrant Shares, nor any interest therein, may be sold, assigned, pledged, 
hypothecated, encumbered or in any other manner transferred or disposed of, 
as a whole or in part, except in compliance with applicable United States 
federal and state securities or Blue Sky laws and the terms and conditions 
hereof.  The Company may require the Holder or his estate to obtain an 
opinion of counsel, at the expense of the Holder or his estate, reasonably 
satisfactory to the Company to the effect that the proposed exercise of the 
Warrant and/or sale, assignment, pledge, hypothecation, encumbrance or other 
transfer of the Warrant Shares may be effected without registration under 
federal and state securities or Blue Sky laws.  Each Warrant shall bear a 
legend in substantially the same form as the legend set forth on the first 
page of this initial Warrant.  Each certificate for Warrant Shares issued 
upon exercise of this Warrant, unless at the time of exercise such Warrant 
Shares are registered under the Securities Act of 1933, shall bear a legend 
substantially in the following form:

     The securities represented by this certificate have not been registered
     under the Securities Act of 1933 or registered or qualified under the
     securities or Blue Sky laws of any state.  Neither these securities nor any
     interest or participation therein may be sold, assigned, pledged,
     hypothecated, encumbered or in any other manner transferred or disposed of
     unless registered under an effective registration statement under the
     Securities Act of 1933 and in full compliance with the applicable rules and
     regulations thereunder and applicable state securities or Blue Sky laws or
     unless Sun Healthcare Group, Inc. receives an opinion of counsel for the
     holder of this certificate, reasonably satisfactory to Sun Healthcare
     Group, Inc., stating that such sale, assignment, pledge, hypothecation,
     encumbrance or other manner of transfer or disposition is exempt from the
     registration and prospectus delivery requirements of the Securities Act of
     1933 and applicable state securities or Blue Sky law.

Any certificate for any Warrant Shares issued at any time in exchange or
substitution for any certificate for any Warrant Shares bearing such legend
(except a new certificate for any Warrant Shares issued after registration of
such Warrant Shares under the Securities Act of 1933) shall also bear such
legend unless, in the opinion of counsel for the Company, the Warrant Shares
represented thereby need no longer be subject to the restriction contained


                                     -36-

<PAGE>

herein.  The provisions of this Section 9 shall be binding upon all 
subsequent holders of certificates for Warrant Shares bearing the above 
legend and all subsequent Holders of this Warrant, if any.  Warrant Shares 
distributed to the public in accordance with Section 8 or sold by the holder 
thereof under Rule 144 under the Securities Act of 1933 shall thereafter 
cease to be deemed to be "Warrant Shares" for all purposes of this Warrant. 

          Section 10.  LISTING ON SECURITIES EXCHANGES.  The Company shall 
list on each national securities exchange on which any Common Stock may at 
any time be listed, including, for the purpose of this Section 10, the New 
York Stock Exchange, subject to official notice of issuance upon the exercise 
of this Warrant, all shares of Common Stock from time to time issuable upon 
exercise of this Warrant and the Company shall maintain, so long as any other 
shares of its Common Stock shall be so listed, all shares of Common Stock 
from time to time issuable upon the exercise of this Warrant; and the Company 
shall so list on each national securities exchange, and shall maintain such 
listing of, any other shares of capital stock of the Company issuable upon 
the exercise of this Warrant if and so long as any shares of capital stock of 
the same class shall be listed on such national securities exchange by the 
Company.  Any such listing shall be at the Company's expense.

          Section 11.  AVAILABILITY OF INFORMATION.  The Company shall comply 
with the reporting requirements of Sections 13 and 15(d) of the Securities 
Exchange Act of 1934 to the extent it is required to do so under the 
Securities Exchange Act of 1934, and shall likewise comply with all other 
applicable public information reporting requirements of the Securities and 
Exchange Commission (including those required to make available the benefits 
of Rule 144 under the Securities Act of 1933) to which it may from time to 
time be subject.  The Company shall also cooperate with the holder of this 
Warrant and the holder of any Warrant Shares in supplying such information as 
may be necessary for such holder to complete and file any information 
reporting forms currently or hereafter required by the Commission as a 
condition to the availability of Rule 144 or any successor rule under the 
Securities Act of 1933 for the sale of this Warrant or the Warrant Shares.  
The provisions of this Section 11 shall survive termination of this Warrant, 
whether upon exercise of this Warrant in full or otherwise.  The Company 
shall also provide to holders of this Warrant the same information that it 
provides to holders of its Common Stock.

          Section 12.  REGISTRATION RIGHTS.

          (a)  See Exhibit A attached hereto and incorporated by reference 
herein.  Capitalized terms defined in Exhibit A and not otherwise defined in 
this Section 12 are used in this Section 12 as therein defined.

          (b)  The rights to cause the Company to register Registrable 
Securities pursuant to Section 12(a) and Exhibit A are personal to the Holder 
may not be assigned by 


                                     -37-

<PAGE>

Holder other than in connection with an assignment of the Warrant on the 
death of Holder as permitted by Section 5(b) or other permitted transfer 
hereunder.

          Section 13.  SUCCESSORS.  Subject to the limitations on transfer 
and assignment provided for herein, all the provisions of this Warrant by or 
for the benefit of the Company or the Holder shall bind and inure to the 
benefit of their respective successors, assigns, heirs and personal 
representatives.

          Section 14.  HEADINGS. The headings of sections of this Warrant 
have been inserted for convenience of reference only, are not to be 
considered a part hereof and shall in no way modify or restrict any of the 
terms or provisions hereof.

          Section 15.  AMENDMENTS.  This Warrant may not be amended except by 
the written consent of the Company and the Holder.

          Section 16.  NOTICES.  Unless otherwise provided in this Warrant, 
any notice or other communication or mailing required or permitted to be made 
or given to any party hereto pursuant to this Warrant shall be deemed made or 
given if delivered by hand on the date of such delivery to such party or, if 
mailed, on the fifth day after the date of mailing, if sent to such party by 
certified or registered mail or air mail, postage prepaid, addressed to it 
(in the case of the Holder) at its address at ________________________________, 
or (in the case of the Company) at its address set forth on the signature page 
hereof, Attention: _____________________, or to such other address as is 
designated by written notice, similarly given to each other party hereto.

          Section 17.  TRANSFER AGENT.  The Company's transfer agent as of 
the date hereof is Boatmen's Trust Company, 510 Locust Street, St. Louis, MO 
63178.

          Section 18.  GOVERNING LAW.  This Warrant shall be governed by the 
laws of the State of New York.

                           [SIGNATURE PAGE FOLLOWS.]


                                     -38-

<PAGE>

     IN WITNESS WHEREOF, the Company has duly caused this Warrant to be 
signed by its duly authorized officer and to be dated as of ______________, 
1997.

                                         SUN HEALTHCARE GROUP, INC.
                                         101 Sun Lane NE
                                         Albuquerque, NM  87109

                                         By:
                                            -----------------------
                                         Name:
                                         Title:






                                ACKNOWLEDGMENT

     By his signature set forth below, the Holder of this Warrant does hereby 
acknowledge receipt thereof and does hereby agree to be bound by the terms 
and conditions of the Exhibit A attached hereto.



                                ----------------------------------
                                Charles Watson


<PAGE>

                                 PURCHASE FORM



                                                      Dated ___________________

          The undersigned hereby irrevocably elects to exercise the within 
Warrant to purchase __________ shares of Common Stock and hereby makes payment 
of _______________________ in payment of the exercise price thereof, and 
requests that the certificates for such shares be issued in the name of, and 
delivered to, _______________________________, whose address is 
___________________________________________________________________________.



                                  Signature 
                                            ---------------------------



<PAGE>

                                 ASSIGNMENT FORM


                                                      Dated ___________________


          FOR VALUE RECEIVED, ___________________________ hereby sells, assigns
and transfers unto ____________________________________________ (the
"Assignee"),            (please type or print name and address in block letters)

its right to purchase up to ___________________ shares of Common Stock
represented by this Warrant and does hereby irrevocably constitute and appoint
________________________ Attorney, to transfer the same on the books of the
Company, with full power of substitution in the premises.


                         Signature ___________________________




                                 ACKNOWLEDGMENT

     By his or her signature set forth below, the Assignee of this Warrant does
hereby acknowledge receipt hereof and does hereby agree to be bound by the
provisions contained in Exhibit A attached hereto.


                         Signature ___________________________

<PAGE>

                                    EXHIBIT A

                               REGISTRATION RIGHTS


          This Exhibit A is attached to, and forms a part of, that certain
Warrant Agreement (the "Warrant") to purchase 40,000 shares of common stock, par
value $.01 per share of Sun Healthcare Group, Inc. (the "Company").

     1.   CERTAIN DEFINITIONS.  As used in this Exhibit A, the following terms
will have the following respective meanings:

          "COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.

          "COMMON STOCK" means the common stock, par value $.01 of the Company.

          "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

          "HOLDER" means Charles Watson who received the Warrant from the
Company pursuant to that certain Purchase and Sale Agreement dated _________
between Sunscript Pharmacy Corporation and Watson Drug Company, Inc. (the
"Purchase Agreement") and any assignee or transferee of a Warrant from any
Holder in any transaction in which registration rights are assigned or
transferred as permitted by Section 12(b) of the Warrant.

          "NYSE" means the New York Stock Exchange, Inc.

          "REGISTRABLE SECURITIES"  means (i) the Warrant Shares, and (ii) any
Common Stock directly or indirectly issued or issuable in respect of such
Warrant Shares upon any stock split, stock dividend, recapitalization, or
similar event; PROVIDED, HOWEVER, that shares of Common Stock will cease to be
Registrable Securities if (A) such Registrable Securities, or the Warrant
pursuant to which such Registrable Securities have been or may be issued, have
been sold by a Holder in a transaction in which its registration rights under
this Exhibit A are not assigned, (B) a registration statement with respect to
the issuance or sale of such Registrable Securities shall have become effective
under the Securities Act and such Registrable Securities shall have been issued
or disposed of in accordance with such registration statement, (C) such
Registrable Securities are available for sale in a transaction which complies
with the provisions of Rule 144 promulgated under the Securities Act, including,
without limitation, the volume restrictions applicable to such transaction under
Rule 144, (D) such Registrable Securities shall have been otherwise transferred,
new certificates for such Registrable Securities not bearing a 

<PAGE>

legend restricting further transfer shall have been delivered by the Company, 
and subsequent disposition of such Registrable Securities shall not be 
subject to registration or qualification under the Securities Act, (E) such 
Registrable Securities, or the Warrant pursuant to which such Registrable 
Securities have been or may be issued, shall have ceased to be outstanding or 
(F) in the opinion of counsel to the Company, such Registrable Securities are 
otherwise available for sale in a transaction exempt from the registration 
and prospectus delivery requirements of the Securities Act so that all 
transfer restrictions and restrictive legends with respect thereto are 
removed upon the consummation of such sale.

          The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering by the
Commission of the effectiveness of such registration statement.

          "REGISTRATION EXPENSES" means all expenses, except as otherwise stated
below, incurred by the Company in complying with Section 2 hereof, including,
without limitation, all registration, qualification and filing fees required to
be paid to the Commission, the NYSE, the National Association of Securities
Dealers, Inc., and any applicable state agency, printing expenses, any transfer
taxes or fees, escrow fees, fees and disbursements of counsel for the Company,
fees and expenses incurred in connection with complying with state securities or
"blue sky" laws, the expense of any special audits incident to or required by
any such registration (but excluding the compensation of regular employees of
the Company which will be paid in any event by the Company).

          "SELLING EXPENSES" means all underwriting discounts and selling
commissions applicable to the securities registered by Holder and all fees and
disbursements of counsel for Holder.

          "SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

           "WARRANT" means the Warrant to purchase shares of Common Stock of 
the Company issued to Holder pursuant to the Purchase Agreement.

          "WARRANT SHARES" means the shares of Common Stock issuable upon
exercise of the Warrant.

          Capitalized terms not otherwise defined in this Exhibit A are used in
this Exhibit A as defined in the Warrant to which this Exhibit A is attached and
forms a part. 

                                     A-2

<PAGE>

     2.   RESALE REGISTRATION.

          Upon issuance of the Warrant the Company will use its best efforts to
(i) as soon as practicable and in any event within one (1) year following the
date of the Warrant, file a registration statement under the Securities Act
(including, without limitation, appropriate registration or qualification under
applicable blue sky or other state securities laws in up to 10 states to be
specified by the Holder) and (ii) effect, or cause the registration statement to
be declared effective by the Commission and appropriate blue sky regulators, if
necessary, as soon as practicable after such filing, such registration,
qualification, listing or compliance as would permit or facilitate the sale and
distribution of the Registrable Securities to the public by Holder. The Company
will not be deemed to be in violation of the terms hereof in the event the
Company notifies Holder that the registration statement will not be timely filed
or declared effective in accordance with this Exhibit A as a result of events
outside of the control of the Company, including, but not limited to, delays by
the Commission in declaring the same effective or requests by the Commission for
additional information concerning, or amendments to, the registration statement
prior to declaring the same effective, or delays by the Commission in declaring
the registration statement effective due to the requirements of Item 7 of Form
8-K under the Exchange Act, or the existence of any of the events described in
Section 4(b); provided, however, that the Company shall proceed in good faith to
effect such filing or to cause the registration statement to be declared
effective as soon as practicable after such event or events have abated. 
Notwithstanding anything contained in clause (i) of this paragraph to the
contrary, if at the time the Warrant is issued the Commission shall not have
declared effective the Company's registration statement on Form S-3 (No. 33-
96240) (the "Existing Registration Statement"), the Company shall include the
Holder as a "Selling Stockholder" of the Registrable Securities in the Existing
Registration Statement.

          The Company will not be obligated to take any action to effect any
such registration, qualification or compliance pursuant to this Section 2 in any
particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act.

     3.   EXPENSES OF REGISTRATION.

          (a)  REGISTRATION EXPENSES.  All Registration Expenses incurred in
connection with all registrations pursuant to Section 2 hereof will be borne by
the Company.

          (b)  SELLING EXPENSES.  Unless otherwise stated herein, all Selling
Expenses relating to securities registered on behalf of Holder pursuant to
Section 2 hereof will be borne by Holder.

     4.   REGISTRATION PROCEDURE.

                                     A-3
<PAGE>

          (a)  DUTIES OF THE COMPANY.  In the case of each registration, 
qualification or compliance effected by the Company pursuant to this Exhibit 
A, the Company will keep Holder advised in writing as to the initiation of 
each registration, qualification and compliance and as to the completion 
thereof.  At its expense the Company will:

               (i)  Prepare and file with the Commission a registration
     statement with respect to the Registrable Securities held by the Holder
     (unless the Holder shall have elected not to include such Registrable
     Securities in the Registration Statement or has not complied with his
     obligations under Section 6 hereof) and use its best efforts to cause such
     registration statement to become and remain effective for two years from
     the date of acquisition from the Company of such Registrable Securities or
     until the distribution described in the registration statement has been
     completed, whichever is less, and if necessary, to supplement or amend the
     Registration Statement if required by the Securities Act or by the rules
     and regulations of the Commission thereunder; and

               (ii) furnish to Holder and to the underwriters, if any, of the
     securities being registered such reasonable number of copies of the
     registration statement, preliminary prospectus, final prospectus and such
     other documents as Holder or the underwriters may reasonably request in
     order to facilitate the public offering of such securities.

          (b)  NOTICE TO HOLDER.  Notwithstanding the existence of an 
effective registration statement pursuant to Section 4(a)(i) of this Exhibit 
A, the Company may notify Holder that Registrable Securities may not be 
issued or sold pursuant to the registration statement if (i) the Company is 
engaged in a public offering of an original issue of Common Stock or 
securities convertible into Common Stock and provides written notice to 
Holder that such issuances or sales are suspended as a result thereof during 
the period beginning with the distribution of the preliminary prospectus and 
ending thirty (30) days after the closing date or (ii) an event occurs which 
requires the making of any changes in the registration statement or related 
prospectus so that, in the case of the registration statement, such document 
shall not contain any untrue statement of a material fact or omit to state 
any material fact required to be stated therein or necessary to make the 
statements therein not misleading, and in the case of the prospectus, such 
document shall not contain any untrue statement of a material fact or omit to 
state any material fact required to be stated therein or necessary to make 
the statements therein not misleading in light of the circumstances in which 
they were made or (iii) the Board of Directors determines in its good faith 
judgment because of the existence of, or in anticipation of, any acquisition 
or divesture involving the Company or any of its subsidiaries, or because of 
an adverse impact on any financing activity, or because of any other event or 
condition of similar significance to the Company or any of its subsidiaries 
it would be significantly disadvantageous (a "Disadvantageous Condition") to 
the Company or any of its subsidiaries or its stockholders to permit sales of 
the Registrable Securities pursuant to the registration statement.  The 
Company

                                    A-4

<PAGE>

shall provide the Holder with a second notice as soon as possible after it 
determines that sales of the Registrable Securities suspended pursuant to 
this Section 4(b) are again permitted.

     5.   INDEMNIFICATION AND CONTRIBUTION.

          (a)  INDEMNIFICATION BY COMPANY.  To the extent permitted by law, 
the Company will indemnify each Holder, each of its officers and directors 
and partners, and each person controlling such Holder within the meaning of 
Section 15 of the Securities Act, with respect to which a registration, 
qualification or compliance has been effected pursuant to this Exhibit A and 
each underwriter, if any, and each person who controls any underwriter within 
the meaning of Section 15 of the Securities Act, against all expenses, 
claims, losses, damages or liabilities, joint or several (or actions in 
respect thereof), including any of the foregoing incurred in settlement of 
any litigation, commenced or threatened, arising out of any untrue statement 
or alleged untrue statement of a material fact contained in any registration 
statement (or any amendment thereto) pursuant to which Registrable Securities 
were registered under the Securities Act, including all documents 
incorporated therein by reference, or the omission or alleged omission 
therefrom of a material fact required to be stated therein or necessary to 
make the statements therein not misleading, or arising out of any untrue 
statement or alleged untrue statement of a material fact contained in any 
prospectus, offering circular or similar document (or any amendment or 
supplement thereto) incident to any such registration, qualification or 
compliance, or the omission or alleged omission therefrom of a material fact 
necessary in order to make the statements therein, in the light of the 
circumstances under which they were made, not misleading, or any violation by 
the Company of the Securitieslation promulgated thereunder or promulgated by 
the NYSE applicable to the Company in connection with any such registration, 
qualification or compliance, and the Company will reimburse each such Holder, 
each of its officers and directors, and each person controlling such Holder, 
each such underwriter and each person who controls any such underwriter for 
any legal and any other expenses reasonably incurred in connection with 
investigating, preparing or defending any such claim, loss, damage, liability 
or action, PROVIDED that the Company will not be liable in any such case to 
the extent that any such claim, loss, damage, liability or expense arises out 
of or is based on any untrue statement or omission or alleged untrue 
statement or omission, made in reliance upon and in conformity with written 
information furnished to the Company by such Holder or controlling person 
specifically for use therein. 

          (b)  INDEMNIFICATION BY HOLDERS.  To the extent permitted, by law, 
each Holder will, if Registrable Securities held by such Holder are included 
in the securities as to which such registration, qualification or compliance 
becomes effective, indemnify the Company, each of its directors and officers, 
each underwriter, if any, of the Company's securities covered by such a 
registration statement, each person who controls the Company or such 
underwriter within the meaning of Section 15 of the Securities Act, and each 
other such Holder, each of its officers and directors and each person 
controlling such Holder within the

                                    A-5

<PAGE>

meaning of Section 15 of the Securities Act, against all claims, losses, 
damages and liabilities (or actions in respect thereof) described in the 
indemnity contained in Section 5(a) hereof, and will reimburse the Company, 
such Holders, and such directors, officers, persons, underwriters or control 
persons for any legal or any other expenses reasonably incurred in connection 
with investigating or defending any such claim, loss, damage, liability or 
action, in, that such untrue statement (or alleged untrue statement) or 
omission (or alleged omission) is made in such registration statement, 
prospectus, offering circular or other document in reliance upon and in 
conformity with written information furnished to the Company by such Holder 
specifically for use therein.  Notwithstanding the foregoing, the liability 
of each Holder under this Section 5(b) will be limited in an amount equal to 
such Holder's net sale proceeds, unless such liability arises out of or is 
based on willful misconduct by such Holder.

          (c)  PROCEDURES.  Each party entitled to indemnification under this 
Section 5 (the "Indemnified Party") will give notice to the party required to 
provide indemnification (the "Indemnifying Party") promptly after such 
Indemnified Party has actual knowledge of any claim as to which indemnity may 
be sought, and will permit the Indemnifying Party to assume the defense of 
any such claim or any litigation resulting therefrom, PROVIDED that counsel 
for the Indemnifying Party, who will conduct the defense of such claim or 
litigation, will be approved by the Indemnified Party (whose approval will 
not unreasonably be withheld), and the Indemnified Party may participate in 
such defense at such party's expense, and PROVIDED, FURTHER, that the failure 
of any Indemnified Party to give notice as provided herein will not relieve 
the Indemnifying Party of its obligations under this Exhibit A unless the 
failure to give notice is materially prejudicial to an Indemnifying Party's 
ability to defend such action and, PROVIDED, FURTHER, that the Indemnifying 
Party will not assume the defense for matters as to which there is a conflict 
of interest or separate and different defenses.

          No Indemnifying Party, in the defense of any such claim or 
litigation, will, except with the consent of each Indemnified Party, consent 
to entry of any judgement or enter into any settlement which does not include 
as an uified Party of a release from all liability in respect of such claim 
or litigation.

          (d)  CONTRIBUTION.  In order to provide for just and equitable 
contribution in circumstances in which any of the indemnity provisions set 
forth in this Section 6 are for any reason held to be unenforceable by the 
indemnified parties although applicable in accordance with its terms, the 
Company and the Holder shall contribute to the aggregate losses, liabilities, 
claims, damages and expenses of the nature contemplated by such indemnity 
agreement incurred by the Company and the Holder, as incurred; PROVIDED, 
HOWEVER, that no person guilty of fraudulent misrepresentation (within the 
meaning of Section 11(f) of the Securities Act) shall be entitled to 
contribution from any person that was not guilty of such fraudulent 
misrepresentation.  As between the Company and the Holder, such parties shall 
contribute to

                                    A-6

<PAGE>

such aggregate losses, liabilities, claims, damages and expenses of the 
nature contemplated by such indemnity agreement in such proportion as shall 
be appropriate to reflect the relative fault of the Company on the one hand, 
and the Holder on the other hand, with respect to the statements or omissions 
which resulted in such loss, liability, claim, damage or expense, or action 
in respect thereof, as well as any other relevant equitable considerations.  
The Company and the Holder agree that it would not be just and equitable if 
contribution pursuant to this Section 6 were to be determined by pro rata 
allocation or by any other method of allocation that does not take into 
account the relevant equitable considerations.  For purposes of this Section 
6, each person, if any, who controls a Holder within the meaning of Section 
15 of the Securities Act shall have the same rights to contribution as such 
Holder, and each director of the Company, each officer of the Company who 
signed the Registration Statement in question, and each person, if any, who 
controls the Company within the meaning of Section 15 of the Securities Act 
shall have the same rights to contribution as the Company.

     6.   INFORMATION BY HOLDERS.  The Holder will furnish to the Company 
such information regarding the Holder, the Registrable Securities held by it 
and the distribution proposed by the Holder as the Company may request in 
writing and as will be required in connection with any registration, 
qualification or compliance referred to in this Exhibit A.

     7.   RULE 144 REPORTING.  With a view to making available the benefits 
of certain rules and regulation of the Commission which may at any time 
permit the sale of the Registrable Securities to the public without 
registration, the Company agrees to use its best efforts to:

          (a)  Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;

          (b)  Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (as any time after it has become subject to
such reporting requirements); and

          (c)  So long as Holder owns any Registrable Securities or the Warrant,
to furnish to Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 of the
Securities Act and the Exchange Act, upon which the Holder shall be entitled to
rely, a copy of the most recent annual or quarterly report of the Company, and
such other reports and documents of the Company and other information in the
possession of or reasonably obtainable by the Company as a Holder may reasonable
request in availing itself of any rule or regulation of the Commission allowing
a Holder to sell any such securities without registration.

                                    A-7


<PAGE>

                                   EXHIBIT D
                      AGGREGATE CONSIDERATION ALLOCATION











                                     A-8

<PAGE>

                                  EXHIBIT E
                                 BILL OF SALE

     In consideration of Ten Dollars ($10.00) and other good and valuable 
consideration, the receipt and sufficiency of which are hereby acknowledged, 
Watson Drug Company, Inc., a North Carolina corporation (the "Seller") does 
hereby grant, bargain, sell, convey and transfer to Sunscript Pharmacy 
Corporation, a New Mexico corporation ("Purchaser") all of its right, title 
and interest in and to, all and singular, the Personal Property, the Motor 
Vehicles, the Trade Name, the Intangible Property, the Inventory and 
Operating Supplies, as each of those terms are defined in the Purchase and 
Sale Agreement dated February ___, 1997 between Seller and Purchaser (the 
"Purchase Agreement").

     TO HAVE AND TO HOLD, all and singular, the Personal Property, the Motor 
Vehicles, the Trade Name, the Intangible Property, the Inventory and the 
Operating Supplies hereby sold, assigned, transferred and conveyed to 
Purchaser, its successors and assigns, to and for its own use and benefit, 
all of which are sold, conveyed and delivered "AS IS" "WHERE IS" as of the 
date of this Bill of Sale except as otherwise set forth in the Purchase 
Agreement.  Except as otherwise set forth in the Purchase Agreement, There 
are no warranties of any kind, express or implied, AND THERE ARE NO 
REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY OR FITNESS AS TO A 
PARTICULAR USE.

     Seller hereby represents and warrants to Purchaser that Seller is the 
owner of the Personal Property, the Inventory and the Operating Supplies, 
that Seller has full right, power and authority to sell the same and to make 
this Bill of Sale and that the same is not encumbered in any manner except as 
specifically set forth in Attachment 1 hereto.

     Dated this _____ day of February, 1997.


                         WATSON DRUG COMPANY, INC.

                         By:
                            ------------------------

                         Its:
                             -----------------------

           
                                    A-9

<PAGE>

                                 EXHIBIT F
                     ASSIGNMENT AND ASSUMPTION AGREEMENT

This Agreement is made and entered into effective as of the ____ day of
February, 1997 by and between Watson Drug Company, Inc., a North Carolina
corporation ("Assignor") and Sunscript Pharmacy Corporation., a New Mexico
corporation ("Sunscript").

                                    RECITALS

     A.   By Purchase and Sale Agreement dated February ___, 1997 (the "Purchase
Agreement") by and among Sunscript, as Purchaser, and Assignor, as Seller,
Sunscript acquired from  Assignor certain assets related to its pharmaceutical
business operations in the State of North Carolina (the "Pharmacy Business"),
including, but not limited to, Seller's right, title and interest in and to
those contracts with the customers of the Pharmacy Business which are listed in
Attachment I hereto (the "Rx Contracts"), the Receivables, the Contracts and the
Trade Payables (as those terms are defined in the Purchase Agreement).

     B. Under the terms of the Purchase Agreement, the Rx Contracts, the
Receivables, the Contracts and the Trade Payables are to be assigned to and
assumed by Sunscript as of the Closing Date (as defined in the Purchase
Agreement).

     C. Assignor and Sunscript are desirous of documenting the terms and
conditions under which said assignment and assumption will occur.
  
     NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS:

                                    AGREEMENT

     1. ASSIGNMENT. As of the Closing Date Assignor does hereby sell, assign,
transfer and convey to Sunscript all of Assignor's right, title and interest in
and to and does hereby delegate to Sunscript all of Assignor's duties and
obligations under the Rx Contracts, the Receivables, the Contracts and the Trade
Payables; provided, however, nothing herein shall be construed as imposing any
liability on Sunscript with respect to the Rx Contracts or the Contracts as a
result of the acts or omissions of Assignor thereunder prior to the Closing Date
(as defined in the Purchase Agreement) or as imposing any liability on Assignor
with respect to the Rx Contracts or the Contracts as a result of the acts or
omissions of Sunscript thereunder from and after the Closing Date. 

     2. ASSUMPTION. From and after the Closing Date, Sunscript does hereby
accept the sale, assignment, transfer and conveyance of Assignor's right, title
and interest in and to and does hereby assume Assignor's duties and obligations
with respect to the Rx Contracts, the Receivables, the Contracts and the Trade
Payables; provided, however, nothing herein shall be

                                    A-10

<PAGE>

construed as imposing any liability on Sunscript with respect to the Rx 
Contracts or the Contracts as a result of the acts or omissions of Assignor 
thereunder prior to the Closing Date (as defined in the Purchase Agreement) 
or as imposing any liability on Assignor with respect to the Rx Contracts and 
the Contracts as a result of the acts or omissions of Sunscript thereunder 
from and after the Closing Date. 

     3. GOVERNING LAW/AMENDMENT. This Agreement shall be governed by and 
construed in accordance with the laws of the State of North Carolina and may 
not be amended or modified except by written instrument signed by the parties 
hereto.

     4. COUNTERPARTS. This Agreement may be executed in counterparts, each of 
which shall be deemed to be an original, but all of which taken together 
shall constitute but one and the same instrument.  Delivery of an executed 
counterpart of a signature page to this Agreement via telephone facsimile 
transmission shall be effective as delivery of a manually executed 
counterpart of this Agreement.

     5. ATTORNEYS' FEES. In the event of a dispute among the parties hereto 
with respect to the subject matter hereof, the prevailing party in any such 
dispute shall be entitled to collect from the other its reasonable attorneys' 
fees and costs.

     6. ENTIRETY. This Agreement and any Exhibits hereto and the documents 
executed in furtherance hereof or in conjunction herewith, including, but not 
limited to, the Purchase Agreement, represent the entire agreement of the 
parties with respect to the subject matter hereof, it being understood and 
agreed that nothing herein shall affect the rights and obligations of 
Assignor and Sunscript under the Purchase Agreement.

     7. NOTICES. Any notice, request or other communication to be given by 
either party hereunder shall be in writing and shall be sent to the parties 
and in the manner specified in the Purchase Agreement.

     8. SEVERABILITY. Should any one or more of the provisions hereof be 
deemed to be invalid or unenforceable said determination shall not affect the 
validity or enforceability of the remaining terms hereof.

     9. CAPTIONS. The captions in this Agreement have been inserted for 
convenience of reference only and shall not be construed to define or to 
limit any of the terms or conditions hereof.


                          [SIGNATURE PAGE FOLLOWS.]

                                    A-11


<PAGE>

     IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day
and year first set forth above.


                         WATSON DRUG COMPANY, INC.


                         By:___________________________________

                         Its:__________________________________



                         SUNSCRIPT PHARMACY CORPORATION

                         By:__________________________________

                         Its:__________________________________







                                    A-12
<PAGE>

                                 EXHIBIT G
                        PERSONAL PROPERTY INVENTORY








                                    A-13
<PAGE>

                                 EXHIBIT H
                          LIENS AND ENCUMBRANCES





                                    A-14
<PAGE>

                                 EXHIBIT I
                             EMPLOYEE SCHEDULE



 

                                    A-15


<PAGE>
                                  EXHIBIT J
                                 RX CONTRACTS




                                    A-16
<PAGE>

                                  EXHIBIT K
                               AR AGING REPORTS



                                    A-17
<PAGE>

                                  EXHIBIT L
                                 LITIGATION




                                    A-18
<PAGE>

                                  EXHIBIT M
                                  INSURANCE




                                   A-19
<PAGE>

                                   EXHIBIT N
                         WATSON EMPLOYMENT AGREEMENT


     THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
this ____ day of February, 1997 by and between Sunscript Pharmacy Corporation, a
New Mexico corporation ("Sunscript"), and Charles Watson ("Employee").

                                    RECITALS

     A.    By Purchase and Sale Agreement dated February ___, 1997 (the
"Purchase Agreement") by and among Sunscript and Watson Drug Company, Inc., a
North Carolina corporation (collectively, the "Seller"), Sunscript acquired from
the Seller certain assets related to its pharmaceutical business operations in
the State of North Carolina (the "Pharmacy Business").

     B.   Prior to the closing of the transaction provided for in the Purchase
Agreement, Employee was involved in the operations of the Pharmacy Business.

     C.   In order to ensure a smooth transition of operational responsibility
for the Pharmacy Businesses, Sunscript is desirous of retaining the services of
Employee to serve as the Director of Pharmaceutical Services for Sunscript dba
Tar Heel Consultants.  

     D.   Employee is desirous of continuing to be associated with the Pharmacy
Business and has agreed to accept employment with Sunscript as the Director of
Pharmaceutical Services for Sunscript dba Tar Heel Consultants.

     E.   Sunscript and Employee are desirous of documenting the terms and
conditions of said employment relationship.

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS:

                                    AGREEMENT

     1.    EMPLOYEE RESPONSIBILITIES.  Effective as of the Commencement Date (as
defined below), Sunscript hereby retains Employee and Employee hereby agrees to
serve, as the  Director of Pharmaceutical Services for Sunscript dba Tar Heel
Consultants. In his capacity as the  Director of Pharmaceutical Services for
Sunscript dba Tar Heel Consultants, Employee shall report to the Southeastern
Regional Vice President of Sunscript.  While employed by Sunscript, Employee
shall be responsible for performing the responsibilities set forth in Exhibit A
as the same may be reasonably modified, extended or curtailed, from time to
time, at the direction of Sunscript, provided that said responsibilities remain
at all times consistent with the duties of Employee's title.  Employee shall
devote such time as shall be necessary to properly carry out and 

                                     A-20

<PAGE>

perform the services described herein, and shall faithfully and diligently 
serve Sunscript's interests; provided, however, that Employee's 
responsibilities and hours of work shall not be increased without the consent 
of Employee.

     2.   COMPENSATION.  In consideration for the services provided hereunder,
Sunscript shall pay to Employee the following:

          a.   BASE SALARY.  During the Term of this Agreement (as defined
below), Employee shall receive an annual base salary of $90,000 (the "Base
Salary"), which shall be payable in equal bi-weekly installments or on such
other basis as Sunscript and Employee shall agree (less any applicable local,
state and federal withholding taxes).

          b.   ADDITIONAL COMPENSATION.  In addition to his Base Salary,
Employee shall be entitled to those benefits described in Exhibit B as the same
may be amended from time to time by Sunscript during the Term to reflect any
changes in such benefits paid or provided to full-time employees of Sunscript
with the same or similar positions as Employee and to such additional time off
without pay as Employee may deem to be appropriate or desirable provided that
such time off does not interfere with the performance of his responsibilities
under this Agreement.

          c.    EXPENSES.  Sunscript shall pay or reimburse Employee for all of
his out of pocket expenses reasonably incurred in performing the services
provided for under this Agreement, including, but not limited to, overnight
delivery charges, secretarial services, long distance telephone and facsimile
charges and travel expenses (including airfare, hotels, car rental expenses,
mileage charges when Employee's own vehicle is used and meals) all in accordance
with Sunscript's expense reimbursement policy.  Payment shall be due after
Sunscript's receipt of Employee's invoice or expense report therefor and in
accordance with Sunscript's expense reimbursement policy, a copy of which has
been provided to Employee as of the date hereof and the receipt of which
Employee does hereby acknowledge.

     3.   TERM.     The term of this Agreement shall be for a period of thirty-
six (36) months commencing on the date of this Agreement (the "Commencement
Date") unless sooner terminated as provided herein (the "Term").

     4.   TERMINATION.

     a.   FOR CAUSE BY SUNSCRIPT.  This Agreement may be terminated prior to the
expiration of the Term by Sunscript for cause.  For purposes hereof, the term
"cause" shall refer to any act or practice by Employee deemed to be a material
breach by Employee of his obligations hereunder, including, without limitation,
the following:

     i.   Misrepresentation, deceit, fraud or dishonesty by Employee in
          connection with his performance hereunder;

                                     A-21

<PAGE>

     ii.  Employee's failure or refusal to competently perform his duties
          hereunder including the refusal to implement reasonable directives of
          Sunscript;

     iii. Any intentional or negligent act or omission by Employee which
          materially injures the business, goodwill or reputation of Sunscript;

     iv.  Employee's violation of any provisions of federal Medicare or Medicaid
          law or state law, where such violation is punishable as a felony; or

     v.   Any other material breach by Employee of any of his obligations
     hereunder.

     Notwithstanding the foregoing, Sunscript shall not be permitted to
terminate this Agreement for any of the foregoing causes until such time as
Sunscript has notified Employee in writing of the nature of the cause and, if
the cause is of a nature which is curable, has given Employee thirty (30) days
following Employee's receipt of said notice within which to cure such matter, to
the reasonable satisfaction of Sunscript.  In the event Employee fails to cure
said matter within said thirty (30) day period, this Agreement shall be deemed
automatically terminated at the end of said thirty (30) day period.  

     b.   FOR CAUSE BY EMPLOYEE. This Agreement may be terminated by Employee
for cause effective thirty (30) days after Sunscript's receipt of written notice
thereof from Employee.  For purposes hereof, the term "cause" shall refer to a
material breach by Sunscript of any of its obligations under this Agreement,
including, without limitation, the following:

     i.   A material limitation or expansion of Employee's duties and powers
          under this Agreement; 

     ii.  The imposition of obligations on Employee which would require Employee
          to perform his obligations hereunder or to otherwise take any action
          which would be in violation of applicable state or federal law; or 

     iii. Any other material breach by Sunscript of any of its obligations
          hereunder.

     Notwithstanding the foregoing, Employee shall not be permitted to terminate
this Agreement for any of the foregoing causes until such time as Employee has
notified Sunscript in writing of the nature of the cause and, if the cause is of
a nature which is curable, has given Sunscript thirty (30) days following
Sunscript's receipt of said notice within which to cure such matter, to the
reasonable satisfaction of Employee.  In the event Sunscript fails to cure said
matter within said thirty (30) day period, this Agreement shall be deemed
automatically terminated at the end of said thirty (30) day period.  

     c.   PAYMENT FOLLOWING TERMINATION .  Effective as of the date of any
termination pursuant to this Section 4, all payments due under Section 2 shall
cease and terminate (excluding, 

                                     A-22

<PAGE>

however, any employee benefits, including Employee's Base Salary, which have 
accrued and/or reimbursable expenses which have been properly incurred, prior 
to the effective date of said termination).

     5.   DEATH OR DISABILITY.     In the event of the death of Employee or  in
the event Employee suffers a physical or mental disability which, in the
reasonable opinion of Sunscript,  renders him permanently unable to perform his
duties under this Agreement, this Agreement shall automatically terminate.  If
this Agreement is terminated as a result of the death or disability of Employee,
all payments due under Section 2 shall cease and terminate (excluding, however,
any employee benefits which have accrued and/or reimbursable expenses which have
been properly incurred, prior to the effective date of said termination).
Employee shall be deemed to be permanently disabled in the event he is deemed to
be disabled within the meaning of Sunscript's disability insurance policy under
which coverage is provided to Employee or, if no such coverage is provided, in
the event he is determined by an independe(90) consecutive days.

     6.   NON-DISCLOSURE.  During the Term of this Agreement, Employee will have
access to certain information not generally known or available to the public or
the competitors of Sunscript relating to the business, customers, sales data,
policies and procedures, marketing strategies and other proprietary and
confidential material of Sunscript ("Confidential Information").  Confidential
Information shall not include information which becomes generally known or
available to the public through no fault of Employee.  This Confidential
Information constitutes a valuable asset of Sunscript, access to and knowledge
of which are essential to the performance of Employee's duties. Employee
acknowledges and agrees that all such Confidential Information is and shall
remain the exclusive property of the entity to which it relates.  Employee
agrees that, except as directed by Sunscript or as may be required by law,
Employee will not at any time, during or after the term of this Agreement, use
or disclose to any person, directly or indirectly, for any purpose other than
for the benefit of any such entities, any Confidential Information, whether
prepared by Employee or otherwise coming into Employee's possession or control,
without the prior written permission of Sunscript.

     7.   POSSESSION.  Employee agrees that upon termination of this Agreement,
or upon request by Sunscript, Employee shall turn over to Sunscript all
documents, files, office supplies and any other material or work product in his
possession or control which were created pursuant to or derived from Employee's
services to Sunscript.

     8.   NON-COMPETITION.  Employee recognizes and agrees that Sunscript has
many substantial, legitimate business interests that can be protected only by
Employee agreeing not to compete with Sunscript under certain circumstances. 
These interests include, without limitation, Sunscript's contacts and
relationships with its customers, Sunscript's reputation and goodwill in the
industry, the financial and other support afforded by Sunscript, and Sunscript's
rights in its Confidential Information.  Employee therefore agrees that during
the Term of this Agreement and for a period of two years thereafter, Employee
will not, directly or indirectly without the 

                                     A-23
<PAGE>


prior written consent of Sunscript, engage in any of the following activities 
anywhere in the State of North Carolina:

     a.   Own, operate or manage a business which engages in the institutional
long-term care pharmacy business in competition with the Pharmacy Business; 

     b.   Work as an employee, employer, independent contractor or consultant
for or with, or provide services as an employee, independent contractor or
consultant under the terms of a verbal or written agreement to, any person or
entity that is engaged in the institutional pharmacy business in competition
with the Pharmacy Business;

     c.   Solicit, acquire or conduct any institutional pharmacy business from
or with any of Sunscript's customers (as defined below);

     d.   Solicit or induce any of the employees or independent contractors of
Sunscript to terminate their employment or contractual relationships with
Sunscript; or

     e.   Serve as an officer or director of, or hold a majority interest in,
any entity engaged in any of the foregoing prohibited activities.

For purposes of this paragraph, Sunscript's customers shall include (i) during
the Term hereof, those long term care facilities, health care providers and
individuals to whom Sunscript provides services or has proposals to provide
services pending and (ii) for the two year period after the term hereof, those
long term care facilities, health care providers and individuals to whom
Sunscript was providing services, or had proposals outstanding for the provision
of services, at the time of the termination of this Agreement.  Notwithstanding
the foregoing, Employee shall not be deemed to be in violation of this Agreement
if he engages in the institutional pharmacy business or another related health
care business as long as such business is not in direct competition with, the
Pharmacy Business and provided he does not solicit or do business with any of
Sunscript's customers or solicit any of the employees or independent contractors
of Sunscript.

The restrictive covenant contained in this Section 8 shall terminate in the
event (i) Employee terminates this Agreement for any reason other than cause (as
defined in Section 4(b) herein) or (ii) Sunscript terminates this Agreement for
any reason other than cause (as defined in Section 4(a) herein); provided,
however, in the event the termination of employment is contested by either
party, the restrictive covenant shall not terminate until such contest is
resolved by a final, non-appealable determination by a court of competent
jurisdiction.

     9.   SAVING PROVISION.  Sunscript and Employee agree and stipulate that the
non-disclosure agreement set out above is fair and reasonably necessary for the
protection of the business, goodwill, Confidential Information, and other
protectable interests of Sunscript in light of all of the facts and
circumstances of the relationship between Employee and Sunscript.  In the

                                   A-24


<PAGE>

event a court of competent jurisdiction should decline to enforce those 
provisions, they shall be deemed to be modified to restrict Employee to the 
maximum extent which the court shall find enforceable; however, in no event 
shall the above provisions be deemed to be more restrictive to Employee than 
those contained herein.

     10.  INJUNCTIVE RELIEF.  Employee acknowledges that the breach or
threatened breach of any of the non-disclosure covenants or other agreements
contained herein would give rise to irreparable injury to Sunscript which injury
would be inadequately compensable in money damages.  Accordingly, Sunscript may
seek and obtain a restraining order and/or injunction prohibiting the breach or
threatened breach of any provision, requirement or covenant of this Agreement,
in addition to and not in limitation of any other legal remedies which may be
available.  Employee further acknowledges, agrees and stipulates that, in the
event of the termination of this Agreement, Employee's experience and
capabilities are such that Employee can obtain employment in business activities
not in violation of the provisions above, and that the enforcement of a remedy
hereunder by way of injunction shall not prevent Employee from earning a
reasonable livelihood.  Employee further acknowledges and agrees that the
agreements set out above are necessary for the protection of Sunscript's
legitimate business interests and are reasonable in scope and content.  

     11.  ENFORCEMENT.  The provisions of this Agreement shall be enforceable
notwithstanding the existence of any claim or cause of action against Sunscript
by Employee, whether predicated on this Agreement or otherwise.

     12.  GOVERNING LAW.  The Agreement shall be construed in accordance with
the laws of the State of North Carolina.

     13.  LEGAL EXPENSE.  The prevailing party in any action to enforce this
Agreement shall be entitled to recover from the other party reasonable sums as
attorney fees and expenses in connection with such action, including appeal.

     14.  WAIVER OF BREACH.  The waiver of any breach of any provision of this
Agreement or failure to enforce any provision hereof shall not operate or be
construed as a waiver of any subsequent breach by any party.

     15.  MODIFICATION.  This Agreement may be modified, supplemented and/or
amended only by a writing that is signed by both Sunscript and Employee.  

     16.  ENTIRETY.  This Agreement, including any exhibits hereto, as it may be
amended pursuant to the terms hereof, represents the complete and final
agreement of the parties and shall control over any other statement,
representation or agreement by Sunscript (E.G., as may appear in employment or
policy manuals).  This Agreement supersedes any prior negotiations or
discussions between the parties.


                                   A-25


<PAGE>

     17.  SURVIVAL.  The provisions of this Agreement relating to
confidentiality and non-competition shall survive the termination of this
Agreement.

     18.  CAPTIONS.  The captions of this Agreement are for convenience of
reference only and shall not be deemed to define or limit any of the terms
hereof.

     19.  BINDING EFFECT.  This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their heirs,  successors, personal
representatives and assigns.

     20.  FURTHER ASSURANCES.  The parties to this Agreement shall execute and
deliver any documents or instruments in addition to those described in this
Agreement which are necessary or appropriate to carry out the terms hereof.

     21.  INDEMNIFICATION.  Each of Sunscript and Employee agrees to indemnify,
defend and hold the other harmless from and against any and all costs, expenses
and liability, including, but not limited to, reasonable attorneys fees, which
it or he may incur in the event of a breach by the other party of its
obligations hereunder or arising from the acts or omissions of the other party
in performing its obligations hereunder.

     22.  AUTHORITY.  Sunscript does hereby represent and warrant that it has
full power and authority to enter into this Agreement and to carry out the terms
hereof and that the same has been duly authorized by the Board of Directors of
Sunscript and that the person executing the same on behalf of Sunscript has been
duly authorized to act in the name and on behalf of Sunscript.

     23.  COUNTERPARTS.  This Agreement may be executed in two or more
counterparts each of which shall be deemed an original for all purposes and all
of which, when taken together, shall constitute one agreement.

                           [SIGNATURE PAGE FOLLOWS.]


                                     A-26
<PAGE>


     IN WITNESS HEREOF, the undersigned have executed this Agreement as of the
day and year first set forth above.


                                        SUNSCRIPT PHARMACY CORPORATION


                                        By____________________________

                                          Its_________________________


                         
                                        ______________________________
                                        CHARLES WATSON




                                    A-27

<PAGE>

                        EXHIBIT A TO EMPLOYMENT AGREEMENT
                                RESPONSIBILITIES

          The duties and responsibilities of Employee shall include, but not be
limited to, the following: 

     Position Summary:   The primary purpose of this position is to direct the
day to day function of the pharmacy operations in accordance with current state,
federal and local standards, guidelines and regulations as delineated in the
attached position description.  The Director of Pharmacy has direct supervisory
responsibility for all staff members.

     Other Responsibilities: The duties and responsibilities of Charles Watson
shall include, but not be limited to, the following:

     1. Client Retention.

     2. Operational Support and Development for pharmacy activities.

     3. Financial operational support.

     4. Representation of Sunscript in a positive light to the long term care
industry, the pharmacy industry and the community in general.

     5. Consultant Pharmacist services and public relations duties to current
clients.

     6. Assist Regional Marketing Director in identifying and securing new
business.

                                      A-28

<PAGE>

                       EXHIBIT B TO EMPLOYMENT AGREEMENT
                       ADDITIONAL COMPENSATION/BENEFITS


                                      A-29

<PAGE>

                                   EXHIBIT O
                        SHAREHOLDER NON-COMPETE AGREEMENT

     THIS AGREEMENT (the "Agreement") is made and entered into as of this ____
day of February, 1997 by and between Sunscript Pharmacy Corporation, a New
Mexico corporation ("Sunscript") and __________ ("Shareholder").

                                    RECITALS

     A.    By Purchase and Sale Agreement dated February ___, 1997 (the
"Purchase Agreement") by and among Sunscript ("Sunscript") and Watson Drug
Company, Inc., a North Carolina corporation (the "Seller"), Sunscript acquired
from the Seller certain assets related to its pharmaceutical business operations
in Pink Hill, North Carolina (the "Pharmacy Business").

     B.   Prior to the closing of the transaction provided for in the Purchase
Agreement, Shareholder was a shareholder in Seller and was involved in the
operations of the Pharmacy Business.

     C.   In order to ensure that there is value to Sunscript in the transaction
provided for in the Purchase Agreement, Shareholder has agreed that for a
specified period of time and in a specified geographic region, he will not
complete with Sunscript in the business previously operated by Seller and that
he will not disclose any confidential information concerning Seller which may be
in his possession as a result of his prior relationship with Seller.

     D.   Sunscript and Shareholder are desirous of documenting the terms and
conditions of said non-competition and non-disclosure agreements.

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS:

                                 AGREEMENT

     1.   NON-COMPETITION.  Shareholder recognizes and agrees that Sunscript has
many substantial, legitimate business interests that can be protected only by
Shareholder agreeing not to compete with Sunscript under certain circumstances. 
These interests include, without limitation, Sunscript's contacts and
relationships with its customers, Sunscript's reputation and goodwill in the
industry, the financial and other support afforded by Sunscript, and Sunscript's
rights in its Confidential Information.  Shareholder therefore agrees that for a
period of [fifteen (15) years (in the case of Charles Watson)] [two (2) years
(in the case of each of William E. Brewer and Elizabeth B. Watson)] after the
date hereof, Shareholder will not, directly or indirectly without the prior
written consent of Sunscript, engage in any of the following activities anywhere
in the States of North Carolina, South Carolina and Virginia:

                                   A-30

<PAGE>

          a.   Own, operate or manage a business which engages in the
institutional long-term care pharmacy business in competition with the Pharmacy
Business;

          b.   Work as an employee, employer, independent contractor or
consultant for or with, or provide services as an employee, independent
contractor or consultant under the terms of a verbal or written agreement to,
any person or entity that is engaged in the institutional pharmacy business in
competition with the Pharmacy Business;

          c.   Solicit, acquire or conduct any institutional pharmacy business
from or with any of Sunscript's customers (as defined below);

          d.   Solicit or induce any of the employees or independent contractors
of Sunscript to terminate their employment or contractual relationships with
Sunscript; or

          e.   Serve as an officer or director of, or hold a majority interest
in, any entity engaged in any of the foregoing prohibited activities.

For purposes of this paragraph, Sunscript's customers shall include those long
term care facilities, health care providers and individuals to whom Sunscript
provides services or has proposals outstanding for the provision of services at
the time of the solicitation or inducement thereof by Shareholder in violation
of the terms of this Agreement.

     2.   NON-DISCLOSURE.  Shareholder acknowledges and agrees that prior to the
consummation of the transaction provided for in the Purchase Agreement,
Shareholder had access to certain information not generally known or available
to the public or the competitors of Seller relating to the business, customers,
sales data, policies and procedures, marketing strategies and other proprietary
and confidential material of Seller ("Confidential Information").  Confidential
Information shall not include information which becomes generally known or
available to the public through no fault of Shareholder.  This Confidential
Information constitutes a valuable asset of Sunscript.  Shareholder acknowledges
and agrees that all such Confidential Information is and shall remain the
exclusive property of the entity to which it relates.  Shareholder agrees that,
except as directed by Sunscript or as may be required by law, Shareholder will
not at any time, during or after the term of this Agreement, use or disclose to
any person, directly or indirectly, for any purpose other than for the benefit
of any such entities, any Confidential Information, whether prepared by
Shareholder or otherwise coming into Shareholder's possession or control,
without the prior written permission of Sunscript.

     3.   SAVING PROVISION.  Sunscript and Shareholder agree and stipulate that
the non-disclosure agreement set out above is fair and reasonably necessary for
the protection of the business, goodwill, Confidential Information, and other
protectable interests of Sunscript in light of all of the facts and
circumstances of the relationship between Shareholder and Sunscript.  In the
event a court of competent jurisdiction should decline to enforce those
provisions, they shall be deemed to be modified to restrict Shareholder to the
maximum extent which the court shall 

                                     A-30

<PAGE>

find enforceable; however, in no event shall the above provisions be deemed 
to be more restrictive to Shareholder than those contained herein.

     4.   INJUNCTIVE RELIEF.  Shareholder acknowledges that the breach or
threatened breach of any of the non-disclosure covenants or other agreements
contained herein would give rise to irreparable injury to Sunscript which injury
would be inadequately compensable in money damages.  Accordingly, Sunscript may
seek and obtain a restraining order and/or injunction prohibiting the breach or
threatened breach of any provision, requirement or covenant of this Agreement,
in addition to and not in limitation of any other legal remedies which may be
available.  Shareholder further acknowledges, agrees and stipulates that,
Shareholder's experience and capabilities are such that Shareholder can obtain
employment in business activities not in violation of the provisions above, and
that the enforcement of a remedy hereunder by way of injunction shall not
prevent Shareholder from earning a reasonable livelihood.  Shareholder further
acknowledges and agrees that the agreements set out above are necessary for the
protection of Sunscript's legitimate business interests and are reasonable in
scope and content.  

     5.   ENFORCEMENT.  The provisions of this Agreement shall be enforceable
notwithstanding the existence of any claim or cause of action against Sunscript
by Shareholder, whether predicated on this Agreement or otherwise.

     6.   GOVERNING LAW.  The Agreement shall be construed in accordance with
the laws of the State of North Carolina.

     7.   LEGAL EXPENSE.  The prevailing party in any action to enforce this
Agreement shall be entitled to recover from the other party reasonable sums as
attorney fees and expenses in connection with such action, including appeal.

     8.   WAIVER OF BREACH.  The waiver of any breach of any provision of this
Agreement or failure to enforce any provision hereof shall not operate or be
construed as a waiver of any subsequent breach by any party.

     9.   MODIFICATION.  This Agreement may be modified, supplemented and/or
amended only by a writing that is signed by both Sunscript and Shareholder.  

    10.   ENTIRETY.  This Agreement, including any exhibits hereto, as it may be
amended pursuant to the terms hereof, represents the complete and final
agreement of the parties and shall control over any other statement,
representation or agreement by Sunscript. This Agreement supersedes any prior
negotiations or discussions between the parties.

    11.   CAPTIONS.  The captions of this Agreement are for convenience of
reference only and shall not be deemed to define or limit any of the terms
hereof.

                                      A-32

<PAGE>

     12.  BINDING EFFECT.  This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their heirs,  successors, personal
representatives and assigns.

     13.  FURTHER ASSURANCES.  The parties to this Agreement shall execute and
deliver any documents or instruments which are necessary or appropriate to carry
out the terms hereof.

     14.  INDEMNIFICATION.  Each of Sunscript and Shareholder agrees to
indemnify, defend and hold the other harmless from and against any and all
costs, expenses and liability, including, but not limited to, reasonable
attorneys fees, which it or he may incur in the event of a breach by the other
party of its obligations hereunder or arising from the acts or omissions of the
other party in performing its obligations hereunder.

     15.  AUTHORITY.  Sunscript does hereby represent and warrant that it has
full power and authority to enter into this Agreement and to carry out the terms
hereof and that the same has been duly authorized by the Board of Directors of
Sunscript and that the person executing the same on behalf of Sunscript has been
duly authorized to act in the name and on behalf of Sunscript.

     16.  COUNTERPARTS.  This Agreement may be executed in two or more
counterparts each of which shall be deemed an original for all purposes and all
of which, when taken together, shall constitute one agreement.

     IN WITNESS WHEREOF, the undersigned have executed this Agreement effective
as of the day and year first set forth above.
  
                         SUNSCRIPT PHARMACY CORPORATION

                         By:________________________________
                         Its:_________________________________
                         


                         [SHAREHOLDER]

                         ____________________________________ 

                                      A-33



<PAGE>


                                   EXHIBIT P
                         WARRANT ACKNOWLEDGMENT LETTER

                                     A-34

<PAGE>

                                   EXHIBIT Q
                              SUBLEASE AGREEMENT


     THIS SUBLEASE AGREEMENT (the "Agreement"), dated February ___, 1997 is
hereby entered into by and between CHARLES WATSON, an individual, resident in
the state of North Carolina, (hereinafter called Sublessor), and SUNSCRIPT
PHARMACY CORPORATION, a New Mexico corporation, (hereinafter referred to as
Sublessee).

                              W I T N E S S E T H:

     Sublessor previously entered into a Commercial Lease dated September 1,
1992 (the Master Lease)(attached hereto as Exhibit "A") with Nancy Turner
Hensley (Owner), for real property and improvements situated in the City of Pink
Hill, County of Lenoir, State of North Carolina, described as 104 W. Broadway,
Pink Hill and now known as 111 W. Broadway, Pink Hill (the "Premises").

     For valuable consideration, including the mutual covenants set forth below,
Sublessor and Sublessee now agree as follows:
                                        
     1.   SUBLEASE OF PREMISES 

          Sublessor does hereby sublease to Sublessee and Sublessee does hereby
sublease from Sublessor, the Premises during the "Term", as that term is defined
below.  The sublease of the Premises shall be on all of the same terms and
conditions as provided for in the Master Lease, but excluding any provision of
the Master Lease which is directly contradicted by this Sublease. Accordingly,
for the purposes of this Sublease, wherever in the Master Lease the word
"Lessor" is used, it shall be deemed to mean the Sublessor herein and wherever
in the Master Lease the word "Lessee" is used, it shall be deemed to mean the
Sublessee herein.  The Master Lease is hereby incorporated herein by this
reference as though fully set forth herein.

     2.   RENT

          A.   Throughout the Term of the Sublease, Sublessee shall pay to
Sublessor as rent for the right to use and occupy the Premises the amounts set
forth in the Master Lease.

          B.   The rent provided for in this Section 2 shall be due and payable
to Sublessor on the first day of each month throughout the Term of this
Sublease; provided, however, that Sublessor acknowledges and agrees that
Sublessor shall be obligated to pay the rent due under the Master Lease without
regard to whether or not the rent due under this Sublease has been paid as and
when due.

                                        A-35
<PAGE>


          C.    In the event Sublessee pays the rent due hereunder and Sublessor
fails to pay the rent due under the Master Lease, Sublessee shall have the
right, but not the obligation, to pay such rent on behalf of Sublessor and to
deduct the same from any future rental payments due hereunder.

          D.   Nothing herein shall be construed as relieving Sublessor of its
obligation to pay the rent due under the Master Lease or to fulfill any other
obligations thereunder which cannot lawfully be delegated to Sublessee.

     3.   TERM

          The term of this Sublease ("Term") shall commence on February ___,
1997, and shall continue thereafter for a period commensurate with the term
provided for in the Master Lease.  

     4.   USE

          The Premises shall be used as office space and storage by Sublessee
for the purpose of conducting the same type of business as Sublessor has
conducted on the Premises since the commencement of the term of the Master
Lease, and for no other use or purpose without the prior written consent of
Sublessor and Master Lessor.  Sublessor agrees not to unreasonably withhold its
consent so long as the Master Lessor consents to any change in lease.

     5.   GENERAL PROVISIONS

          A.   FURTHER ASSURANCES.  Each of the parties hereto agrees to execute
and deliver any and all further agreements, documents or instruments necessary
to effectuate this Sublease and the transactions referred to herein or
contemplated hereby or reasonably requested by the other party to perfect or
evidence their rights hereunder.

          B.   NOTICES. Any notice, request or other communication to be given
by any party hereunder shall be in writing and shall be sent by registered or
certified mail, postage prepaid, by overnight courier guaranteeing overnight
delivery or by facsimile transmission, to the following address:

     To Sublessor:       Mr. Charles Watson
                         Tar Heel Consultants
                         Watson Drug Company, Inc.
                         106 West Broadway
                         P. O. Box 395
                         Pink Hill, NC  28572
                         Phone:      919-568-3163
                         Facsimile:  919-568-4922


                                        A-36
<PAGE>


     with copy to:       Sally Nan Barber, Esq.
                         Parker, Poe, Adams & Bernstein L.L.P.
                         2500 Charlotte Plaza
                         Charlotte, NC 28244
                         Phone:      704-335-9026
                         Facsimile:  704-334-4706


     To Sublessee:       Sunscript Pharmacy Corporation
                         101 Sun Lane, NE
                         Albuquerque, NM  87109
                         Phone:      505-821-3355
                         Facsimile:  505-821-3670
                         Attn: John W. Driscoll

     with copy to:       Randi S. Nathanson, Esq.
                         The Nathanson Group
                         1411 Fourth Avenue
                         Suite 905
                         Seattle, WA  98101
                         Phone:      206-623-6239
                         Facsimile:  206-623-1738

     Notice shall be deemed given three (3) business days after deposit in the
mail, on the next day if sent by overnight courier and on receipt if sent by
facsimile.

          C.   PAYMENT OF EXPENSES.  Each party hereto shall bear its own legal,
accounting and other expenses incurred in connection with the preparation and
negotiation of this Sublease and the consummation of the transaction
contemplated hereby, whether or not the transaction is consummated.

          D.   ENTIRE AGREEMENT; AMENDMENT; WAIVER.  This Sublease, together
with the other agreements referred to herein and executed in conjunction
herewith, constitute the entire understanding between the parties with respect
to the subject matter hereof, superseding all negotiations, prior discussions
and preliminary agreements.  This Sublease may not be modified or amended except
in writing signed by the parties hereto.  No waiver of any term, provision or
condition of this Sublease in any one or more instances, shall be deemed to be
or be construed as a further or continuing waiver of any such term, provision or
condition of this Sublease.  No failure to act shall be construed as a waiver of
any term, provision, condition or rights granted hereunder.

          E.   JOINT VENTURE; THIRD PARTY BENEFICIARIES.  Nothing contained
herein shall be construed as forming a joint venture or partnership between the
parties hereto with respect to 


                                        A-37


<PAGE>

the subject matter hereof.  The parties hereto do not intend that any third 
party shall have any rights under this Sublease.

          F.   CAPTIONS.  The section headings contained herein are for 
convenience only and shall not be considered or referred to in resolving 
questions of interpretation.

          G.   COUNTERPARTS.  This Sublease may be executed in two or more 
counterparts, including by facsimile signature, with original signature 
delivered thereafter, and all such counterparts taken together shall 
constitute a single original agreement.

          H.   GOVERNING LAW.  This Sublease shall be governed by and 
construed in accordance with the laws of the State of North Carolina.

     IN WITNESS WHEREOF, the parties hereby execute this Sublease as of the 
day and year first set forth above.


"SUBLESSOR"                             "SUBLESSEE"
                              
CHARLES WATSON                     SUNSCRIPT PHARMACY CORPORATION,
                                   a New Mexico corporation

________________________      
                                   By:  ______________________
                                   Its: ______________________



                                   A-38
<PAGE>


                                    EXHIBIT A
                                 "MASTER LEASE"



                                   A-39

<PAGE>
                                                                    EXHIBIT 23.1
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
   
    As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3 of our report dated
February 27, 1997 included in Sun Healthcare Group, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996 and our report dated March 5, 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.
    
 
                                          ARTHUR ANDERSEN LLP
 
   
Albuquerque, New Mexico
May 9, 1996
    

<PAGE>
   
                                                                    EXHIBIT 24.4
    
 
                               POWER OF ATTORNEY
 
   
    Each person whose signature appears below hereby appoints each of Robert
Murphy, Robert D. Woltil and William C. Warrick, as his attorney-in-fact to sign
this Registration Statement on his or her 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,
                   Andrew L. Turner                      President, and Chief
                                                         Executive Officer                         May 9, 1997
 
                 /s/ ROBERT D. WOLTIL                   Senior Vice President
                   Robert D. Woltil                      Financial Services and Chief
                                                         Financial Officer and
                                                         Director (Principal
                                                         Financial Officer)                        May 9, 1997
 
                 /s/ JOHN E. BINGAMAN
                   John E. Bingaman                     Director                                   May 9, 1997
 
                /s/ LOIS E. SILVERMAN
                  Lois E. Silverman                     Director                                   May 9, 1997
 
                  /s/ MARTIN G. MAND
                    Martin G. Mand                      Director                                   May 9, 1997
 
               /s/ WARREN C. SCHELLING*
                 Warren C. Schelling                    Director                                   May 9, 1997
</TABLE>
    


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission