<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
SUN HEALTHCARE GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined:)
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[SUN HEALTHCARE LOGO]
[LOGO]
101 SUN LANE, N.E.
ALBUQUERQUE, NEW MEXICO 87109
August 21, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of Sun Healthcare Group, Inc. The meeting will be held on Thursday, September
18, 1997 at the Company's Rev. Dr. Kay M. Glaesner, Jr. Training Center, 101 Sun
Lane, N.E., Albuquerque, New Mexico 87109, at 9:00 a.m., local time.
The business to be conducted at the meeting is outlined in the attached
Notice of Annual Meeting and Proxy Statement.
Whether or not you plan to attend the meeting in person, your shares should
be represented and voted at the meeting. Accordingly, after reading the enclosed
Proxy Statement, kindly complete, sign, date and promptly return the proxy in
the enclosed self-addressed envelope. No postage is required if it is mailed in
the United States. If you later decide to attend the meeting and wish to vote
your shares personally, you may revoke your proxy at any time before it is
exercised.
We look forward to seeing you on September 18th.
Sincerely,
/s/ Andrew L. Turner
Andrew L. Turner
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
<PAGE>
SUN HEALTHCARE GROUP, INC.
101 SUN LANE, N.E.
ALBUQUERQUE, NEW MEXICO 87109
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 18, 1997
------------------------
To the Stockholders of Sun Healthcare Group, Inc.:
The 1997 Annual Meeting of Stockholders of Sun Healthcare Group, Inc., a
Delaware corporation (the "Company"), will be held at the Company's Rev. Dr. Kay
M. Glaesner, Jr. Training Center, 101 Sun Lane, N.E., Albuquerque, New Mexico
87109, on Thursday, September 18, 1997, at 9:00 a.m., local time, to consider
and vote on the following matters described in the attached proxy statement:
1. To elect three directors to hold office for three-year terms;
2. To adopt the Sun Healthcare Group, Inc. 1997 Stock Incentive Plan;
3. To adopt the Sun Healthcare Group, Inc. 1997 Non-Employee Directors'
Stock Plan;
4. To ratify the appointment of Arthur Andersen LLP as independent public
accountants of the Company for the fiscal year ending December 31, 1997;
and
5. To transact such other business as may properly come before the
Company's Annual Meeting, or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on August 11, 1997 as
the record date for determining stockholders entitled to receive notice of and
to vote at the meeting and at any adjournment or postponement thereof. All
stockholders are cordially invited to attend the meeting in person. Whether or
not you plan to attend the Annual Meeting, you are urged to mark, date and sign
the enclosed proxy card and return it at your earliest convenience in the
enclosed envelope. If you attend the Annual Meeting and wish to vote your own
shares in person, you may withdraw your proxy at that time.
For the Board of Directors,
/s/ Robert F. Murphy
Robert F. Murphy
SECRETARY
August 21, 1997
<PAGE>
SUN HEALTHCARE GROUP, INC.
101 SUN LANE, N.E.
ALBUQUERQUE, NM 87109
------------------------
PROXY STATEMENT
---------------------
INTRODUCTION
This Proxy Statement is furnished by the Board of Directors of Sun
Healthcare Group, Inc., a Delaware corporation (the "Company"), in connection
with its solicitation of proxies for use at the Annual Meeting of Stockholders
(the "Annual Meeting") to be held on Thursday, September 18, 1997, at 9:00 a.m.,
local time, at the Company's Rev. Dr. Kay M. Glaesner, Jr. Training Center, 101
Sun Lane, N.E., Albuquerque, New Mexico 87109, and at any and all adjournments
or postponements thereof. This Proxy Statement, the attached Notice of Annual
Meeting and the accompanying proxy card are first being mailed to the Company's
stockholders on or about August 21, 1997.
PROXY PROCEDURES
The persons named to serve as proxyholders were selected by the Board of
Directors of the Company. If a proxy card is properly executed and returned
before the Annual Meeting, and not revoked, all shares represented thereby will
be voted at the Annual Meeting, including any adjournments thereof. If a proxy
card specifies the manner in which shares are to be voted, the shares will be
voted in accordance with such specifications. If no such specification is made
on a proxy card which is signed and returned, such shares will be voted as
recommended in this Proxy Statement by the Board of Directors. As to any other
business which may properly come before the meeting, the persons named in the
accompanying proxy card will vote the shares in accordance with their best
judgment. The Company does not presently know of any other business to come
before the meeting.
Execution of a proxy card will not in any way affect a stockholder's right
to attend the meeting and vote in person, and any person giving a proxy has the
right to revoke it at any time before it is exercised by filing with the
Secretary of the Company an instrument revoking it or a duly executed proxy
bearing a later date or by attending the meeting and voting in person.
The cost of solicitation of proxies will be paid by the Company. In
addition, the Company may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for expenses incurred in forwarding
solicitation materials to the beneficial holders of stock held of record by such
persons. The Company has not yet determined whether it will retain an outside
company to assist in the distribution and solicitation of proxies. If the
Company decides to do so, it will not spend more than $5,000 plus reimbursement
of customary out-of-pocket expenses. Although it is contemplated that proxies
will be solicited primarily through the mail, the Company may use its directors,
officers and employees, without additional compensation, to conduct solicitation
by telephone, telecopier and other means.
OUTSTANDING SHARES AND VOTING RIGHTS
At the close of business on August 11, 1997, there were outstanding
49,348,646 shares of the Company's common stock, par value $.01 per share (the
"Common Stock"). Only the holders of Common Stock on August 11, 1997, the record
date for stockholders entitled to notice of and to vote at the Annual Meeting,
are entitled to vote at the Annual Meeting and each share of Common Stock is
entitled to one vote on each matter to be voted upon. A majority of the shares
of Common Stock entitled to vote will constitute a quorum for the transaction of
business at the meeting.
1
<PAGE>
Votes cast by proxy or in person at the Annual Meeting will be counted by
the persons appointed by the Company to act as election inspectors for the
Annual Meeting. The election inspectors will treat shares represented by proxies
that reflect abstentions as shares that are present and entitled to vote, for
purposes of determining the presence of a quorum and for purposes of determining
the outcome of any matter submitted to the stockholders for a vote. Abstentions,
however, do not constitute votes "for" or "against" any matter and thus will be
disregarded and have no effect in the calculation of "votes cast."
The election inspectors will treat shares referred to as "broker non-votes"
(I.E., shares identified as held by brokers or nominees as to which instructions
have not been received from the beneficial owners or persons entitled to vote
that the broker or nominee does not have discretionary power to vote on a
particular matter) as shares that are present and entitled to vote for purposes
of determining the presence of a quorum. However, for purposes of determining
the outcome of any matter as to which the broker or nominee has physically
indicated on the proxy that it does not have discretionary authority to vote,
those shares will be treated as not present and not entitled to vote with
respect to that matter (even though those shares are considered entitled to vote
for quorum purposes and may be entitled to vote on other matters).
Directors will be elected by a plurality of the votes cast. Each other
matter to be submitted to a vote of the stockholders at the Annual Meeting must
receive an affirmative vote by a majority of the votes cast to be approved. In
addition, if the adoption of the Company's 1997 Stock Incentive Plan and 1997
Non-Employee Directors' Stock Plan are approved by an affirmative vote of a
majority of shares present in person or represented by proxy and entitled to
vote on the matters, then transactions in Common Stock resulting from purchases
of Common Stock pursuant to the relevant provisions of such plans will be
entitled to exemption from Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). For the sole purpose of determining whether the
exemption from Section 16(b) is met, abstentions will have the same effect as
votes cast against the matter, but broker non-votes will not be included in the
tabulation.
Eligible participants in the Company's Employee Stock Purchase Plan are
entitled to instruct the trustee of the Sun Healthcare Group, Inc. Grantor Stock
Trust (the "GSOP Trust") on how to vote a designated percentage of the shares of
Common Stock held by the GSOP Trust. The percentage allocated to each eligible
participant is solely for the purpose of voting the shares owned by the GSOP
Trust. Such participants will receive separate voting instruction cards to
direct the trustee, on a confidential basis, to vote the shares. If the trustee
receives an instruction card on a timely basis from a participant, it will vote
the participant's allocated shares as the participant instructs. If a
participant signs and timely returns an instruction card without indicating a
vote, the trustee will vote that participant's allocated shares in accordance
with the recommendations of the Board of Directors. Allocations are based on the
number of eligible participants who provide voting instructions to the trustee
on a timely basis. All shares held by the GSOP Trust will be voted by eligible
participants.
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<PAGE>
BENEFICIAL OWNERSHIP OF COMPANY SHARES
EQUITY OWNERSHIP OF MANAGEMENT
The following table and footnotes set forth certain information regarding
the beneficial ownership of Common Stock as of August 11, 1997 (i) by each
incumbent director, director nominee and the five executive officers named in
the Summary Compensation Table herein and (ii) by all incumbent directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(1)(%)
- -------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Andrew L. Turner.............................................. 6,810,647(2)(3) 13.8%
John E. Bingaman.............................................. 182,500(4) *
Zev Karkomi................................................... 83,850(5) *
Robert A. Levin............................................... 163,000(3)(6) *
Martin G. Mand................................................ 1,250(7) *
Robert F. Murphy.............................................. 59,000(3) *
Warren C. Schelling........................................... 73,334(3)(8) *
Lois E. Silverman............................................. 2,750(9) *
James R. Tolbert, III......................................... 2,750(9) *
Mark G. Wimer................................................. 162,000(3)(10) *
Robert D. Woltil.............................................. 79,334(3)(11) *
R. James Woolsey.............................................. 1,500(12) *
All directors and executive officers as a group (17 persons,
including those named above)................................ 7,701,009(13) 15.5%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to options currently exercisable,
or exercisable within 60 days of August 11, 1997, are deemed outstanding for
computing the percentage of the person holding such option but are not
deemed outstanding for computing the percentage of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned.
(2) Includes 153,000 shares of Common Stock owned by the Turner Children's
Trust, 26,024 shares of Common Stock held by the Andrew and Nora Turner
Trust and 263,645 shares of Common Stock owned by the Turner Family
Foundation (Mr. Turner disclaims beneficial ownership of these shares). Also
includes currently exercisable options to purchase 100,000 shares of Common
Stock.
(3) Includes restricted shares awarded under the Company's 1997 Stock Incentive
Plan which may be subject to a substantial risk of forfeiture. The number of
restricted shares included for each executive officer listed above as having
restricted shares is as follows: Mr. Turner--251,000; Mr. Levin-- 122,000;
Mr. Murphy--59,000; Mr. Schelling--58,000; Mr. Wimer--124,000; and Mr.
Woltil--66,000.
(4) Includes currently exercisable options to purchase 42,500 shares of Common
Stock.
(5) Includes 200 shares owned by Mr. Karkomi's grandson. Mr. Karkomi disclaims
beneficial ownership of these shares. Also includes currently exercisable
options to purchase 42,500 shares of Common Stock.
(6) Includes 3,000 shares owned by Mr. Levin and his wife, as to which Mr.
Levin has shared voting and investment power. Includes currently exercisable
options to purchase 38,000 shares of Common Stock.
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<PAGE>
(7) Consists of currently exercisable options to purchase 1,250 shares of
Common Stock.
(8) Consists of shares owned by Mr. Schelling and his wife, as to which Mr.
Schelling has shared voting and investment power. Includes currently
exercisable options to purchase 13,334 shares of Common Stock.
(9) Consists of currently exercisable options to purchase 2,750 shares of
Common Stock.
(10) Includes currently exercisable options to purchase 38,000 shares of Common
Stock.
(11) Includes 5,000 shares owned by Mr. Woltil and his wife, as to which Mr.
Woltil has shared voting and investment power. Also includes currently
exercisable options to purchase 8,334 shares of Common Stock.
(12) Consists of currently exercisable options to purchase 1,500 shares of
Common Stock.
(13) Includes an aggregate of 304,252 shares of Common Stock issuable upon the
exercise of options that are currently exercisable or subject to vesting
within 60 days of August 11, 1997. Also includes an aggregate of 746,000
restricted shares awarded under the 1997 Stock Incentive Plan which may be
subject to a substantial risk of forfeiture.
EQUITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
The following table and footnotes set forth certain information with respect
to each person believed by the Company to be the beneficial owner of more than
five percent of Common Stock as of August 11, 1997:
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) CLASS(1)(%)
- ----------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Andrew L. Turner ................................................ 6,810,647(2) 13.8%
Sun Healthcare Group, Inc.
101 Sun Lane, N.E.
Albuquerque, New Mexico 87109
Neuberger & Berman LLC .......................................... 2,708,500(3) 5.5%
605 Third Avenue
New York, New York 10158-3698
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to optionscurrently exercisable,
or exercisable within 60 days of August 11, 1997, are deemed outstanding for
computing the percentage of the person holding such option but are not
deemed outstanding for computing the percentage of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned.
(2) Includes 153,000 shares of Common Stock owned by the Turner Children's
Trust, 26,024 shares of Common Stock held by the Andrew and Nora Turner
Trust and 263,645 shares of Common Stock owned by the Turner Family
Foundation (Mr. Turner disclaims beneficial ownership of these shares). Also
includes 251,000 restricted shares awarded under the Stock Incentive Plan
which may be subject to a substantial risk of forfeiture and currently
exercisable options to purchase 100,000 shares of Common Stock.
(3) Based upon a Schedule 13G filed with the Commission on February 11, 1997.
4
<PAGE>
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
The Bylaws of the Company provide that the Board of Directors shall be
classified into three classes as nearly equal in number as possible, such that
approximately one-third of the members of the Board shall be elected at each
annual meeting of stockholders and each director shall serve for a three-year
term.
The Board of Directors currently is comprised of eleven members and there
are three director positions in the class whose term of office expires in 1997.
The Board of Directors has designated Andrew L. Turner, Robert A. Levin and
Robert D. Woltil as nominees for election to three-year terms expiring in 2000
and until their successors are elected and qualified. Each nominee has consented
to being named in this Proxy Statement and to serve as a director if elected.
There are no family relationships among any directors, executive officers or
nominees. Each of the nominees for election is currently serving as a director
of the Company.
The Board of Directors knows of no reason why any nominee may be unable to
serve as a director. If any nominee is unable to serve, the shares represented
by all valid proxies received may be voted for a substitute nominee designated
by the Board or the Board may reduce the number of directors. If any director
resigns, dies or is otherwise unable to serve out his or her term, or the number
of directors is increased by the Board, any vacancy so arising may be filled by
the Board. A director elected to fill a vacancy shall serve for the remainder of
the full term of the class of directors in which the vacancy occurred or the new
directorship was created.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
ELECTION OF ALL NOMINEES FOR DIRECTOR.
Biographical information follows for each person nominated and each person
whose term of office as a director will continue after the Annual Meeting.
Directors' ages are as of the date of the Annual Meeting.
NOMINATIONS FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2000 ANNUAL
MEETING
ANDREW L. TURNER, age 50, is Chairman of the Board of Directors, President
and Chief Executive Officer of the Company. Mr. Turner has served in each of
these capacities for the Company since its formation. Mr. Turner was also the
founder of the Company and has overseen the development of the Company's
business since its inception in 1989. Mr. Turner also was a founder and
previously served as Chief Operating Officer of Horizon Healthcare Corporation,
a health care services provider, from 1986 to 1989. Prior to 1986, Mr. Turner
served as a Senior Vice President of Operations of Hillhaven Corporation
("Hillhaven"). Mr. Turner has over 20 years of experience in the long-term care
industry.
ROBERT A. LEVIN, age 42, joined the Board of Directors of the Company in
April 1993 and has served as the Secretary of the Company from April 1993 to
October 1996. Effective January 1, 1996, Mr. Levin became the Senior Vice
President for Rehabilitation Services. This position includes responsibility for
all therapy services of the Company, including those of Sundance Rehabilitation
Company, the Company's rehabilitation therapy subsidiary ("Sundance"). From
January 1991 to December 1995, Mr. Levin was the President and Chief Operating
Officer of Sundance. Previously Mr. Levin was Vice President of National
Accounts for Medline Industries, Inc., a manufacturer and distributor of medical
supplies.
ROBERT D. WOLTIL, age 43, joined the Board of Directors of the Company in
March 1996. Mr. Woltil became the Senior Vice President-Financial Services and
Chief Financial Officer of the Company in February 1996. From 1982 to January
1996, Mr. Woltil served in various capacities for Beverly Enterprises, Inc.
("Beverly"), a health care services provider. From May 1995 until January 1996,
Mr. Woltil was President and Chief Executive Officer of Pharmacy Corporation of
America, a subsidiary of Beverly. From 1992 to May 1995, Mr. Woltil was the
Chief Financial Officer of Beverly, and from 1990 to
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<PAGE>
1992, Mr. Woltil was the Vice President-Financial Planning and Control for
Beverly. Mr. Woltil is also a certified public accountant.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1998 ANNUAL MEETING
JOHN E. BINGAMAN, age 51, joined the Board of Directors of the Company in
1993. Mr. Bingaman also served as a consultant to the Company from October 1994
to July 1996. Since July 1993, Mr. Bingaman has been Vice President of BKS
Properties. From July 1993 to October 1994, Mr. Bingaman was the President of
Four Seasons Healthcare Management, Inc., which was the Company's subsidiary
that managed certain long-term care facilities through management contracts.
Between 1984 and July 1993, Mr. Bingaman was Chief Executive Officer of
Honorcare Corporation ("Honorcare"), a provider of long-term care services,
responsible for the overall management and strategic planning of Honorcare. Mr.
Bingaman has over 25 years of experience in the long-term care industry. See
"Compensation Committee Interlocks and Insider Participation in Compensation
Decisions" for a description of certain relationships between the Company and
Mr. Bingaman.
MARTIN G. MAND, age 60, joined the Board of Directors of the Company in
February 1996, when the Board was increased in size from nine to ten persons.
Since January 1995, Mr. Mand has been Chairman, President and Chief Executive
Officer of Mand Associates, Limited, a financial consulting, speaking and
writing firm. Mr. Mand was previously Executive Vice President and Chief
Financial Officer of Northern Telecom, Ltd., a global manufacturer of
telecommunications equipment, from March 1990 to June 1994. Mr. Mand also
previously served as Vice President and Treasurer of E.I. du Pont de Nemours &
Co., a chemical, allied products and energy company. Mr. Mand also serves on the
Board of Directors of the Fuji Bank and Trust Company.
JAMES R. TOLBERT, III, age 62, joined the Board of Directors of the Company
in August 1995, when he filled a vacancy on the Board caused by the resignation
of another director. Mr. Tolbert has served as the Chairman, President, Chief
Executive Officer and Treasurer of First Oklahoma Corporation, a holding
company, since July 1986. Mr. Tolbert has over 15 years of experience in the
nursing home industry. In addition, Mr. Tolbert is a member of the Board of
Directors of Bonray Drilling Corporation, a corporation engaged in domestic
onshore contract drilling of oil and gas wells.
R. JAMES WOOLSEY, age 55, joined the Board of Directors of the Company in
October 1995, when the Board was increased in size from eight to nine persons.
Mr. Woolsey has been a partner in the law firm of Shea & Gardner since January
1995, where he previously had been a partner from 1980 to 1989 and from 1991 to
1993. From 1993 to 1995, Mr. Woolsey served as the Director of Central
Intelligence for the United States government. From 1989 to 1991, Mr. Woolsey
was the Ambassador and U.S. Representative to the Negotiation on Conventional
Armed Forces in Europe. In addition, Mr. Woolsey is a member of the Board of
Directors of USF&G Corp., an insurance holding company, and Yurie Systems, Inc.,
a network communications company.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1999 ANNUAL MEETING
ZEV KARKOMI, age 73, has been a member of the Board of Directors of the
Company since 1993. Mr. Karkomi has over 25 years of experience in the real
estate business, with a primary emphasis on properties owned and leased to
long-term healthcare operators. He has served as President of Karell Capital
Ventures, Inc., a corporation involved in the acquisition, sale, leasing and
management of long-term care facilities, since 1980. Mr. Karkomi also serves as
the President of Zevco Enterprises, Inc. and Executive Vice President and
Chairman of the Board of Progressive Health Group, Inc., real estate investment
companies. See "Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" for a description of certain relationships between the
Company and Mr. Karkomi.
LOIS E. SILVERMAN, age 57, joined the Board of Directors of the Company in
October 1995, when she filled a vacancy on the Board caused by the resignation
of another director. Ms. Silverman, a co-
6
<PAGE>
founder of CRA Managed Care, Inc., a provider of services designed to reduce the
costs associated with workers' compensation, automobile and disability claims,
has served as the Chairman of the Board of CRA since March 1994 and as its Chief
Executive Officer from 1988 to 1995. Prior to founding CRA, Ms. Silverman held
the position of Northeast Regional Manager at IntraCorp., a division of Cigna
Corporation. Ms. Silverman is a director of Care Group and an overseer of Tufts
Medical School in Boston. She is a trustee at the Hebrew Rehabilitation Center
for the Aged and at Simmous College as well as director of Immunetics, a
Cambridge Massachusetts biotechnology company, and a member of the Dean's
Council of the Harvard School of Public Health.
MARK G. WIMER, age 44, became a director of the Company in 1993. Mr. Wimer
became the Senior Vice President for Inpatient Services effective January 1,
1996. This position includes responsibility for all of the Company's inpatient
services, including those of Sunrise Healthcare Corporation ("Sunrise"), the
Company's subsidiary responsible for operations of the Company's long-term care
facilities. Mr. Wimer previously served as the President of Sunrise effective
July 1993 until December 1995. From February 1988 to July 1993, Mr. Wimer was
President and Chief Executive Officer of Franciscan Eldercare Corporation, a
non-profit organization that develops and manages long-term care facilities.
From November 1984 through February 1988, Mr. Wimer was Regional Vice President
of Operations for Hillhaven and had responsibility for management of long-term
care facilities for Hillhaven in Washington, Oregon, Idaho and Montana.
WARREN C. SCHELLING, age 44, became a director of the Company in October,
1996, when the Board was increased in size from ten to eleven persons. Mr.
Schelling became the Senior Vice President for Pharmaceutical Services effective
January 1, 1996. This position includes responsibility for all of the Company's
pharmaceutical operations, including those of Sunscript Pharmacy Corporation
("Sunscript"), the Company's pharmacy subsidiary. From July 1994 to December
1995, Mr. Schelling was the President of Sunscript. Prior to joining the
Company, Mr. Schelling was the President and Chief Operating Officer of HPI
Health Care Services, Inc. a subsidiary of Diagnostek, Inc., which provides
pharmacy management services to hospitals, HMOs, long-term care facilities and
health systems, from January 1993 to July 1994. From January 1994 to July 1994,
Mr. Schelling also served as the Executive Vice President/Pharmacy Services
Officer at Diagnostek, Inc. From September 1985 to January 1993, Mr. Schelling
was a manager in HPI Health Care Services, Inc.
COMMITTEES OF THE BOARD AND BOARD ATTENDANCE
COMMITTEES OF THE BOARD
To assist in the discharge of its responsibilities, the Board of Directors
has established an Audit Committee and a Compensation Committee. There is no
standing Nominating Committee to the Board of Directors. The members of these
standing committees are elected by the Board of Directors and serve at the
pleasure of the Board.
AUDIT COMMITTEE. The Audit Committee has the responsibility of making
recommendations to the Board concerning the engagement of the Company's
independent public accountants, reviewing the overall scope and results of the
annual audit and performing such functions as may be prescribed by the Board.
The Audit Committee also reviews proposed audit fees, fiscal year-end audit
results and the internal financial controls of the Company. The members of the
Audit Committee are elected annually by the directors. During 1996, the Audit
Committee was initially comprised of James R. Tolbert, III, Zev Karkomi and Lois
E. Silverman. Martin G. Mand became a member of the Committee in February 1996
and John E. Bingaman became a member in June 1996. None of these members were
employees of the Company. The Audit Committee met 12 times during 1996, and each
member of the Audit Committee as of the date of such meetings attended the
meetings with one exception.
COMPENSATION COMMITTEE. The Compensation Committee is authorized to review
the compensation of the senior officers of the Company and to determine
salaries, bonuses, stock options and any other
7
<PAGE>
forms of equity-based compensation, to review recommendations to the Board
concerning the compensation of the directors and to perform such other functions
as the Board may direct. The Compensation Committee also administers the
Company's stock option plans for employees. The members of the Compensation
Committee are elected annually by the directors. During 1996, the Compensation
Committee was initially comprised of Messrs. Bingaman, Karkomi and Woolsey. None
of these members were employees of the Company. In June 1996, Messrs. Bingaman
and Karkomi were replaced by Lois E. Silverman and Martin G. Mand. In 1996, the
Compensation Committee held six meetings, and each member of the Compensation
Committee as of the date of such meetings attended the meetings with three
exceptions.
ATTENDANCE AT BOARD MEETINGS
During 1996, the Board of Directors held 10 meetings by conference call or
in person and took a number of actions by written consent. No director attended
fewer than 90% of the total meetings of the Board of Directors.
NON-EMPLOYEE DIRECTOR COMPENSATION
All non-employee directors of the Company are entitled to receive an annual
fee of $24,000, which is payable in four equal quarterly installments. In
addition, each Chairperson of a committee of the Board of Directors is entitled
to receive an additional annual fee of $4,000, payable in four equal quarterly
installments. Effective after April 11, 1997, and subject to approval of the
Company's 1997 Non-Employee Directors' Stock Plan (the "Directors' Stock Plan")
by the stockholders of the Company, all non-employee directors and Committee
Chairpersons have the election of (1) receiving the entire annual retainer and,
in the case of Committee Chairpersons, their Chairperson fees in cash; or (2)
receiving one-half of the retainer and, if applicable, Committee Chairperson
fees in cash and the remaining one-half in the form of restricted stock awards.
If restricted stock is elected, for every dollar of cash given up, the recipient
will receive restricted stock worth $1.10. The receipt of the relevant annual
fee is subject to attendance by the director at no less than 75% of the total
Board and Committee meetings for the calendar year. See "Proposal No.
3--Approval of the Sun Healthcare Group, Inc. 1997 Non-Employee Directors' Stock
Plan."
Until April 11, 1997, directors who were not employees of the Company were
also entitled to receive fees of $1,200 for each Board of Directors meeting
attended in person, $500 for each Board of Directors meeting attended by
telephone and $500 for each Committee meeting of the Board of Directors attended
in person or by telephone, plus reimbursement of out-of-pocket expenses for
attendance at such meetings. Effective after April 11, 1997, the fee for the
first Board of Directors meeting or Committee meeting attended in person by a
non-employee director in a single day has been increased to $1,750. Directors
are entitled to an additional $500 for each subsequent meeting attended that
same day. The fees for any meetings that are attended by telephone are $500. In
addition, subject to stockholder approval of the Directors' Stock Plan by the
stockholders of the Company, non-employee directors already serving on the Board
are entitled to 4,000 shares which are to be awarded annually in the form of
non-qualified stock options and 2,000 shares which are to be awarded annually in
the form of restricted stock awards. Non-employee directors who are elected to
the Board for the first time or after a period of not serving on the Board are
entitled to a one-time award of 10,000 shares in the form of non-qualified stock
options and a one-time award of 5,000 shares in the form of restricted stock.
Assuming the Directors' Stock Plan is approved by the Company's stockholders at
the Annual Meeting, no further awards will be made under the 1995 Non-Employee
Directors' Stock Option Plan.
At the Annual Meeting held in 1996, the Company's stockholders approved the
1995 Non-Employee Directors' Stock Option Plan to supersede the 1993
Non-Employee Directors' Stock Option Plan. The 1995 Non-Employee Directors'
Stock Option Plan provides that each non-employee director will receive an
option to purchase 5,000 shares upon his or her initial appointment to the Board
of Directors. In
8
<PAGE>
addition, commencing January 1, 1996, each non-employee director who has not
been an employee of the Company during the previous twelve months will receive
an annual option to purchase 1,000 shares, provided, that any such director who
was a non-employee director prior to August 22, 1995, was not eligible to
receive an annual option grant in 1996. Accordingly, Messrs. Karkomi and
Bingaman, who were non-employee directors of the Company prior to August 22,
1995, did not receive an annual option grant under the 1995 Non-Employee
Directors' Stock Option Plan in 1996. All options under the 1995 Non-Employee
Directors' Stock Option Plan are non-qualified stock options and vest in four
equal annual installments beginning on the second anniversary of the date of
grant.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information concerning the annual and long-term
compensation for services in all capacities to the Company and its subsidiaries
for the fiscal years shown of those persons ("Named Executive Officers") who
were, during the latest fiscal year (i) the chief executive officer and (ii) the
other four most highly compensated executive officers of the Company:
SUMMARY COMPENSATION TABLE
The following table provides information concerning the annual and long-term
compensation for services in all capacities to the Company and its subsidiaries
for the fiscal years shown of those persons ("Named Executive Officers") who
were, during the latest fiscal year (i) the chief executive officer and (ii) the
other four most highly compensated executive officers of the Company:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- -------------------------------------------- --------- ---------- ---------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Andrew L. Turner ........................... 1996 $ 500,000 $ 250,000 -- $ 390
President and Chief Executive Officer 1995 500,000 -- 100,000 720
1994 469,235 225,000 100,000 330
Robert A. Levin ............................ 1996 330,202 -- 15,000 390
Senior Vice President for Rehabilitation 1995 281,261 125,000 15,000 720
Services 1994 211,542 125,000 8,000 58,009(2)
Mark G. Wimer .............................. 1996 322,516 125,000 15,000 605
Senior Vice President for Inpatient 1995 281,261 125,000 15,000 720
Services 1994 212,692 125,000 8,000 330
Robert D. Woltil ........................... 1996 296,164(3) 125,000 25,000 --
Senior Vice President for Financial
Services and Chief Financial Officer
Robert F. Murphy ........................... 1996 260,000 100,000 -- --
Senior Vice President, General Counsel and 1995 35,000(4) -- 10,000 --
Secretary
</TABLE>
- ------------------------
(1) Except as otherwise provided, consists of matching contributions under the
Company's 401(k) Plan.
(2) Includes $57,679 paid by the Company for relocation expenses for Mr. Levin.
9
<PAGE>
(3) Salary for 1996 represents amounts paid to Mr. Woltil in 1996 after the
commencement of his employment by the Company in February 1996. Mr. Woltil's
annualized salary for 1996 would have been $350,000.
(4) Salary for 1995 represents amounts paid to Mr. Murphy in 1995 after the
commencement of his employment by the Company in November 1995. Mr. Murphy's
annualized salary for 1995 would have been $260,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning individual
grants of stock options made to each of the Named Executive Officers during the
year ended December 31, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
GRANTED TO ANNUAL RATES OF STOCK
NUMBER OF EMPLOYEES EXERCISE PRICE APPRECIATION FOR
SECURITIES IN FISCAL OR BASE OPTION TERM(3)
UNDERLYING YEAR PRICE EXPIRATION ----------------------
NAME OPTIONS(1) (%) ($/SH)(2) DATE 5% ($) 10% ($)
- ----------------------------------------- ----------- ----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andrew L. Turner(4)...................... -- -- % $ -- -- $ -- $ --
Robert A. Levin.......................... 15,000 3.47 13.125 04/08/06 123,814 313,768
Mark G. Wimer............................ 15,000 3.47 13.125 04/08/06 123,814 313,768
Robert D. Woltil......................... 25,000 5.78 12.375 03/25/06 194,564 493,064
Robert F. Murphy(4)...................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) All options were granted under the Company's 1996 Combined Incentive and
Non-qualified Stock Option Plan.
(2) All options were granted at an exercise price equal to the fair market value
of Common Stock on the option grant date. All options will vest and become
exercisable at a rate of one-third each year beginning on the first
anniversary of the date of grant. All options become fully exercisable on
the occurrence of a change in control as described in the plan pursuant to
which each option was granted.
(3) Gains are reported net of the option exercise price, but before taxes
associated with exercise.These amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercise are
dependent on the future performance of Common Stock as well as the option
holder's continued employment through the vesting period. The amounts
reflected in this table may not necessarily be achieved.
(4) Mr. Turner and Mr. Murphy did not receive stock option grants in 1996.
10
<PAGE>
FISCAL YEAR-END OPTION VALUES
Set forth in the table below is information concerning the value of stock
options held as of December 31, 1996 by each of the Named Executive Officers.
None of the Named Executive Officers exercised any stock options during the year
ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END (#) AT YEAR-END ($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew L. Turner.......................................... -- 200,000 $ -- $ --
Robert A. Levin........................................... 25,000 38,000 62,500 5,625
Mark G. Wimer............................................. 25,000 38,000 62,500 5,625
Robert D. Woltil.......................................... -- 25,000 -- 28,125
Robert F. Murphy.......................................... -- 10,000 -- 40,000
</TABLE>
- ------------------------
(1) Based on the closing price of the Common Stock, as reported on the New York
Stock Exchange, at December 31, 1996, which was $13.50 per share.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement dated as of June 2, 1993
with Mr. Turner (the "Employment Agreement") that initially provided Mr. Turner
with an annual salary of $375,000 and an annual bonus, not exceeding $250,000
per year, pursuant to a formula established by the Compensation Committee. Mr.
Turner's annual salary was increased in April 1994 to $500,000 and remained at
that level for 1995 and 1996. See "Compensation Committee Report--Base
Salaries." Pursuant to the Employment Agreement, Mr. Turner is restricted from
disclosing confidential information that has been obtained by him or disclosed
to him as a result of his employment with the Company. In addition, during the
term of his employment by the Company and for a period of two years thereafter,
Mr. Turner is prohibited from competing with the Company or any of its
affiliates, soliciting the business of any patient or customer of the Company or
any of its affiliates, and soliciting for employment any of the employees of the
Company or any of its subsidiaries. The Employment Agreement provides that it
terminates after the expiration of five years, upon death or total disability of
Mr. Turner, upon Mr. Turner reaching mandatory retirement age under any
retirement policy adopted by the Company, by mutual agreement of Mr. Turner and
the Company, upon dissolution and liquidation of the Company, at Mr. Turner's
election without cause upon six months' notice, or upon notice by the Company to
Mr. Turner for cause.
SEVERANCE AGREEMENTS
The Company has entered into severance agreements (the "Severance
Agreements") with certain executive officers, including the Named Executive
Officers. Each Severance Agreement provides that in the event of the involuntary
termination of the executive, he or she will be entitled to receive any accrued
but unpaid salary plus a PRO RATA portion of annual bonus. In addition, the
executive will be entitled to a severance payment equal to two times salary at
the rate in effect at the time of the executive's involuntary termination, or,
in the event that such termination occurs following a change in control of the
Company (as defined below), a severance payment equal to three times salary at
the rate then in effect. The executive will continue to receive health and other
benefits for a period of two years following his or her involuntary termination
(or for a period of three years in the event that such termination occurs
following a change in control of the Company). The Severance Agreements also
provide for a gross-up payment to be made to the executives, if necessary to
eliminate the effects of the imposition of the excise tax under Section 280G of
the Code on the payments made thereunder. The Severance Agreements contain
identical noncompetition and nondisclosure covenants, except that the
noncompetition covenant in Mr. Turner's Severance
11
<PAGE>
Agreement follows the noncompetition covenant in his Employment Agreement. See
"--Employment Agreement" for a description of this provision.
For purposes of the Severance Agreements, "change in control" is generally
defined as (i) the acquisition by a person or group of beneficial ownership
representing 33 1/3% of the Company's then outstanding voting stock, (ii)
stockholder approval of a merger or consolidation of the Company other than a
merger of consolidation in which the voting securities of the Company
outstanding immediately prior thereto continues to represent at least 66 2/3% of
the combined voting power of the surviving entity's outstanding voting
securities, (iii) under certain conditions, a change in the majority of the
Board of Directors of the Company, or (iv) stockholder approval of a
reorganization of the Company or a sale of substantially all of Sun's assets.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and the rules promulgated thereunder
require the Company's directors and executive officers and persons who own more
than ten percent of the Company's Common Stock to report their ownership and
changes in their ownership of Common Stock to the Securities and Exchange
Commission (the "Commission") and the New York Stock Exchange. Copies of the
reports must also be furnished to the Company. Specific due dates for the
reports have been established by the Commission and the Company is required to
report in this Proxy Statement any failure of its directors, executive officers
and more than ten percent stockholders to file by these dates.
Based solely on a review of the copies of such forms and amendments thereto
received by the Commission, or written representations from certain reporting
persons, the Company believes that during 1996 all Section 16(a) filing
requirements applicable to its directors, executive officers and greater than
ten percent beneficial owners were met.
RELATED PARTY TRANSACTIONS
Mr. Turner guarantees the Company's obligations under the lease for a
nursing home in Connecticut that is owned by Mr. Karkomi. Mr. Turner is the
guarantor of subleases on four facilities in Illinois, the sublessor of which is
a company co-owned by Mr. Karkomi. Mr. Karkomi's company, in turn, is the
guarantor of the master lease. Mr. Turner also guarantees the Company's
obligations under three facility leases in Washington.
In connection with the reorganization in April 1993 of various legal
entities that became wholly owned subsidiaries of the Company and the
termination of S corporation status for certain of the Company's subsidiaries,
Mr. Turner and his spouse (the "Indemnitees") entered into a tax indemnity
agreement (the "Tax Indemnity Agreement") with the Company and such
subsidiaries. The Tax Indemnity Agreement provides that the Company and such
subsidiaries will indemnify the Indemnitees from all liabilities and claims,
subject to certain limitations, that the Indemnitees may sustain for payment of
federal and state income taxes in connection with any tax adjustments relating
to such subsidiaries when they were taxed as S corporations to the extent that
the Company or such subsidiaries receive favorable tax adjustments subsequent to
the years such subsidiaries were taxed as S corporations. In addition, Sundance,
the Company's rehabilitation therapy subsidiary, entered into an agreement with
Mr. Turner whereby Sundance agreed to change its method of accounting for income
tax purposes from the cash basis to the accrual basis so as to be consistent
with financial statement reporting. Pursuant thereto, Sundance approved a
distribution to Mr. Turner out of its prior accumulated S corporation earnings
in an amount sufficient to cover certain of his tax obligations; the Company
paid $3,682,000 in 1994 and 1993 to cover such tax obligations. While Sundance
and Mr. Turner believe such distribution will not be taxable to Mr. Turner,
Sundance has agreed to indemnify him against any tax liability resulting from
such payment.
12
<PAGE>
In April 1995, the Company paid Mr. Turner $504,884 as reimbursement for
expenses incurred by him as a selling stockholder in the Company's December 1994
underwritten public offering of Common Stock.
Kenneth C. Noonan, Senior Vice President--SunSolution, is indebted to the
Company in the amount of $220,000. The Company entered into a short-term loan
with Mr. Noonan in connection with his relocation to the Company's headquarters
in Albuquerque. Mr. Noonan does not pay interest on this loan.
See "Compensation Committee Interlocks and Insider Participation in
Compensation Decisions" for a description of certain relationships between the
Company and the members of the Compensation Committee of the Board of Directors.
COMPENSATION COMMITTEE REPORT
This report sets forth information on the compensation and benefits provided
to the Chief Executive Officer and other executive officers of the Company
during 1996 and has been prepared by the Compensation Committee (the
"Committee") of the Board of Directors.
At the beginning of the 1996 fiscal year, the Committee was comprised of
three members, John E. Bingaman, R. James Woolsey and Zev Karkomi, all
non-employee directors of the Company. In June 1996, following the annual
meeting of stockholders, Mr. Bingaman and Mr. Karkomi were replaced by Lois E.
Silverman and Martin G. Mand, also non-employee directors of the Company. In
June 1997, Mr. Woolsey resigned from the Compensation Committee and in July 1997
James R. Tolbert, III, also a non-employee director of the Company, was elected
to the Committee. The basis for the changes in committee membership was to
ensure that the Committee is composed solely of "outside directors" for purposes
of Section 162(m) of the Code. Under Section 162(m), persons who are remunerated
by the Company, either directly or indirectly, in any capacity other than as a
director do not qualify as "outside directors." See "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions."
COMPENSATION PHILOSOPHY
The Company has pursued and intends to continue to pursue a long-term
operating strategy of growth through (i) selective acquisitions of long-term and
subacute care facility operations, (ii) increased facility profitability through
active marketing and by offering rehabilitation therapy, subacute care,
institutional pharmaceutical services and other specialized services, and (iii)
expansion of rehabilitation therapy and institutional pharmaceutical services
provided primarily to non-affiliated long-term and subacute care facilities. The
objectives of the compensation program for executives of the Company are to
attract and retain the highest quality senior management team possible, to
motivate exceptional performance, and to inspire teamwork among the executives
and loyalty to the Company's objectives.
In July 1996 the Company engaged Deloitte & Touche LLP as compensation
consultants to review the total compensation provided to the Company's senior
executives, to compare such compensation to the compensation provided to
executives in a selected peer group of companies and to determine whether the
Company's then current compensation structure was appropriate to achieve the
Company's objectives. Deloitte & Touche LLP completed its review in September
1996 and the results were then shared with the Committee. The Deloitte & Touche
LLP findings and the Committee's responses to those findings are described
below.
COMPENSATION PROGRAMS
The Company subscribes to a total compensation philosophy. Compensation is a
function of four factors: base salary; annual incentive bonus; long-term
incentive compensation; and benefits, including retirement programs and
perquisites.
13
<PAGE>
BASE SALARIES
In March of each year the Committee reviews the base salary of each
executive officer of the Company to determine whether adjustments are
appropriate. With respect to executives other than the Chief Executive Officer,
the Committee considers the recommendations of Mr. Turner in determining salary
adjustments. The base salary of the Chief Executive Officer is set by the
Committee. Base salaries are intended to be competitive with base salaries paid
by those organizations determined to be competitors of the Company and high
performing companies. In its 1996 study, Deloitte & Touche LLP recommended that
the base salaries of the Company's executives be increased so as to be within
90% of the market midpoint for each position, thereby holding down the fixed
general and administrative expenses associated with base salary while placing
more emphasis on performance-based incentives both short and long-term. Acting
on the Deloitte & Touche LLP recommendations, the Committee decided that
beginning in 1997 it would work towards establishing the executives' base
salaries at the midpoint of competitor companies. Market surveys by an objective
third party executive compensation firm will be conducted to determine
competitor salaries at least every two years, when the Company's growth defines
a different competitor group, or at the direction of the Committee.
MR. TURNER. On April 8, 1996, the Committee resolved to maintain Mr.
Turner's annual salary payable pursuant to his Employment Agreement at $500,000.
The Committee's determination not to increase Mr. Turner's salary for 1996 was
based upon Mr. Turner's own recommendation.
OTHER EXECUTIVE OFFICERS. The 1996 salaries of the Company's executive
officers (including the Named Executive Officers) were established by the
Committee at levels believed to be competitive with opportunities available to
such officers in the healthcare industry. In establishing these salaries, the
Committee also evaluated the responsibilities of the position held by and the
experience of each officer, and the performance of each such officer in
achieving individual and organizational goals during the year.
ANNUAL INCENTIVE BONUS
The Company's annual incentive bonus program for executive officers is
designed to motivate exceptional operational performance which results in the
attainment of the Company's annual financial, strategic and quality goals. At
the recommendation of the Chief Executive Officer of the Company, the annual
bonus plan for Senior Vice Presidents for 1996 provided for bonuses of up to 40%
of the base salary of each executive involved based upon a combination of
objective and qualitative factors including the Company's achievement of
preestablished earnings objectives. With respect to executives other than the
Chief Executive Officer, the Committee considered the recommendations of Mr.
Turner in determining actual bonus payouts. In its study, Deloitte & Touche LLP
recommended that the annual incentive plan include all members of the executive
management team and that targeted incentives be developed with a system of tiers
using system-wide performance criteria. Acting on the Deloitte & Touche LLP
recommendations, the Committee decided that the annual bonus opportunity for the
senior management team would include all senior executives and be competitive
with the market midpoint, as determined by the Deloitte & Touche LLP survey,
with the actual payout determined by performance measured in accordance with the
Company's annual bonus plan.
The Committee recognizes that during 1996 the price of the Common Stock did
not rise at a rate comparable to the stock market in general. The Committee
believes, however, that the stock price in 1996 was affected by factors largely
beyond the control of Mr. Turner and the Company's other senior executives.
Among those factors were the ongoing governmental inquiry regarding some of the
billing practices of the Company, the continuing congressional debate over
deficit reduction which contemplated reduced Medicare reimbursements to long
term care providers, and speculation over salary equivalency reimbursement rates
for certain therapy services.
14
<PAGE>
MR. TURNER. Mr. Turner was awarded a bonus of $250,000 for 1996. In
determining Mr. Turner's bonus, the Committee considered several factors,
including Mr. Turner's success in setting a vision for the Company's future,
strengthening the Company's senior management team, and leading and achieving
continued growth in each of the Company's major lines of business.
OTHER NAMED EXECUTIVE OFFICERS. Based on their success in achieving their
objectives for 1996, the Committee approved bonuses of $125,000 to Mr. Wimer,
$125,000 to Mr. Woltil, and $100,000 to Mr. Murphy.
LONG TERM INCENTIVE COMPENSATION
In 1996, the Committee approved grants of options to purchase a total of
55,000 shares of the Common Stock to three of the Named Executive Officers
pursuant to the 1996 Combined Incentive and Non-qualified Stock Option Plan. The
foregoing options will become exercisable over three years at the rate of
one-third of the shares issuable thereunder each year, beginning on the first
anniversary of the date of the option. This vesting period is based upon the
Committee's belief that stock options that vest over a period of time provide a
strong incentive for key employees to remain with the Company and contribute to
its long-term growth and profitability. These awards are intended to enhance the
stability of the Company's management team during the next several years which
are of critical importance to the Company's growth, as well as to provide
incentives for individual performance that coincide with the enhancement of
stockholder value.
In its September 1996 study, Deloitte & Touche LLP determined that the
Company's long term incentive compensation was not competitive with peer group
organizations and recommended that actions be taken to align the Company's long
term incentive opportunity for each executive with the targeted market midpoint.
Specifically, Deloitte & Touche LLP recommended that a one-time restricted stock
award be made to certain executive officers to create immediate equity ownership
among the executive team that is competitive with the long term incentives
earned by their counterparts within the peer group studied by Deloitte & Touche
LLP, and that the Company adopt a new equity-based compensation plan to provide
for such awards. The Committee approved these recommendations on October 21,
1996 and accordingly commenced the process of developing the Stock Incentive
Plan, for which stockholder approval is sought at the Annual Meeting. See
"Proposal No. 2--Approval of the Sun Healthcare Group, Inc. 1997 Stock Incentive
Plan."
The Stock Incentive Plan is designed to promote a high level of contribution
to the long term goals of the Company through the provision of a variety of
equity-based and equity-related awards, which include stock options, stock
appreciation rights, restricted stock, performance units and other forms of
stock awards. Awards under the Stock Incentive Plan will be granted in order to
reward excellence in performance and/or contribution to the attainment of the
Company's long-term objectives. Based upon the Deloitte & Touche LLP
recommendation that restricted stock be granted to certain of the Company's
executive officers in order to make their long term compensation competitive
with that earned by their counterparts within the Company's peer group, the
Committee has approved such awards subject to stockholder approval of the Stock
Incentive Plan. See "Proposal No. 2--Approval of the Sun Healthcare Group, Inc.
1997 Stock Incentive Plan--New Plan Benefits."
BENEFITS
The Company's executives receive the retirement, health and welfare benefits
which are available to all the Company employees. Executives are eligible for
participation in the Company's 401(k) Retirement Savings Plan, consistent with
annually-determined limits for highly compensated employees and Federal
contribution limits. A non-qualified, voluntary Executive Deferred Compensation
Plan is also available for the Company's senior managers, with no matching
provision. Other benefits, or perquisites which are
15
<PAGE>
approved by the Committee, such as a company automobile, may be provided at the
discretion of the Chief Executive Officer with approval of the Committee.
POLICY ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Under Section 162(m) of the Code, the Company is generally precluded from
deducting compensation in excess of $1 million per year for its Chief Executive
Officer and any of its four highest-paid executive officers, unless the payments
are made under qualifying performance-based plans. As discussed above, the
composition of the Committee changed during 1996 in order to ensure that Section
162(m)'s requirements for deductibility will be met with respect to certain
compensation paid to these executive officers of the Company. The Company
intends that certain compensation paid pursuant to the 1996 Combined Incentive
and Non-qualified Stock Option Plan and the 1997 Stock Option Plan being
submitted to stockholders at the Annual Meeting will qualify for exemption under
Section 162(m) and thus not be counted toward the $1 million limitation.
While it is the Committee's intention to maximize the deductibility of
compensation paid to executive officers, deductibility will be only one among a
number of factors used by the Committee in ascertaining appropriate levels or
modes of compensation. The Company intends to maintain the flexibility to
compensate executive officers based upon an overall determination of what it
believes to be in the best interests of the Company and its stockholders.
Lois E.Silverman, Chairperson
Martin G. Mand
James R. Tolbert, III
16
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph and chart compare the cumulative total stockholder
return for the period from July 2, 1993 through December 31, 1996 on an
investment of $100 in (i) Common Stock, (ii) the New York Stock Exchange market
index and (iii) the Media General Health Institutional Services Industry Group
Index ("MG Group Index," which consists of approximately 266 institutional
health services companies). Cumulative total stockholder return assumes the
reinvestment of all dividends. Stock price performances shown in the graph are
not necessarily indicative of future price performances.
COMPARISON OF COMULATIVE TOTAL
RETURN SINCE JULY 1993 AMONG SUN HEALTHCARE
GROUP, INC., THE NYSE MARKET INDEX AND THE
MG GROUP INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SUN HEALTHCARE MG GROUP INDEX NYSE MARKET INDEX
<S> <C> <C> <C>
7/2/1993 $100.00 $100.00 $100.00
12/31/1993 $136.73 $121.72 $107.39
12/30/1994 $207.14 $135.10 $105.31
12/29/1995 $110.20 $169.09 $136.55
12/31/1996 $110.20 $168.18 $164.48
</TABLE>
17
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
At the beginning of the 1996 fiscal year, the Compensation Committee was
comprised of three members, John E. Bingaman, R. James Woolsey and Zev Karkomi,
all non-employee members of the Board of Directors. In June 1996, following the
annual meeting of stockholders, Mr. Bingaman and Mr. Karkomi were replaced by
Lois E. Silverman and Martin G. Mand, also non-employee members of the Board of
Directors. None of these directors were employees of the Company.
The Company's nursing home subsidiary, Sunrise, is a lessee or sublessee of
56 facilities from partnerships or corporations in which Mr. Karkomi is a
general partner, stockholder or director. The Company also leases two facilities
from Mr. Karkomi as an individual. These arrangements were entered into from
February 1989 to March 1997, with varying lease terms. Approximately 50% of the
facilities are under ten-year terms. The aggregate lease payments, including
base rents, contingent rents and other miscellaneous payments in connection with
these leases, totaled approximately $15,451,000 in 1996. Aggregate lease
installments paid since lease inception and all payments due through lease
termination, together with known adjustments to those lease amounts, total
approximately $216,200,000.
Sunrise and a limited partnership in which Mr. Karkomi is a general partner
entered into various agreements pursuant to which Sunrise operated a nursing
facility owned by the partnership. Sunrise operated the facility as a licensee
from July 1996 until September 1996. Pursuant to these agreements, the Company
is entitled to approximately $289,000 from the limited partnership in which Mr.
Karkomi is a general partner and/or accounts receivable of the facility for
certain costs in excess of revenues for the period the nursing facility was
operated by the Company, which amount was approximately $1.2 million.
Mr. Turner guarantees the Company's obligations under the lease for a
nursing home in Connecticut that is owned by Mr. Karkomi. Mr. Turner is the
guarantor of subleases on four facilities in Illinois, the sublessor of which is
a company co-owned by Mr. Karkomi. Mr. Karkomi's company, in turn, is the
guarantor of the master lease. Mr. Turner also guarantees the Company's
obligations under three facility leases in Washington.
Sunrise is a lessee or assignee of seven facilities from partnerships in
which Mr. Bingaman has an equity interest of greater than ten percent. Each of
these lease arrangements was entered into prior to the closing of the
acquisition of Honorcare. All of the leases commenced on July 13, 1993 and
terminate in 2001. The aggregate lease payments, including base rents,
contingent rents and other miscellaneous payments in connection with these
leases, totaled approximately $2,180,000 in 1996. Aggregate lease installments
paid since lease inception and all payments due through lease termination,
together with known adjustments to lease amounts, total approximately
$16,414,000.
The Company believes the terms of all of the foregoing transactions are as
favorable to the Company as those that could have been obtained from
non-affiliated parties in arm's-length transactions. However, the Company's
contractual relationship with entities affiliated with members of the Board of
Directors creates the potential for conflicts of interest.
No executive officer of the Company during the last fiscal year served as a
member of a compensation committee or director of another entity in a situation
in which an executive officer of such other entity served as a member of the
Company's Compensation Committee.
18
<PAGE>
APPROVAL OF THE SUN HEALTHCARE GROUP, INC.
1997 STOCK INCENTIVE PLAN
(PROPOSAL NO. 2)
The Board of Directors seeks stockholder approval of the Sun Healthcare
Group, Inc. 1997 Stock Incentive Plan (the "Stock Incentive Plan"). The Board of
Directors adopted the Stock Incentive Plan on January 15, 1997, subject to
approval by the stockholders of the Company. Approval of the adoption of the
Stock Incentive Plan requires the affirmative vote of a majority of the
outstanding shares of the Common Stock represented and entitled to vote at the
Annual Meeting. The Stock Incentive Plan will be effective as of the date of its
approval by the stockholders of the Company.
The Stock Incentive Plan replaces the Sun Healthcare Group, Inc. 1996
Combined Incentive and Non-qualified Stock Option Plan (the "Predecessor Stock
Plan"). Assuming the Stock Incentive Plan is approved at the Annual Meeting, no
further awards will be made under the Predecessor Stock Plan.
A summary of certain material provisions of the Stock Incentive Plan is set
forth below. The summary is qualified in its entirety be reference to the full
text of the Stock Incentive Plan, which is attached to this Proxy Statement as
Exhibit A.
DESCRIPTION OF STOCK INCENTIVE PLAN
PURPOSES AND ELIGIBILITY. The purposes of the Stock Incentive Plan are to
attract, retain and motivate officers and other key employees and consultants of
the Company, to compensate them for their contributions to the growth and
profits of the Company and to encourage ownership by them of stock of the
Company. The Stock Incentive Plan authorizes the issuance of certain awards
("Awards") to such individuals. The Company estimates that as of July 1, 1997,
approximately 500 individuals will be eligible to participate in the 1997 Stock
Incentive Plan.
SHARES AVAILABLE UNDER THE STOCK INCENTIVE PLAN. An aggregate of 4,500,000
shares of Common Stock are authorized for issuance under the Stock Incentive
Plan. The number of shares available for issuance under the Stock Incentive Plan
will be proportionately adjusted in the event of certain changes in the
Company's capitalization, a merger, or a similar transaction. Shares issued
pursuant to the Stock Incentive Plan may be newly issued shares, treasury shares
or any combination thereof.
ADDITIONAL LIMITS. In addition to the overall share limit, two special
limits apply. First, in accordance with the requirements under the regulations
promulgated under Section 162(m) of the Code, no eligible individual may receive
grants of Awards with respect to an aggregate of more than 400,000 shares of
Common Stock in respect of any fiscal year of the Company. Second, in accordance
with the requirements under Section 422 of the Code pertaining to incentive
stock options, the number of shares of Common Stock that may be issued pursuant
to incentive stock options under the Stock Incentive Plan may not exceed, in the
aggregate, 500,000 shares.
ADMINISTRATION. The Compensation Committee of the Board of Directors (the
"Committee") will administer the Stock Incentive Plan, select participants from
among eligible individuals, and determine the size, form, terms and conditions
of Awards, including those related to vesting, forfeiture, payment and
exercisability. Subject to certain limitations, the Committee may from time to
time delegate some or all of its authority to one or more officers of the
Company.
AWARDS GENERALLY. The Stock Incentive Plan authorizes the following Awards
based upon the Common Stock: (i) stock options; (ii) stock appreciation rights,
which may be granted in tandem with or independently of stock options; (iii)
stock awards; (iv) performance share awards; (v) Section 162(m) awards; and (vi)
other forms of awards which the Committee determines to be consistent with the
purposes of the Stock Incentive Plan and the interests of the Company.
19
<PAGE>
The vesting, exercisability, payment and other restrictions applicable to an
Award (which may include, without limitation, restrictions on transferability or
provision for mandatory resale to the Company) will be determined by the
Committee. The Committee shall also have authority to determine the effect, if
any, that a participant's termination of employment will have on the vesting,
exercisability, payment or lapse of restrictions applicable to an Award.
No Awards may be made under the Stock Incentive Plan after the tenth
anniversary of the date on which the Stock Incentive Plan is approved by
stockholders.
AWARDS--STOCK OPTIONS. Stock options awarded under the Stock Incentive Plan
may be either non-qualified stock options or incentive stock options within the
meaning of Section 422 of the Code. Under the terms of the Stock Incentive Plan,
the per share exercise price of a stock option shall be no less than 100% of the
fair market value of the Common Stock on the date of grant (subject to a limited
exception for options assumed in connection with the acquisition of another
entity by the Company). The term of a stock option will be fixed by the
Committee upon grant and may not exceed ten years.
The exercise price of a stock option may be paid in cash or previously owned
stock or a combination thereof. Stock options may also be exercised through a
"cashless exercise" procedure that affords participants the opportunity to sell
immediately some or all of the shares underlying the exercised portion of a
stock option in order to generate sufficient cash to pay the exercise price
and/or to satisfy withholding tax obligations related to exercise.
AWARDS--STOCK APPRECIATION RIGHTS. Stock appreciation rights entitle a
participant to receive upon exercise an amount equal to the excess, if any, of
the fair market value on the date of exercise of the number of shares of Common
Stock subject to the stock appreciation right over the applicable exercise
price. At the discretion of the Committee, payments to a participant upon
exercise of a stock appreciation right may be made in cash, shares of Common
Stock or a combination thereof. Stock appreciation rights may be granted alone
or in tandem with stock options.
AWARDS--STOCK AWARDS. Stock Awards consist of one or more shares of Common
Stock granted or offered for sale to a participant subject to terms and
conditions, including vesting requirements or restrictions on transferability,
as determined by the Committee.
AWARDS--PERFORMANCE SHARE AWARDS. Performance Share Awards entitle a
participant to receive shares of Common Stock upon satisfaction of certain
specified performance criteria and subject to such other terms and conditions as
the Committee deems appropriate. Payment in settlement of a Performance Share
Award will be made as soon as practicable following the conclusion of the
applicable performance period in shares of Common Stock, in an equivalent amount
of cash or in a combination of Common Stock and cash, as the Committee
determines.
AWARDS--OTHER AWARDS. The Committee has the authority to specify the terms
and provisions of other forms of equity-based or equity-related Awards not
described above which the Committee determines to be consistent with the purpose
of the Plan and the interests of the Company, which Awards may provide for cash
payments based in whole or in part on the value or future value of Common Stock,
for the acquisition or future acquisition of Common Stock, or any combination
thereof. Other Awards may also include cash payments based on one or more
criteria determined by the Committee which are unrelated to the value of Common
Stock.
AWARDS--SECTION 162(M) AWARDS. Section 162(m) of the Code limits the
deductibility of compensation in excess of $1,000,000 paid to the chief
executive officer and the four other most highly compensated officers of a
public company, as determined pursuant to the rules of the Commission, unless
the payments are made under qualifying performance-based plans and upon the
attainment of certain performance goals. The Stock Incentive Plan contains
special provisions that are intended to enable the Committee, if it so chooses,
to make Awards to Company officers who are subject to Section 162(m) (the
"Section 162(m)
20
<PAGE>
Officers") that will constitute "qualified performance-based compensation" for
purposes of Section 162(m) of the Code.
Section 162(m) Awards may consist of stock options, stock appreciation
rights, stock awards, performance share awards or other forms of awards the
vesting, exercisability and/or payment of which is conditioned upon the
attainment for the applicable performance period of specified performance
targets related to designated performance goals for such period selected by the
Committee. Performance goals will be selected from among the following
performance criteria: (i) net revenue, (ii) net earnings, (iii) operating
earnings or income, (iv) absolute and/or relative return on equity or assets,
(v) earnings per share, (vi) cash flow, (vii) pretax profits, (viii) earnings
growth, (ix) revenue growth, (x) book value per share, (xi) stock price and
(xii) performance relative to peer companies, each of which may be established
on a corporate-wide basis or established with respect to one or more operating
units, divisions, acquired businesses, minority investments, partnerships or
joint ventures.
In addition to the foregoing, the Committee may also grant Section 162(m)
Officers stock options or stock appreciation rights which may, pursuant to the
regulations promulgated under Section 162(m), be qualified as performance-based
compensation for Section 162(m) purposes without regard to the foregoing.
CHANGE IN CONTROL. In the event of a change in control and except as the
Committee may otherwise determine, all outstanding stock options and stock
appreciation rights will become fully exercisable, all restrictions and
conditions of all stock awards then outstanding will lapse, all performance
share awards will be deemed to have been fully earned, and in the case of a
change in control involving a merger or consolidation of the Company in which
the Company is not the surviving corporation or becomes a wholly owned
subsidiary of another entity, outstanding stock options that are not exercised
as of the date of the change in control will be converted into options to
acquire common stock of the survivor on substantially the same terms and
conditions as the original option, with appropriate adjustments as to the number
and kind of shares and exercise prices.
For purposes of the Stock Incentive Plan, a change in control is defined as
(i) an acquisition of more than 33 1/3% of the then outstanding voting stock of
the Company by any person or group other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company; (ii) approval
by the stockholders of the Company and a majority of the non-employee directors
of the Company of a merger or consolidation of the Company, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent at least 66 2/3%
of the combined voting power of the voting securities of the Company or other
surviving entity outstanding immediately after the merger or consolidation;
(iii) approval by the stockholders of the Company of a plan of reorganization or
an agreement for the sale or disposition of all or substantially all of the
Company's assets; or (iv) a change in Board composition during any two
consecutive years such that individuals who constitute the Board of Directors at
the beginning of the period and subsequently elected members whose election is
approved by at least a majority of such members or their successors whose
election was so approved or recommended, cease to constitute at least a majority
of the Board of Directors.
AMENDMENTS. The Board of Directors or the Committee may amend or terminate
the Stock Incentive Plan at any time, except that stockholder approval is
required to increase the maximum number of shares issuable under the plan or to
reduce the exercise price of any outstanding stock option or stock appreciation
right. No amendment or termination may adversely affect a participant's rights
with respect to previously granted Awards without his or her consent.
STOCK PRICE. On August 11, 1997, the closing price of the Common Stock on
the New York Stock Exchange was $20 3/16.
21
<PAGE>
NEW PLAN BENEFITS
Based upon the recommendation of Deloitte & Touche LLP in its September 1996
study of the Company's compensation practices (see "Compensation Committee
Report"), and subject to stockholder approval of the Stock Incentive Plan, on
January 20, 1997 and July 25, 1997 the Committee approved the restricted stock
awards under the Stock Incentive Plan to certain officers of the Company
indicated in the chart below. As awards under the Stock Incentive Plan are
authorized by the Committee in its discretion, it is not possible to determine
the additional benefits or amounts, if any, that will be received by any
employees or group of employees in 1997, or the benefits or amounts that will be
received by any employees or group of employee in future years.
<TABLE>
<CAPTION>
NUMBER OF
RESTRICTED
DOLLAR VALUE SHARES
NAME AND POSITION ($)(1) (#)
- ---------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Andrew L. Turner............................................................ $ 3,419,875 251,000
Robert A. Levin............................................................. 1,622,250 122,000
Mark G. Wimer............................................................... 1,689,500 124,000
Robert D. Woltil............................................................ 89,925 66,000
Robert F. Murphy............................................................ 803,875 59,000
All executive officers as a group (11 persons).............................. 10,203,250 746,000
All non-employee directors as a group....................................... 0 0
All employees (other than executive officers) as a group.................... 490,000 36,000
</TABLE>
- ------------------------
(1) Based on the average of the high and low prices of the Common Stock, as
reported on the New York Stock Exchange, on the date of grant.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal income tax consequences
in connection with the Stock Incentive Plan. State tax treatment is subject to
individual state laws and is not reviewed in this discussion.
NON-QUALIFIED STOCK OPTIONS. The grant of a non-qualified stock option will
not result in the recognition of taxable income by the participant or in a
deduction to the Company. Upon exercise, a participant will recognize ordinary
income in an amount equal to the excess of the fair market value of Common Stock
on the date of exercise over the exercise price. The Company is required to
withhold tax on the amount of income so recognized, and a tax deduction is
allowable equal to the amount of such income (subject to the satisfaction of
certain conditions in the case of stock options exercised by Section 162(m)
Officers). Gain or loss upon a subsequent sale of any Common Stock received upon
the exercise of a non-qualified stock option generally would be taxed as capital
gain or loss (long-term or short-term, depending upon the holding period of the
stock sold). Certain additional rules apply if the exercise price for an option
is paid in shares previously owned by the participant.
INCENTIVE STOCK OPTIONS. An incentive stock option results in no taxable
income to the participant and no deduction to the Company at the time it is
granted or exercised. If the participant retains the shares of Common Stock
received as a result of an exercise of an incentive stock option for at least
two years from the date of the grant and one year from the date of exercise,
then the gain is treated as long-term capital gain. If the shares are disposed
of during this period, the option will be treated as a non-qualified stock
option. The Company receives a tax deduction only if the shares are disposed of
during such period. The deduction is equal to the amount of taxable income to
the participant.
STOCK APPRECIATION RIGHTS. No income is recognized by the recipient of a
stock appreciation right until cash representing the amount of the appreciation
or the equivalent amount in shares of Common
22
<PAGE>
Stock are transferred to the participant pursuant to exercise of the right. The
amount of income will equal the cash amount (or fair market value of shares) so
delivered and will be ordinary income. The Company will be entitled to a
deduction at the same time and in the same amount (subject to the satisfaction
of certain conditions in the case of stock appreciation rights exercised by
Section 162(m) Officers).
STOCK AWARDS. No income will be recognized by a participant who is granted
a stock award if the Award is subject to a substantial risk of forfeiture or
restrictions on transferability, unless the participant makes a special election
with the Internal Revenue Service pursuant to Section 83(b) of the Code to be
taxed at the time of grant. Upon lapse of the risk of forfeiture or restrictions
on transferability, the participant will be taxed at ordinary income tax rates
on the then fair market value of the Common Stock and a corresponding deduction
will be allowable to the Company (subject to the satisfaction of certain
conditions in the case of stock awards granted to Section 162(m) Officers). The
participant's basis in the Common Stock will be equal to the ordinary income so
recognized. Upon subsequent disposition of such Common Stock, the participant
will realize capital gain or loss (long-term or short-term, depending upon the
holding period of the stock sold).
Pursuant to Section 83(b) of the Code, a participant may elect within 30
days of receipt of the stock award to be taxed at ordinary income tax rates on
the fair market value of the Common Stock comprising the stock award at the time
of award. If the election is made, the Company will be entitled to a
corresponding deduction. No income will be recognized, and no deduction allowed
the Company, upon lapse of the risk of forfeiture or restrictions on
transferability.
PERFORMANCE SHARE AWARDS. A participant who receives a performance share
award will be taxed at ordinary income tax rates on the then fair market value
of the shares of Common Stock distributed at the time of payment in settlement
of such performance share award and a corresponding deduction will be allowable
to the Company at that time (subject to the satisfaction of certain conditions
in the case of performance share awards granted to Section 162(m) Officers). The
participant's basis in the shares of Common Stock will be equal to the amount
taxed as ordinary income so recognized. Gain or loss upon a subsequent
disposition of such shares will be taxed as capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold).
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE STOCK INCENTIVE PLAN.
APPROVAL OF THE SUN HEALTHCARE GROUP, INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
(PROPOSAL NO. 3)
The Board of Directors of the Company seeks stockholder approval of the Sun
Healthcare Group, Inc. 1997 Non-Employee Directors' Stock Plan (the "Directors
Stock Plan"), which provides for awards of restricted shares and stock options
to the Company's non-employee directors. The Board of Directors adopted the
Directors Stock Plan on April 11, 1997, subject to approval by the stockholders
of the Company at the Annual Meeting. Approval of the adoption of the Directors
Stock Plan requires the affirmative vote of a majority of the outstanding shares
of the Common Stock of the Company represented and entitled to vote at the
meeting. The Directors Stock Plan will be effective as of the date of its
approval by the stockholders of the Company.
The Directors Stock Plan replaces the 1995 Non-Employee Directors' Stock
Option Plan (the "Predecessor Directors Plan"). Assuming the Directors Stock
Plan is approved at the Annual Meeting, no further awards will be made under the
Predecessor Directors Plan.
A summary of certain material provisions of the Directors Stock Plan is set
forth below. The summary is qualified in its entirety be reference to the full
text of the Directors Stock Plan, which is attached to this Proxy Statement as
Exhibit B.
23
<PAGE>
DESCRIPTION OF DIRECTORS STOCK PLAN
PURPOSES AND ELIGIBILITY. The purposes of the Directors Stock Plan are to
retain the services of qualified persons who are not employees of the Company to
serve as members of the Board of Directors and to secure for the Company the
benefit of the incentives inherent in increased stock ownership by such
directors. Only directors who are not employees of the Company may participate
in the Directors Stock Plan. There are currently six such directors who are
eligible to participate in the Directors Stock Plan: Ms. Silverman and Messrs.
Bingaman, Mand, Tolbert, Woolsey and Karkomi.
SHARES AVAILABLE UNDER THE DIRECTORS STOCK PLAN. A total of 400,000 shares
of Common Stock will be reserved for issuance under the Directors Stock Plan,
which amount will be proportionately adjusted in the event of certain changes in
the Company's capitalization, a merger, or a similar transaction. Shares issued
pursuant to the Directors Stock Plan may be either authorized but unissued
shares, treasury shares or a combination thereof.
ADMINISTRATION. The Directors Stock Plan will be administered by a
committee consisting exclusively of members of the Board of Directors who are
non-employee directors. The committee will have authority to adopt such rules as
it deems necessary to carry out the purposes of the Directors Stock Plan and to
construe and interpret the plan.
RESTRICTED RETAINER SHARES. The Directors Stock Plan provides that,
commencing with the Annual Meeting, each non-employee director of the Company
who will remain in office following the date of an annual meeting may elect to
receive up to one-half of his or her annual retainer and Committee Chairperson
Fee in the form of restricted shares (the "Restricted Retainer Shares"). The
number of Restricted Retainer Shares awarded to each non-employee director will
be determined by dividing 110% of the portion of the annual retainer to be
received in shares of Common Stock by the fair market value of a share of Common
Stock on the date of such annual meeting. Restricted Retainer Shares will vest
over a one-year period on a quarterly basis commencing with the first day of the
calendar quarter coincident with or first succeeding the date of grant, subject
to early vesting in the event a non-employee director's service on the Board of
Directors terminates by reason of death, disability, retirement or involuntary
termination of service other than for cause.
RESTRICTED GRANT SHARES. The Directors Stock Plan also provides that at the
annual meeting coincident with or first succeeding a non-employee director's
initial election to the Board of Directors, each non-employee director will
receive a grant of 5,000 restricted shares (the "Restricted Grant Share"). At
each annual meeting thereafter, provided that the non-employee director will
remain in office following the date of such annual meeting, he or she will
receive an additional award of 2,000 Restricted Grant Shares. Restricted Grant
Shares will vest in three equal installments as of each of the first three
annual meetings following the date of grant, subject to early vesting in the
event a non-employee director's service on the Board of Directors terminates by
reason of death, disability, retirement or involuntary termination of service
other than for cause.
STOCK OPTION GRANTS. The Directors Stock Plan provides for automatic grants
of non-qualified stock options ("Director Options") to non-employee directors.
Each non-employee director will receive at the annual meeting coincident with or
first succeeding his or her initial election to the Board of Directors, an
option to purchase 10,000 shares of Common Stock. At each annual meeting
thereafter, provided that the non-employee director will remain in office
following the date of such annual meeting, he or she will receive an additional
option to purchase 4,000 shares of Common Stock. All Director Options will have
a per share exercise price equal to the fair market value of the shares on the
date of award. Such exercise price may be paid in cash or previously owned stock
or a combination thereof.
All Director Options (i.e., both initial and annual grants) will vest in
equal installments on each of the first three annual meetings following the date
of grant, subject to early vesting in the event a non-employee
24
<PAGE>
director's service on the Board of Directors terminates by reason of death,
disability, retirement or involuntary termination of service other than for
cause.
All Director Options expire at the annual meeting that occurs in the tenth
year following the date of grant. If a non-employee director's service on the
Board of Directors terminates due to death, retirement or involuntary
termination other than for cause, all Director Options must be exercised within
three years following such termination (subject to earlier expiration as
described above). If a non-employee director's service on the Board of Directors
terminates for any other reason, such non-employee director must exercise any
Director Options that have vested as of the date of such termination within the
six month period following such termination (subject to earlier termination as
described above) and all Director Options that have not vested as of the date of
such termination will immediately expire.
AMENDMENTS. The Board of Directors of the Company may amend or terminate
the Directors Stock Plan at any time, except that stockholder approval is
required to increase the maximum number of shares issuable under the Directors
Stock Plan. The consent of a non-employee director is required to the extent
that any amendment or termination would adversely affect such non-employee
director's rights with respect to any previously granted award. Unless earlier
terminated, the Directors Stock Plan will terminate as of the tenth anniversary
of the effective date, and no further awards will be made under the Directors
Stock Plan after that date.
STOCK PRICE. On August 11, 1997, the closing price of the Common Stock on
the New York Stock Exchange was $20 3/16.
25
<PAGE>
NEW PLAN BENEFITS
As the number of Restricted Retainer Shares which a Non-Employee Director
will receive will be determined in the future, based upon his or her election
with respect thereto, the amount of such awards are not readily determinable.
The following table sets forth the number of Restricted Grant Shares and
Director Options that will be awarded to the present non-employee directors
under the Directors Stock Plan in 1997, if the stockholders approve the
Directors Stock Plan:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF RESTRICTED DIRECTOR OPTIONS
NAME AND POSITION DOLLAR VALUE ($) GRANT SHARES (#) (#)
- ------------------------------------------------------ --------------------- --------------------- -------------------
<S> <C> <C> <C>
Current directors who are not executive officers (6
persons)............................................ (1) 12,000 24,000
</TABLE>
- ------------------------
(1) The dollar value of these awards cannot be determined because the value
depends on the price of the Common Stock and, in the case of the Director
Options, other factors, on September 18, 1997, the date of the Annual
Meeting.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal income tax consequences
in connection with the Directors Stock Plan. State tax treatment is subject to
individual state laws and is not reviewed in this discussion.
RESTRICTED RETAINER SHARES AND RESTRICTED GRANT SHARES. No income will be
recognized by a non-employee director who is granted an award of restricted
stock if the award is subject to a substantial risk of forfeiture or
restrictions on transferability, unless the participant makes a special election
with the Internal Revenue Service pursuant to Section 83(b) of the Code to be
taxed at the time of grant. Upon lapse of the risk of forfeiture or restrictions
on transferability, the grantee will be taxed at ordinary income tax rates on
the then fair market value of the Company's common stock and a corresponding
deduction will be allowable. The grantee's basis in the Common Stock will be
equal to the ordinary income so recognized. Upon subsequent disposition of such
common stock, the grantee will realize capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold).
Pursuant to Section 83(b) of the Code, a non-employee director may elect
within 30 days of receipt of the restricted stock award to be taxed at ordinary
income tax rates on the fair market value of the Common Stock comprising the
restricted stock award at the time of award. If the election is made, the
Company will be entitled to a corresponding deduction. No income will be
recognized, and no deduction allowed the Company, upon lapse of the risk of
forfeiture or restrictions on transferability.
DIRECTOR OPTIONS. The grant of a Director Option will not result in the
recognition of taxable income by the grantee or in a deduction to the Company.
Upon exercise, a grantee will recognize ordinary income in an amount equal to
the excess of the fair market value of the Common Stock on the date of exercise
over the exercise price. A tax deduction is allowable to the Company in an
amount equal to the amount of such income. Gain or loss upon a subsequent sale
of any common stock received upon the exercise of a Director Option generally
would be taxed as capital gain or loss (long-term or short-term, depending upon
the holding period of the stock sold).
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE
APPROVAL OF THE DIRECTORS STOCK PLAN.
26
<PAGE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL NO. 4)
The Board of Directors recommends that the stockholders ratify the selection
of Arthur Andersen LLP as independent public accountants to audit the accounts
of the Company and its subsidiaries for 1997.
A representative of Arthur Andersen LLP is expected to attend the Annual
Meeting. The representative will have the opportunity to make a statement if he
or she desires to do so, and is expected to be available to answer appropriate
questions.
The ratification of the selection of Arthur Andersen LLP is being submitted
to the stockholders because the Board of Directors believes that such action
follows sound corporate practice and is in the best interests of the
stockholders. If the stockholders do not ratify the selection of independent
public accountants, the Board will consider it a directive to consider selecting
other public accountants for the subsequent year. Even if the stockholders
ratify the selection, the Board of Directors, in its discretion, may still
direct the appointment of new independent public accountants at any time during
the year if the Board believes that such a change would be in the best interests
of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
RATIFICATION OF THE SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS FOR 1997.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report to Stockholders of the Company for the fiscal
year ended December 31, 1996 (the "Annual Report"), which includes financial
statements for the year ended December 31, 1996, has been distributed to
stockholders prior to the date of delivery of this Proxy Statement.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (AS
AMENDED BY FORM 10-K/A FILED APRIL 30, 1997), MAY BE OBTAINED WITHOUT CHARGE BY
WRITING TO INVESTOR RELATIONS, SUN HEALTHCARE GROUP, INC., 101 SUN LANE, N.E.,
ALBUQUERQUE, NEW MEXICO 87109, OR BY TELEPHONE REQUEST TO (505) 856-2341.
APPRAISAL AND DISSENTERS' RIGHTS
Under Delaware law, holders of Common Stock are not entitled to appraisal or
dissenters' rights with respect to the matters to be considered at the Annual
Meeting.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of no
matters which will be presented for consideration at the Annual Meeting other
than as described in this Proxy Statement. If any other matter properly comes
before the Annual Meeting or any adjournment or postponement thereof and is
voted upon, it is the intention of the persons named in the accompanying proxies
to vote such proxies in accordance with the judgment of the Board of Directors.
STOCKHOLDER PROPOSALS
Proposals of stockholders submitted pursuant to Rule 14a-8 of the Commission
for inclusion in the proxy statement for the 1998 annual meeting of stockholders
must be received by the Company at its principal executive offices at 101 Sun
Lane, N.E., Albuquerque, New Mexico 87109 on or before December 31, 1997.
Under the Company's bylaws, stockholders desiring to nominate persons for
election as directors or bring other business before the stockholders at an
annual meeting must notify the Secretary of the Company in writing not less than
60 days before the annual meeting if such meeting is to be held on a day
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which is within 30 days preceding the anniversary of the previous year's annual
meeting, or not less than 90 days before the annual meeting if such meeting is
to be held on or after the anniversary of the previous year's annual meeting.
Stockholders' notices must contain the specific information set forth in the
bylaws. Stockholders will be furnished a copy of the Company's bylaws without
charge upon written request to the Secretary of the Company.
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EXHIBIT A
SUN HEALTHCARE GROUP, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSE. The purposes of the Sun Healthcare Group, Inc. 1997 Stock
Incentive Plan (the "PLAN") are to attract, retain and motivate officers and
other key employees and consultants of Sun Healthcare Group, Inc. (the
"COMPANY"), to compensate them for their contributions to the growth and profits
of the Company and to encourage ownership by them of stock of the Company. The
Plan is being adopted as a replacement to the 1996 Combined Incentive and
Nonqualified Stock Option Plan, under which no additional options shall be
granted as of the Effective Date (as defined herein).
2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as follows:
"ADMINISTRATOR" means the individual or individuals to whom the
Committee delegates authority under the Plan in accordance with Section
3(d).
"AFFILIATE" and "Associate" have the respective meanings ascribed to
such terms in Rule 12b-2 promulgated under the Exchange Act.
"AWARD" means an award made pursuant to the terms of the Plan to an
Eligible Individual in the form of Stock Options, Stock Appreciation Rights,
Stock Awards, Performance Share Awards, Section 162(m) Awards or other
awards determined by the Committee.
"AWARD AGREEMENT" means a written agreement or certificate granting an
Award. An Award Agreement shall be executed by an officer on behalf of the
Company and shall contain such terms and conditions as the Committee deems
appropriate and that are not inconsistent with the terms of the Plan. The
Committee may in its discretion require that an Award Agreement be executed
by the Participant to whom the relevant Award is made.
"BENEFICIAL OWNER" has the meaning ascribed to such term in Rule 13d-3
promulgated under the Exchange Act.
"BOARD" means the Board of Directors of the Company.
A "CHANGE IN CONTROL" of the Company shall be deemed to have occurred
when:
(a) any "person" or "group" (within the meaning of Sections 13(d)]and
14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "1934
ACT")), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company (an "ACQUIRING PERSON"), is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act),
directly or indirectly, of more than 33 1/3% of the then outstanding voting
stock of the Company;
(b) the shareholders of the Company and a majority of the non-employee
directors of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least 66 2/3%
of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
(c) the shareholders of the Company approve a plan of reorganization
(other than a reorganization or liquidation under the United States
Bankruptcy Code or complete liquidation of the Company) or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets;
(d) during any period of two consecutive years (beginning on or after
the Effective Date), individuals who at the beginning of such period
constitute the Board and any new director (other than a director who is a
representative or nominee of an Acquiring Person) whose election by the
Board or nomination for election by the Company's shareholders was approved
by a vote of at least a majority
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of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, no longer constitute a majority of the Board;
PROVIDED, HOWEVER, that a Change in Control shall not be deemed to have occurred
in the event of
(i) a sale or conveyance in which the Company continues as a holding
company of an entity or entities that conduct the business or businesses
formerly conducted by the Company; or
(ii) any transaction undertaken for the purpose of reincorporating the
Company under the laws of another jurisdiction, if such transaction does not
materially affect the beneficial ownership of the Company's capital stock.
"CODE" means the Internal Revenue Code of 1986, as amended, and the
applicable rulings and regulations thereunder.
"COMBINED VOTING POWER" means the combined voting power of the Company's
or other relevant entity's then outstanding voting securities.
"COMMITTEE" means the Compensation Committee of the Board, any successor
committee thereto or any other committee appointed by the Board to
administer the Plan.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company.
"ELIGIBLE INDIVIDUALS" means the individuals described in Section 6 who
are eligible for Awards under the Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the applicable rulings and regulations thereunder.
"FAIR MARKET VALUE" means, in the event the Common Stock is traded on a
recognized securities exchange or quoted by the National Association of
Securities Dealers Automated Quotations on National Market Issues, an amount
equal to the average of the high and low prices of the Common Stock on such
exchange or such quotation on the date set for valuation or, if no sales of
Common Stock were made on said exchange or so quoted on that date, the
average of the high and low prices of the Common Stock on the next preceding
day on which sales were made on such exchange or quotations; or, if the
Common Stock is not so traded or quoted, that value determined, in its sole
discretion, by the Committee.
"INCENTIVE STOCK OPTION" means a Stock Option which is an "incentive
stock option" within the meaning of Section 422 of the Code and designated
by the Committee as an Incentive Stock Option in an Award Agreement.
"NONQUALIFIED STOCK OPTION" means a Stock Option which is not an
Incentive Stock Option.
"PARENT" means any corporation which is a "parent corporation" within
the meaning of Section 424(e) of the Code with respect to the relevant
entity.
"PARTICIPANT" means an Eligible Individual to whom an Award has been
granted under the Plan.
"PERFORMANCE PERIOD" means a fiscal year of the Company or such other
period that may be specified by the Committee in connection with the grant
of a Section 162(m) Award.
"PERFORMANCE SHARE AWARD" means a conditional Award of shares of Common
Stock granted to an Eligible Individual pursuant to Section 11 hereof.
"PERSON" means any person, entity or "group" within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act.
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"SECTION 162(M) PARTICIPANT" means, for a given fiscal year of the
Company, any Participant designated by the Committee by not later than 90
days following the start of such year as a Participant (or such other time
as may be required or permitted by Section 162(m) of the Code) whose
compensation for such fiscal year may be subject to the limit on deductible
compensation imposed by Section 162(m) of the Code.
"STOCK APPRECIATION RIGHT" means an Award to receive all or some portion
of the appreciation on shares of Common Stock granted to an Eligible
Individual pursuant to Section 9 hereof.
"STOCK AWARD" means an Award of shares of Common Stock granted to an
Eligible Individual pursuant to Section 10 hereof.
"STOCK OPTION" means an Award to purchase shares of Common Stock granted
to an Eligible Individual pursuant to Section 8 hereof.
"SUBSIDIARY" means (i) any corporation which is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code with respect
to the Company or (ii) any other corporation or other entity in which the
Company, directly or indirectly, has an equity or similar interest and which
the Committee designates as a Subsidiary for the purposes of the Plan.
"SUBSTITUTE AWARD" means an Award granted upon assumption of, or in
substitution for, outstanding awards previously granted by a company or
other entity in connection with a corporate transaction, such as a merger,
combination, consolidation or acquisition of property or stock.
3. ADMINISTRATION OF THE PLAN.
(a) POWER AND AUTHORITY OF THE COMMITTEE. The Plan shall be
administered by the Committee, which shall have full power and authority,
subject to the express provisions hereof, (i) to select Participants from
the Eligible Individuals, (ii) to make Awards in accordance with the Plan,
(iii) to determine the number of Shares subject to each Award or the cash
amount payable in connection with an Award, (iv) to determine the terms and
conditions of each Award, including, without limitation, those related to
vesting, forfeiture, payment and exercisability, and the effect, if any, of
a Participant's termination of employment with the Company or, subject to
Section 16 hereof, of a Change in Control on the outstanding Awards granted
to such Participant, and including the authority to amend the terms and
conditions of an Award after the granting thereof to a Participant in a
manner that is not, without the consent of the Participant, prejudicial to
the rights of such Participant in such Award, (v) to specify and approve the
provisions of the Award Agreements delivered to Participants in connection
with their Awards, (vi) to construe and interpret any Award Agreement
delivered under the Plan, (vii) to prescribe, amend and rescind rules and
procedures relating to the Plan, (viii) to vary the terms of Awards to take
account of tax, securities law and other regulatory requirements of foreign
jurisdictions, (ix) subject to the provisions of the Plan and subject to
such additional limitations and restrictions as the Committee may impose, to
delegate to one or more officers of the Company some or all of its authority
under the Plan, and (x) to make all other determinations and to formulate
such procedures as may be necessary or advisable for the administration of
the Plan.
(b) PLAN CONSTRUCTION AND INTERPRETATION. The Committee shall have
full power and authority, subject to the express provisions hereof, to
construe and interpret the Plan.
(c) DETERMINATIONS OF COMMITTEE FINAL AND BINDING. All determinations
by the Committee in carrying out and administering the Plan and in
construing and interpreting the Plan shall be final, binding and conclusive
for all purposes and upon all persons interested herein.
(d) DELEGATION OF AUTHORITY. The Committee may, but need not, from
time to time delegate some or all of its authority under the Plan to an
Administrator consisting of one or more members of the Committee or of one
or more officers of the Company; PROVIDED, HOWEVER, that the Committee may
not delegate its authority (i) to make Awards to Eligible Individuals (A)
who are subject on the date
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of the award to the reporting rules under Section 16(a) of the Exchange Act,
(B) who are Section 162(m) Participants or (C) who are officers of the
Company who are delegated authority by the Committee hereunder, or (ii)
under Sections 3(b) and 17 of the Plan. Any delegation hereunder shall be
subject to the restrictions and limits that the Committee specifies at the
time of such delegation or thereafter. Nothing in the Plan shall be
construed as obligating the Committee to delegate authority to an
Administrator, and the Committee may at any time rescind the authority
delegated to an Administrator appointed hereunder or appoint a new
Administrator. At all times, the Administrator appointed under this Section
3(d) shall serve in such capacity at the pleasure of the Committee. Any
action undertaken by the Administrator in accordance with the Committee's
delegation of authority shall have the same force and effect as if
undertaken directly by the Committee, and any reference in the Plan to the
Committee shall, to the extent consistent with the terms and limitations of
such delegation, be deemed to include a reference to the Administrator.
(e) LIABILITY OF COMMITTEE. No member of the Committee shall be liable
for anything whatsoever in connection with the administration of the Plan
except such person's own willful misconduct. Under no circumstances shall
any member of the Committee be liable for any act or omission of any other
member of the Committee. In the performance of its functions with respect to
the Plan, the Committee shall be entitled to rely upon information and
advice furnished by the Company's officers, the Company's accountants, the
Company's counsel and any other party the Committee deems necessary, and no
member of the Committee shall be liable for any action taken or not taken in
reliance upon any such advice.
4. DURATION OF PLAN. The Plan shall remain in effect until terminated by
the Board of Directors and thereafter until all Awards granted under the Plan
are satisfied by the issuance of shares of Common Stock or the payment of cash
or are terminated under the terms of the Plan or under the Award Agreement
entered into in connection with the grant thereof. Notwithstanding the
foregoing, no Awards may be granted under the Plan after the tenth anniversary
of the Effective Date (as defined in Section 18(k)).
5. SHARES OF STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided
in Section 15(b) hereof, the number of shares of Common Stock that may be issued
under the Plan pursuant to Awards shall not exceed, in the aggregate, 4,500,000
shares (the "SECTION 5 LIMIT"), of which the number of shares of Common Stock
that may be issued under the Plan pursuant to Incentive Stock Options may not
exceed, in the aggregate, 500,000 shares. Such shares may be either authorized
but unissued shares, treasury shares or any combination thereof. For purposes of
determining the number of shares that remain available for issuance under the
Plan, the following rules shall apply:
(a) the number of Shares subject to outstanding Awards shall be charged
against the Section 5 Limit; and
(b) the Section 5 Limit shall be increased by:
(i) the number of shares subject to an Award (or portion thereof)
which lapses, expires or is otherwise terminated without the issuance of
such shares or is settled by the delivery of consideration other than
shares,
(ii) the number of shares tendered to pay the exercise price of a
Stock Option or other Award, and
(iii) the number of shares withheld from any Award to satisfy a
Participant's tax withholding obligations or, if applicable, to pay the
exercise price of a Stock Option or other Award.
In addition, any shares underlying Substitute Awards shall not be counted
against the Section 5 Limit set forth in the first sentence of this Section 5.
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6. ELIGIBLE INDIVIDUALS.
(a) ELIGIBILITY CRITERIA. Awards may be granted by the Committee to
individuals ("ELIGIBLE INDIVIDUALS") who are officers or other key employees
or consultants of the Company or a Subsidiary with the potential to
contribute to the future success of the Company or its Subsidiaries. Members
of the Committee will not be eligible to receive Awards under the Plan. An
individual's status as an Administrator will not affect his or her
eligibility to participate in the Plan.
(b) MAXIMUM NUMBER OF SHARES PER ELIGIBLE INDIVIDUAL. In accordance
with the requirements under Section 162(m) of the Code, no Eligible
Individual shall receive grants of Awards with respect to an aggregate of
more than 400,000 shares of Common Stock in respect of any fiscal year of
the Company. For purposes of the preceding sentence, any Award that is made
as bonus compensation, or is made in lieu of compensation that otherwise
would be payable to an Eligible Individual, shall be considered made in
respect of the fiscal year to which such bonus or other compensation relates
or otherwise was earned.
7. AWARDS GENERALLY. Awards under the Plan may consist of Stock Options,
Stock Appreciation Rights, Stock Awards, Performance Share Awards, Section
162(m) Awards or other awards determined by the Committee. The terms and
provisions of an Award shall be set forth in a written Award Agreement approved
by the Committee and delivered or made available to the Participant as soon as
practicable following the date of the award. The vesting, exercisability,
payment and other restrictions applicable to an Award (which may include,
without limitation, restrictions on transferability or provision for mandatory
resale to the Company) shall be determined by the Committee and set forth in the
applicable Award Agreement. Notwithstanding the foregoing, the Committee may
accelerate (i) the vesting or payment of any Award, (ii) the lapse of
restrictions on any Award or (iii) the date on which any Option or Stock
Appreciation Right first becomes exercisable. The date of a Participant's
termination of employment for any reason shall be determined in the sole
discretion of the Committee. The Committee shall also have full authority to
determine and specify in the applicable Award Agreement the effect, if any, that
a Participant's termination of employment for any reason will have on the
vesting, exercisability, payment or lapse of restrictions applicable to an
outstanding Award.
8. STOCK OPTIONS.
(a) TERMS OF STOCK OPTIONS GENERALLY. Subject to the terms of the Plan
and the applicable Award Agreement, each Stock Option shall entitle the
Participant to whom such Stock Option was granted to purchase the number of
shares of Common Stock specified in the applicable Award Agreement and shall
be subject to the terms and conditions established by the Committee in
connection with the Award and specified in the applicable Award Agreement.
Upon satisfaction of the conditions to exercisability specified in the
applicable Award Agreement, a Participant shall be entitled to exercise the
Stock Option in whole or in part and to receive, upon satisfaction or
payment of the exercise price or an irrevocable notice of exercise in the
manner contemplated by Section 8(d) below, the number of shares of Common
Stock in respect of which the Stock Option shall have been exercised. Stock
Options may be either Nonqualified Stock Options or Incentive Stock Options.
(b) EXERCISE PRICE. The exercise price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant and set forth in the Award Agreement, PROVIDED, that the
exercise price per share shall be no less than 100% of the Fair Market Value
per share on the date of grant. Notwithstanding the foregoing, the exercise
price per share of a Stock Option that is a Substitute Award may be less
than the Fair Market Value per share on the date of award, PROVIDED that the
excess of:
(i) the aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the shares subject to the Substitute Award, over
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(ii) the aggregate exercise price thereof,
does not exceed the excess of:
(iii) the aggregate fair market value (as of the time immediately
preceding the transaction giving rise to the Substitute Award, such fair
market value to be determined by the Committee) of the shares of the
predecessor entity that were subject to the award assumed or substituted
for by the Company, over
(iv) the aggregate exercise price of such shares.
(c) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee and set forth in the Award Agreement; PROVIDED, HOWEVER, that a
Stock Option shall not be exercisable after the expiration of ten (10) years
after the date the Stock Option is granted.
(d) METHOD OF EXERCISE. Subject to the provisions of the applicable
Award Agreement, the exercise price of a Stock Option may be paid in cash or
previously owned shares or a combination thereof and, if the applicable
Award Agreement so provides, in whole or in part through the withholding of
shares subject to the Stock Option with a value equal to the exercise price.
In accordance with the rules and procedures established by the Committee for
this purpose, the Stock Option may also be exercised through a "cashless
exercise" procedure approved by the Committee involving a broker or dealer
approved by the Committee, that affords Participants the opportunity to sell
immediately some or all of the shares underlying the exercised portion of
the Stock Option in order to generate sufficient cash to pay the Stock
Option exercise price and/or to satisfy withholding tax obligations related
to the Stock Option.
9. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights shall be subject
to the terms and conditions established by the Committee in connection with the
Award thereof and specified in the applicable Award Agreement. Upon satisfaction
of the conditions to the payment specified in the applicable Award Agreement,
each Stock Appreciation Right shall entitle a Participant to an amount, if any,
equal to the Fair Market Value of a share of Common Stock on the date of
exercise over the Stock Appreciation Right exercise price specified in the
applicable Award Agreement. At the discretion of the Committee, payments to a
Participant upon exercise of a Stock Appreciation Right may be made in Shares,
cash or a combination thereof. A Stock Appreciation Right may be granted alone
or in addition to other Awards, or in tandem with a Stock Option. If granted in
tandem with a Stock Option, a Stock Appreciation Right shall cover the same
number of shares of Common Stock as covered by the Stock Option (or such lesser
number of shares as the Committee may determine) and shall be exercisable only
at such time or times and to the extent the related Stock Option shall be
exercisable, and shall have the same term and exercise price as the related
Stock Option. Upon exercise of a Stock Appreciation Right granted in tandem with
a Stock Option, the related Stock Option shall be cancelled automatically to the
extent of the number of shares covered by such exercise; conversely, if the
related Stock option is exercised as to some or all of the shares covered by the
tandem grant, the tandem Stock Appreciation Right shall be cancelled
automatically to the extent of the number of shares covered by the Stock Option
exercise.
10. STOCK AWARDS. Stock Awards shall consist of one or more shares of
Common Stock granted or offered for sale to an Eligible Individual, and shall be
subject to the terms and conditions established by the Committee in connection
with the Award and specified in the applicable Award Agreement. The shares of
Common Stock subject to a Stock Award may, among other things, be subject to
vesting requirements or restrictions on transferability.
11. PERFORMANCE SHARE AWARDS. Performance Share Awards shall be evidenced
by an Award Agreement in such form and containing such terms and conditions as
the Committee deems appropriate and which are not inconsistent with the terms of
the Plan. Each Award Agreement shall set forth the number of shares of Common
Stock to be earned by a Participant upon satisfaction of certain specified
performance criteria and subject to such other terms and conditions as the
Committee deems appropriate. Payment in
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settlement of a Performance Share Award shall be made as soon as practicable
following the conclusion of the applicable performance period, or at such other
time as the Committee shall determine, in shares of Common Stock, in an
equivalent amount of cash or in a combination of Common Stock and cash, as the
Committee shall determine.
12. OTHER AWARDS. The Committee shall have the authority to specify the
terms and provisions of other forms of equity-based or equity-related Awards not
described above which the Committee determines to be consistent with the purpose
of the Plan and the interests of the Company, which Awards may provide for cash
payments based in whole or in part on the value or future value of Common Stock,
for the acquisition or future acquisition of Common Stock, or any combination
thereof. Other Awards shall also include cash payments (including the cash
payment of dividend equivalents) under the Plan which may be based on one or
more criteria determined by the Committee which are unrelated to the value of
Common Stock and which may be granted in tandem with, or independent of, other
Awards under the Plan.
13. SECTION 162(M) AWARDS.
(a) TERMS OF SECTION 162(M) AWARDS GENERALLY. In addition to any other
Awards under the Plan, the Company may make Awards that are intended to
qualify as "qualified performance-based compensation" for purposes of
Section 162(m) of the Code ("SECTION 162(M) AWARDS"). Section 162(m) Awards
may consist of Stock Options, Stock Appreciation Rights, Stock Awards,
Performance Share Awards or Other Awards the vesting, exercisability and/or
payment of which is conditioned upon the attainment for the applicable
Performance Period of specified performance targets related to designated
performance goals for such period selected by the Committee from among the
performance goals specified in Section 13(b) below. Section 162(m) Awards
will be made in accordance with the procedures specified in applicable
Treasury regulations for compensation intended to be "qualified
performance-based compensation."
(b) PERFORMANCE GOALS. For purposes of this Section 13, performance
goals shall be limited to one or more of the following: (i) net revenue,
(ii) net earnings, (iii) operating earnings or income, (iv) absolute and/or
relative return on equity or assets, (v) earnings per share, (vi) cash flow,
(vii) pretax profits, (viii) earnings growth, (ix) revenue growth, (x) book
value per share, (xi) stock price and (xii) performance relative to peer
companies, each of which may be established on a corporate-wide basis or
established with respect to one or more operating units, divisions, acquired
businesses, minority investments, partnerships or joint ventures.
(c) OTHER PERFORMANCE-BASED COMPENSATION. The Committee's decision to
make, or not to make, Section 162(m) Awards within the meaning of this
Section 13 shall not in any way prejudice the qualification of any other
Awards as performance-based compensation under Section 162(m). In
particular, Awards of Stock Options may, pursuant to applicable regulations
promulgated under Section 162(m), be qualified as performance-based
compensation for Section 162(m) purposes without regard to this Section 13.
14. NON-TRANSFERABILITY. No Award granted under the Plan or any rights or
interests therein shall be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of except by will or by the laws of descent and
distribution or pursuant to a "qualified domestic relations order" ("QDRO") as
defined in the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations thereunder; PROVIDED, HOWEVER,
that the Committee may, subject to such terms and conditions as the Committee
shall specify, permit the transfer of an Award to a Participant's family members
or to one or more trusts established in whole or in part for the benefit of one
or more of such family members; and PROVIDED FURTHER, that the restrictions in
this sentence shall not apply to the shares received in connection with an Award
after the date that the restrictions on transferability of such shares set forth
in the applicable Award Agreement have lapsed. During the lifetime of a
Participant, a Stock Option or Stock Appreciation Right shall be exercisable
only by, and payments in settlement of Awards shall be payable only to, the
Participant or, if applicable, the "alternate payee" under a QDRO or the family
member or
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trust to whom such Stock Option, Stock Appreciation Right or other Award has
been transferred in accordance with the previous sentence.
15. RECAPITALIZATION OR REORGANIZATION.
(a) AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the
Plan, the Award Agreements and the Awards granted hereunder shall not affect
or restrict in any way the right or power of the Company or the shareholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of stock or
of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks whose rights are superior to or affect
the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any provision of the
Plan or any Award Agreement, in the event of any change in the outstanding
Common Stock by reason of a stock dividend, recapitalization,
reorganization, merger, consolidation, stock split, combination or exchange
of shares or any other significant corporate event affecting the Common
Stock, the Committee, in its discretion, may make (i) such proportionate
adjustments as it considers appropriate (in the form determined by the
Committee in its sole discretion) to prevent diminution or enlargement of
the rights of Participants under the Plan with respect to the aggregate
number of shares of Common Stock for which Awards in respect thereof may be
granted under the Plan, the number of shares of Common Stock covered by each
outstanding Award, and the exercise or Award prices in respect thereof
and/or (ii) such other adjustments as it deems appropriate. The Committee's
determination as to what, if any, adjustments shall be made shall be final
and binding on the Company and all Participants.
16. CHANGE IN CONTROL. In the event of a Change in Control and except as
the Committee (as constituted immediately prior to such Change in Control) may
otherwise determine in its sole discretion, (i) all Stock Options or Stock
Appreciation Rights then outstanding shall become fully exercisable as of the
date of the Change in Control, whether or not then exercisable, (ii) all
restrictions and conditions of all Stock Awards then outstanding shall lapse as
of the date of the Change in Control, (iii) all Performance Share Awards shall
be deemed to have been fully earned as of the date of the Change in Control, and
(iv) in the case of a Change in Control involving a merger of, or consolidation
involving, the Company in which the Company is (A) not the surviving corporation
(the "SURVIVING ENTITY") or (B) becomes a wholly owned subsidiary of the
Surviving Entity or any Parent thereof, each outstanding Stock Option granted
under the Plan and not exercised (a "PREDECESSOR OPTION") will be converted into
an option (a "SUBSTITUTE OPTION") to acquire common stock of the Surviving
Entity or its Parent, which Substitute Option will have substantially the same
terms and conditions as the Predecessor Option, with appropriate adjustments as
to the number and kind of shares and exercise prices.
17. AMENDMENT OF THE PLAN. The Board or Committee may at any time and from
time to time terminate, modify, suspend or amend the Plan in whole or in part;
PROVIDED, HOWEVER, that no such termination, modification, suspension or
amendment shall be effective without shareholder approval if such approval is
required to comply with any applicable law or stock exchange rule; and PROVIDED
FURTHER, that the Board or Committee may not, without shareholder approval,
increase the maximum number of shares issuable under the Plan. No termination,
modification, suspension or amendment of the Plan shall, without the consent of
a Participant to whom any Awards shall previously have been granted, adversely
affect his or her rights under such Awards. Notwithstanding any provision herein
to the contrary, the Board or Committee shall have broad authority to amend the
Plan or any Stock Option to take into account changes in applicable tax laws,
securities laws, accounting rules and other applicable state and federal laws.
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18. MISCELLANEOUS.
(a) TAX WITHHOLDING. No later than the date as of which an amount
first becomes includable in the gross income of the Participant for
applicable income tax purposes with respect to any award under the Plan, the
Participant shall pay to the Company or make arrangements satisfactory to
the Committee regarding the payment of any federal, state or local taxes of
any kind required by law to be withheld with respect to such amount. Unless
otherwise determined by the Committee, in accordance with rules and
procedures established by the Committee, the minimum required withholding
obligations may be settled with Common Stock, including Common Stock that is
part of the award that gives rise to the withholding requirement. The
obligation of the Company under the Plan shall be conditioned upon such
payment or arrangements and the Company shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the Participant.
(b) LOANS. On such terms and conditions as shall be approved by the
Committee, the Company may directly or indirectly lend money to a
Participant to accomplish the purposes of the Plan, including to assist such
Participant to acquire or carry shares of Common Stock acquired upon the
exercise of Stock Options granted hereunder, and the Committee may also
separately lend money to any Participant to pay taxes with respect to any of
the transactions contemplated by the Plan.
(c) NO RIGHT TO GRANTS OR EMPLOYMENT. No Eligible Individual or
Participant shall have any claim or right to receive grants of Awards under
the Plan. Nothing in the Plan or in any Award or Award Agreement shall
confer upon any employee of the Company or any Subsidiary any right to
continued employment with the Company or any Subsidiary, as the case may be,
or interfere in any way with the right of the Company or a Subsidiary to
terminate the employment of any of its employees at any time, with or
without cause.
(d) UNFUNDED PLAN. The Plan is intended to constitute an unfunded plan
for incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of
the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created
under the Plan to deliver Common Stock or payments in lieu thereof with
respect to awards hereunder.
(e) OTHER EMPLOYEE BENEFIT PLANS. Payments received by a Participant
under any Award made pursuant to the provisions of the Plan shall not be
included in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the Company.
(f) SECURITIES LAW RESTRICTIONS. The Committee may require each
Eligible Individual purchasing or acquiring shares of Common Stock pursuant
to a Stock Option or other Award under the Plan to represent to and agree
with the Company in writing that such Eligible Individual is acquiring the
shares for investment and not with a view to the distribution thereof. All
certificates for shares of Common Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any exchange upon
which the Common Stock is then listed, and any applicable federal or state
securities law, and the Committee may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions. No
shares of Common Stock shall be issued hereunder unless the Company shall
have determined that such issuance is in compliance with, or pursuant to an
exemption from, all applicable federal and state securities laws.
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<PAGE>
(g) COMPLIANCE WITH RULE 16B-3.
(i) The Plan is intended to comply with Rule 16b-3 under the
Exchange Act or its successors under the Exchange Act and the Committee
shall interpret and administer the provisions of the Plan or any Award
Agreement in a manner consistent therewith. To the extent any provision
of the Plan or Award Agreement or any action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee. Moreover, in the event the Plan or
an Award Agreement does not include a provision required by Rule 16b-3 to
be stated therein, such provision (other than one relating to eligibility
requirements, or the price and amount of Awards) shall be deemed
automatically to be incorporated by reference into the Plan or such Award
Agreement insofar as Participants subject to Section 16 of the Exchange
Act are concerned.
(ii) Notwithstanding anything contained in the Plan or any Award
Agreement to the contrary, if the consummation of any transaction under
the Plan would result in the possible imposition of liability on a
Participant pursuant to Section 16(b) of the Exchange Act, the Committee
shall have the right, in its sole discretion, but shall not be obligated,
to defer such transaction to the extent necessary to avoid such
liability.
(h) AWARD AGREEMENT. In the event of any conflict or inconsistency
between the Plan and any Award Agreement, the Plan shall govern, and the
Award Agreement shall be interpreted to minimize or eliminate any such
conflict or inconsistency.
(i) EXPENSES. The costs and expenses of administering the Plan shall
be borne by the Company.
(j) APPLICABLE LAW. Except as to matters of federal law, the Plan and
all actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of New Mexico without giving effect to
conflicts of law principles.
(k) EFFECTIVE DATE. The Plan shall be effective as of the date (the
"EFFECTIVE DATE") of its approval by the shareholders of the Company. Awards
granted under the Plan prior to such shareholder approval shall be and are
made subject to defeasance by the failure of shareholders to approve the
Plan.
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<PAGE>
EXHIBIT B
SUN HEALTHCARE GROUP, INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
1. DEFINITIONS.
"ANNUAL MEETING" means an annual meeting of the Company's stockholders.
"ANNUAL RETAINER" means any annual fee payable to a Non-Employee Director
for service on the Board and any other fee payable to a Non-Employee Director
for acting as chairperson of any committee of the Board.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer the
Plan, which shall be composed exclusively of members of the Board who are
Non-Employee Directors.
"COMMON STOCK" means the Common Stock of the Company, par value $.01 per
share.
"COMPANY" means Sun Healthcare Group, Inc., a Delaware corporation, or any
successor to substantially all of its business.
"DISABILITY" means eligibility for disability benefits under the terms of
the Company's long-term disability plan in effect at the time the Non-Employee
Director becomes disabled.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, in the event the Common Stock is traded on a
recognized securities exchange or quoted by the National Association of
Securities Dealers Automated Quotations on National Market Issues, an amount
equal to the average of the high and low prices of the Common Stock on such
exchange or such quotation on the date set for valuation or, if no sales of
Common Stock were made on said exchange or so quoted on that date, the average
of the high and low prices of the Common Stock on the next preceding day on
which sales were made on such exchange or quotations; or, if the Common Stock is
not so traded or quoted, that value determined, in its sole discretion, by the
Committee.
"NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an employee
of the Company or any of its Subsidiaries.
"OPTION" means an option to purchase shares of Common Stock awarded to a
Non-Employee Director pursuant to the Plan, which option shall not be intended
to qualify, and shall not be treated, as an "incentive stock option" within the
meaning of Section 422 of the Code.
"PERSON" means any person, entity, or "group" within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Exchange Act.
"PLAN" means the Sun Healthcare Group, Inc. 1997 Non-Employee Directors'
Stock Plan.
"RESTRICTED GRANT SHARES" means shares of Common Stock granted to a
Non-Employee Director, which shares are subject to such restrictions on transfer
or other incidents of ownership for such periods of time, and are subject to
such terms and conditions as are set forth in Section 5 below.
"RESTRICTED SHARES" means Restricted Grant Shares and Restricted Retainer
Shares.
"RESTRICTED RETAINER SHARES" means shares of Common Stock which a
Non-Employee Director elects to receive in lieu of part of his or her Annual
Retainer, which shares are subject to such restrictions on transfer or other
incidents of ownership for such periods of time, and are subject to such terms
and conditions as are set forth in Section 5 below.
<PAGE>
"RETIREMENT" means a Non-Employee Director ceasing to be a member of the
Board as a result of retirement from the Board in accordance with the retirement
policy then applicable to Board members.
"SUBSIDIARY" means (i) any corporation which is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code with respect to the Company or
(ii) any other corporation or other entity in which the Company, directly or
indirectly, has an equity or similar interest and which the Committee designates
as a Subsidiary for the purposes of the Plan.
2. PURPOSES. The purposes of the Plan are to retain the services of
qualified individuals who are not employees of the Company to serve as members
of the Board and to secure for the Company the benefits of the incentives
inherent in increased Common Stock ownership by such individuals by awarding
such individuals Restricted Shares and Options to purchase shares of Common
Stock.
3. ADMINISTRATION.
(a) AUTHORITY. The Committee will be responsible for administering the
Plan. The Committee will have authority to adopt such rules as it may deem
appropriate to carry out the purposes of the Plan, and shall have authority to
interpret and construe the provisions of the Plan and any agreements and notices
under the Plan and to make determinations pursuant to any Plan provision. Each
interpretation, determination or other action made or taken by the Committee
pursuant to the Plan shall be final and binding on all Persons. No member of the
Committee shall be liable for any action or determination made in good faith,
and the members of the Committee shall be entitled to indemnification and
reimbursement in the manner provided in the Company's Restated Certificate of
Incorporation as it may be amended from time to time.
(b) DELEGATION. The Committee may designate a committee composed of one or
more members of the Board to carry out its responsibilities under such
conditions as it may set.
4. SHARES AVAILABLE. Subject to the provisions of Section 7 of the Plan,
the maximum number of shares of Common Stock which may be issued under the Plan
shall not exceed 400,000 shares (the "Section 4 Limit"). Either authorized and
unissued shares of Common Stock or treasury shares may be delivered pursuant to
the Plan. For purposes of determining the number of shares that remain available
for issuance under the Plan, the following rules shall apply:
(a) the number of shares subject to awards granted under the Plan shall
be charged against the Section 4 Limit; and
(b) the Section 4 Limit shall be increased by:
(i) the number of shares subject to an Option which lapses, expires
or is otherwise terminated without the issuance of such shares,
(ii) the number of shares tendered to pay the exercise price of an
Option, and
(iii) the number of shares withheld to satisfy any tax withholding
obligations of a Non-Employee Director with respect to any shares or
other payments hereunder.
5. RESTRICTED SHARES.
(a) RESTRICTED RETAINER SHARE AWARDS.
With respect to each Annual Meeting commencing with the Annual
Meeting coincident with or first succeeding the Effective Date, each
Non-Employee Director who will remain in office after the date of such
Annual Meeting may elect, no later than the date of such Annual Meeting,
to receive a specified percentage of his or her Annual Retainer in the
form of Restricted Retainer Shares; provided, however, that such
percentage may not exceed 50%. In the event that such an annual election
is made, the Non-Employee Director will receive a number of Restricted
Retainer Shares determined by dividing (i) by (ii), and rounding up the
result to the next whole
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<PAGE>
share, where (i) is the product of (x) the percentage of the Annual
Retainer which the Non-Employee Director elects to receive in the form of
Restricted Retainer Shares and (y) 110%, and (ii) is the Fair Market
Value as of the date of such Annual Meeting.
(b) RESTRICTED GRANT SHARE AWARDS.
(i) At the Annual Meeting coincident with or first succeeding a
Non-Employee Director's election to the Board (other than reelection for
a successive term), each Non-Employee Director (including any
Non-Employee Director reelected after a period during which he did not
serve on the Board) shall receive an award of 5,000 Restricted Grant
Shares.
(ii) At each Annual Meeting, other than Annual Meeting coincident
with or first succeeding a Non-Employee Director's initial election to
the Board (or reelection after a period during which he or she did not
serve on the Board), each Non-Employee Director who will remain in office
after the date of such Annual Meeting shall receive an additional award
of 2,000 Restricted Grant Shares (or such lesser number determined by
multiplying 2,000 by a fraction, the numerator of which is the number of
full or partial months since the immediately preceding Annual Meeting
during which such individual served on the Board in the capacity of a
Non-Employee Director, and the denominator of which is the number of full
or partial months since the immediately preceding Annual Meeting).
(c) TERMS OF RESTRICTED SHARES.
(i) VESTING SCHEDULE OF RESTRICTED RETAINER SHARES. Each award of
Restricted Retainer Shares granted as of an Annual Meeting shall vest and
become nonforfeitable on a quarterly basis commencing with the first day
of the calendar quarter coincident with or first succeeding the date of
such Annual Meeting.
(ii) VESTING SCHEDULE OF RESTRICTED GRANT SHARES. Each award of
Restricted Grant Shares granted as of an Annual Meeting shall vest and
become nonforfeitable in equal installments as of each of the first three
Annual Meetings following the date of grant
(iii) LAPSE OF RESTRICTIONS; FORFEITURE. Notwithstanding anything
herein to the contrary, if a Non-Employee Director ceases to be a member
of the Board by reason of death, Disability, Retirement or in the event
of his or her involuntary termination of service on the Board other than
for cause, all Restricted Shares issued to such Non-Employee Director
shall immediately vest in full and become nonforfeitable. If a
Non-Employee Director ceases to be a member of the Board for any other
reason, any Restricted Shares that have not vested as of the date of such
termination of service shall immediately be forfeited and all further
rights of such Non-Employee Director to or with respect to such
Restricted Shares shall terminate without any obligation on the part of
the Company.
(iv) SHARE CERTIFICATES; RIGHTS AND PRIVILEGES. At the time
Restricted Shares are granted to a Non-Employee Director, share
certificates representing the appropriate number of Restricted Shares
shall be registered in the name of the Non-Employee Director but, prior
to vesting, shall be held in the custody of the Company for the account
of such Non-Employee Director. The certificates shall bear a legend
restricting their transferability as provided in Section 5(c)(v) below.
The Non-Employee Director shall have all the rights and privileges of a
stockholder as to the Restricted Shares, including the right to receive
dividends and the right to vote such Restricted Shares, subject to the
restrictions set forth in Section 5(c)(v) below, unless and until such
Restricted Shares are forfeited pursuant to Section 5(c)(ii) above.
(v) RESTRICTIONS ON TRANSFER. Prior to vesting, the Restricted
Shares granted hereunder may not be sold, transferred, assigned, pledged
or otherwise encumbered or disposed of.
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<PAGE>
6. OPTIONS. In addition to the awards of Restricted Shares described above
in Section 5, each Non-Employee Director shall also receive awards of Options
under the Plan as follows:
(a) OPTION GRANTS.
(i) INITIAL AWARD. At the Annual Meeting coincident with or first
succeeding a Non-Employee Director's election to the Board (other than
reelection for a successive term), such Non-Employee Director (including
any Non-Employee Director reelected after a period during which he or she
did not serve on the Board) shall receive an award consisting of an
Option to purchase 10,000 shares of Common Stock. Such Option shall have
a per share exercise price equal to the Fair Market Value of the Common
Stock on the date of award and shall be subject to the vesting schedule
provided for in Section 6(b) and the other terms and conditions provided
for herein.
(ii) ANNUAL AWARDS. At each Annual Meeting, other than the Annual
Meeting coincident with or first succeeding a Non-Employee Director's
initial election to the Board (or reelection after a period during which
he or she did not serve on the Board), each Non-Employee Director who
will remain on the Board following the date of such Annual Meeting shall
receive as of such date an award consisting of an Option to purchase
4,000 shares of Common Stock (or such lesser number determined by
multiplying 4,000 by a fraction, the numerator of which is the number of
full or partial months since the immediately preceding Annual Meeting
during which such individual served on the Board in the capacity of a
Non-Employee Director, and the denominator of which is the number of full
or partial months since the immediately preceding Annual Meeting). Such
Option shall have a per share exercise price equal to the Fair Market
Value of the Common Stock on the date of award and shall be subject to
the vesting schedule provided for in Section 6(b) and the other terms and
conditions provided for herein.
(b) VESTING SCHEDULE AND TERM OF OPTIONS. Options awarded pursuant to
the Plan shall vest and become exercisable in equal installments as of each
of the first three Annual Meetings following the date of grant; provided,
however, that an Option shall become fully vested and exercisable upon a
Non-Employee ceasing to be a member of the Board as a result of death,
Disability or Retirement, or in the event of his or her involuntary
termination of service on the Board other than for cause. An Option shall
expire on the date of the Annual Meeting held in the tenth calendar year
following the date of grant.
(c) EXERCISE OF OPTIONS FOLLOWING TERMINATION OF SERVICE.
(i) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DEATH,
DISABILITY OR RETIREMENT. If a Non-Employee Director's ceases to be a
member of the Board by reason of death, Disability, Retirement or in the
event of his involuntary termination of service on the Board other than
for cause, all Options awarded to such Non-Employee Director may be
exercised by such Non-Employee Director, or by his or her estate,
personal representative or beneficiary, as the case may be, at any time
within three years after the date of termination of service, subject to
earlier termination as provided in Section 6(b) above.
(ii) EXERCISE FOLLOWING OTHER TERMINATIONS OF SERVICE. If a
Non-Employee Director ceases to be a member of the Board for any reason
other than as set forth above in subsection (i) hereof, then (A) the
Non-Employee Director shall have the right, subject to the terms and
conditions hereof, to exercise the Option, to the extent it has vested as
of the date of such termination of service, at any time within six months
after the date of such termination, subject to earlier termination as
provided in Section 6(b) above, and (B) the unvested portion of any
Options awarded to the Non-Employee Director shall be forfeited as of the
date of termination of service.
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<PAGE>
(d) TIME AND MANNER OF EXERCISE OF OPTIONS.
(i) NOTICE OF EXERCISE. Subject to the other terms and conditions
hereof, a Non-Employee Director may exercise any Options, to the extent
such Options are vested, by giving written notice of exercise to the
Company; provided, however, that in no event shall an Option be
exercisable for a fractional share. The date of exercise of an Option
shall be the later of (i) the date on which the Company receives such
written notice or (ii) the date on which the conditions provided in
Section 6(d)(ii) are satisfied.
(ii) PAYMENT. Prior to the issuance of a certificate pursuant to
Section 6(d)(v) hereof evidencing the shares of Common Stock in respect
of which all or a portion of an Option shall have been exercised, a
Non-Employee Director shall have paid to the Company the exercise price
of the Option for all such shares purchased pursuant to the exercise of
such Option. Payment may be made by personal check, bank draft or postal
or express money order (such modes of payment are collectively referred
to as "cash") payable to the order of the Company in U.S. dollars or in
shares of Common Stock already owned by the Non-Employee Director valued
at their Fair Market Value as of the last business day preceding the date
of exercise, or in any combination of cash or such shares as the
Committee in its sole discretion may approve. Payment of the exercise
price in shares of Common Stock shall be made by delivering to the
Company the share certificate(s) representing the required number of
shares, with the Non-Employee Director signing his or her name on the
back, or by attaching executed stock powers (the signature of the
Non-Employee Director must be guaranteed in either case).
(iii) STOCKHOLDER RIGHTS. A Non-Employee Director shall have no
rights as a stockholder with respect to any shares of Common Stock
issuable upon exercise of an Option until a certificate evidencing such
shares shall have been issued to the Non-Employee Director pursuant to
Section 6(d)(v), and no adjustment shall be made for dividends or
distributions or other rights in respect of any share for which the
record date is prior to the date upon which the Non-Employee Director
shall become the holder of record thereof.
(iv) LIMITATION ON EXERCISE. No Option shall be exercisable unless
the Common Stock subject thereto has been registered under the Securities
Act and qualified under applicable state "blue sky" laws in connection
with the offer and sale thereof, or the Company has determined that an
exemption from registration under the Securities Act and from
qualification under such state "blue sky" laws is available.
(v) ISSUANCE OF SHARES. Subject to the foregoing conditions, as soon
as is reasonably practicable after its receipt of a proper notice of
exercise and payment of the exercise price of the Option for the number
of shares with respect to which the Option is exercised, the Company
shall deliver to the Non-Employee Director (or following the Non-Employee
Director's death, such other Person entitled to exercise the Option), at
the principal office of the Company or at such other location as may be
acceptable to the Company and the Non-Employee Director (or such other
Person), one or more stock certificates for the appropriate number of
shares of Common Stock issued in connection with such exercise. Such
shares shall be fully paid and nonassessable and shall be issued in the
name of the Non-Employee Director (or such other Person).
(e) RESTRICTIONS ON TRANSFER. An Option may not be transferred,
pledged, assigned, or otherwise disposed of, except by will or by the laws
of descent and distribution or pursuant to a qualified domestic relations
order as defined in the Code or Title I of ERISA ("QDRO"); PROVIDED,
HOWEVER, that the Committee may, subject to such terms and conditions as the
Committee shall specify, permit the transfer of an Option to a Non-Employee
Director's family members or to one or more trusts established in whole or
in part for the benefit of one or more of such family members. The Option
shall be exercisable, during the Non-Employee Director's lifetime, only by
the Non-Employee Director or by the Person to whom the Option has been
transferred in accordance with the previous
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<PAGE>
sentence. No assignment or transfer of the Option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law
or otherwise, except by will or the laws of descent and distribution or
pursuant to a QDRO, shall vest in the assignee or transferee any interest or
right in the Option, but immediately upon any attempt to assign or transfer
the Option the same shall terminate and be of no force or effect.
7. RECAPITALIZATION OR REORGANIZATION.
(a) AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the
Plan shall not affect or restrict in any way the right or power of the
Company or the shareholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the
Company's capital structure or its business, any merger or consolidation of
the Company, any issue of stock or of options, warrants or rights to
purchase stock or of bonds, debentures, preferred or prior preference stocks
whose rights are superior to or affect the Common Stock or the rights
thereof or which are convertible into or exchangeable for Common Stock, or
the dissolution or liquidation of the Company, or any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any other provision of
the Plan, in the event of any change in the outstanding Common Stock by
reason of a stock dividend, recapitalization, reorganization, merger,
consolidation, stock split, combination or exchange of shares or any other
significant corporate event affecting the Common Stock, the Committee, in
its discretion, may make (i) such proportionate adjustments as it considers
appropriate (in the form determined by the Committee in its sole discretion)
to prevent diminution or enlargement of the rights of Non-Employee Directors
under the Plan with respect to the aggregate number of shares of Common
Stock authorized to be awarded under the Plan, the number of shares of
Common Stock covered by each outstanding Option and the exercise prices in
respect thereof, the number of shares of Common Stock covered by future
Option awards and/or (ii) such other adjustments as it deems appropriate.
The Committee's determination as to what, if any, adjustments shall be made
shall be final and binding on the Company and all Non-Employee Directors.
8. TERMINATION AND AMENDMENT OF THE PLAN.
(a) TERMINATION. The Plan shall terminate as of the tenth anniversary
of the Effective Date.
(b) GENERAL POWER OF BOARD. Notwithstanding anything herein to the
contrary, the Board or the Committee may at any time and from time to time
terminate, modify, suspend or amend the Plan in whole or in part; provided,
however, that no such termination, modification, suspension or amendment
shall be effective without shareholder approval if such approval is required
to comply with any applicable law or stock exchange rule; and provided
further, that the Board may not, without shareholder approval, increase the
maximum number of shares issuable under the Plan except as provided in
Section 7(b) above.
(c) WHEN NON-EMPLOYEE DIRECTORS' CONSENTS REQUIRED. The Committee may
not alter, amend, suspend, or terminate the Plan without the consent of any
Non-Employee Director to the extent that such action would adversely affect
his or her rights with respect to Restricted Shares or Options that have
previously been granted.
9. MISCELLANEOUS.
(a) TAX WITHHOLDING. No later than the date as of which an amount
first becomes includable in the gross income of the Non-Employee Director
for applicable income tax purposes with respect to any award under the Plan,
the Non-Employee Director shall pay to the Company or make arrangements
satisfactory to the Committee regarding the payment of any federal, state or
local taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the
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<PAGE>
Committee, in accordance with rules and procedures established by the
Committee, the minimum required withholding obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives
rise to the withholding requirement. The obligation of the Company under the
Plan shall be conditioned upon such payment or arrangements and the Company
shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the Non-Employee
Director.
(b) NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to
create any obligation on the part of the Board to nominate any of its
members for reelection by the Company's stockholders, nor confer upon any
Non-Employee Director the right to remain a member of the Board for any
period of time, or at any particular rate of compensation.
(c) SECURITIES LAW RESTRICTIONS. The Committee may require each
Non-Employee Director purchasing or acquiring shares of Common Stock
pursuant to the Plan to agree with the Company in writing that such
Non-Employee Director is acquiring the shares for investment and not with a
view to the distribution thereof. All certificates for shares of Common
Stock delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and Exchange
Commission or any exchange upon which the Common Stock is then listed, and
any applicable federal or state securities laws, and the Committee may cause
a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions. No shares of Common Stock shall be issued
hereunder unless the Company shall have determined that such issuance is in
compliance with, or pursuant to an exemption from, all applicable federal
and state securities laws.
(d) COMPLIANCE WITH RULE 16B-3.
(i) The Plan is intended to comply with the requirements of Rule
16b-3 under the Exchange Act or its successors under the Exchange Act and
the Committee shall interpret and administer the provisions of the Plan
in a manner consistent therewith. To the extent any provision of the Plan
or any action by the Committee fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
Committee. Moreover, in the event the Plan does not include a provision
required by Rule 16b-3 to be stated therein, such provision (other than
one relating to eligibility requirements, or the price and amount of
Options) shall be deemed automatically to be incorporated by reference
into the Plan.
(ii) Notwithstanding anything contained in the Plan to the contrary,
if the consummation of any transaction under the Plan would result in the
possible imposition of liability on a Non-Employee Director pursuant to
Section 16(b) of the Exchange Act, the Committee shall have the right, in
its sole discretion, but shall not be obligated, to defer such
transaction to the extent necessary to avoid such liability.
(e) EXPENSES. The costs and expenses of administering the Plan shall
be borne by the Company.
(f) APPLICABLE LAW. Except as to matters of federal law, the Plan and
all actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to
conflicts of law principles.
(g) EFFECTIVE DATE. Subject to the approval of the Plan by the
Company's shareholders, the Plan shall be effective as of the date of the
1997 Annual Meeting (the "EFFECTIVE DATE"). Upon the effectiveness of the
Plan, the Company's 1995 Non-Employee Directors' Stock Option Plan shall be
terminated.
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<PAGE>
SUN HEALTHCARE GROUP, INC.
ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 18, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints ROBERT F. MURPHY AND JULIE C. COLLINS and
each of them, the attorneys and proxies of the undersigned, each with full
power of substitution, to vote all the shares of Common Stock of Sun
Healthcare Group, Inc. (the "Company") which the undersigned is entitled to
vote at the Annual Meeting of Stockholders of the Company to be held at the
Company's Rev. Dr. Kay M. Glaesner, Jr. Training Center, 101 Sun Lane, N.E.,
Albuquerque, New Mexico 87109, on September 18, 1997 at 9:00 a.m.
(Albuquerque time), and at any adjournments or postponements thereof, and
authorizes and instructs the proxies to vote in the manner directed on the
reverse side.
A copy of the Notice of Annual Meetings of Stockholders dated August 21,
1997 and the Proxy Statement dated August 21, 1997 has been received by the
undersigned.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS SET FORTH
HEREIN AND FOR THE NOMINEES LISTED. IF NO INSTRUCTION TO THE CONTRARY IS
INDICATED, THIS PROXY WILL BE VOTED FOR ITEMS 2, 3 AND 4 AND FOR THE
ELECTION AS DIRECTORS OF THE NOMINEES LISTED.
(BE SURE TO SIGN AND DATE THE REVERSE SIDE OF THIS FORM)
<PAGE>
Please mark your vote as indicated in this example /X/
1. Election of Directors
FOR all nominees listed / /
WITHHOLD AUTHORITY to vote for all nominees listed below / /
(To withhold authority to vote for any individual nominee(s), strike through
the individual's name(s) listed below)
Andrew L. Turner Robert A. Levin Robert D. Woltil
2. On the proposal to adopt the Sun Healthcare Group, Inc. 1997 Stock
Incentive Plan.
/ / FOR / / AGAINST / / ABSTAIN
3. On the proposal to adopt the Sun Healthcare Group Inc. 1997 Non-Employee
Directors' Stock Plan.
/ / FOR / / AGAINST / / ABSTAIN
4. On the proposal to ratify the appointment of Arthur Andersen LLP as
independent public accountants of the Company for the fiscal year ending
December 31, 1997.
/ / FOR / / AGAINST / / ABSTAIN
5. In their discretion, proxies are authorized to transact and vote upon such
other business as may properly come before the meeting or any adjournments or
postponements thereof.
Dated: , 1997
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Signature
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Signature if jointly held (a joint or common ownership)
Please sign exactly as name or names appear at left, including the title
"Executor," "Guardian," etc. if the same is indicated. When joint names
appear both should sign. If stock is held by a corporation this proxy should
be executed by a proper officer thereof, whose title should be given.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD IN THE ENCLOSED
POSTAGE PAID ENVELOPE TODAY
