<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - --- ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-12040
-----------
SUN HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 85-0410612
(State of Incorporation) (I.R.S. Employer Identification No.)
101 SUN AVENUE, NE
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Address and telephone number of Registrant)
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days.
Yes X No
--- ---
As of November 9, 1998, there were 59,748,082 shares of the Registrant's
$.01 par value Common Stock outstanding, net of treasury shares.
<PAGE>
SUN HEALTHCARE GROUP, INC.
INDEX
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997......................................... 3
Consolidated Statements of Earnings
For the three months ended September 30, 1998 and 1997........................... 5
Consolidated Statements of Earnings
For the nine months ended September 30, 1998 and 1997............................ 6
Consolidated Statements of Comprehensive Income
For the three months and nine months ended September 30, 1998 and 1997........... 7
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997............................ 8
Notes to the Consolidated Financial Statements................................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 47
Item 4. Submission of Matters to a Vote of Security Holders.............................. 48
Item 6. Exhibits and Reports on Form 8-K................................................. 49
Signatures.................................................................................. 50
</TABLE>
2
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 13,053 $ 32,684
Restricted cash............................................................ --- 10,823
Accounts receivable, net of allowance for doubtful accounts of $65,791 as
of September 30, 1998, and $47,005 as of December 31, 1997,
respectively............................................................ 651,626 550,558
Other receivables.......................................................... 66,304 39,292
Prepaids and other assets.................................................. 73,727 57,732
Deferred tax assets........................................................ 39,881 11,730
------------------ --------------
Total current assets.................................................... 844,591 702,819
------------------ --------------
Property and equipment, net................................................ 873,700 790,143
Goodwill, net.............................................................. 1,083,150 1,046,229
Notes receivable........................................................... 85,003 76,312
Other assets, net.......................................................... 191,210 175,038
Deferred tax assets........................................................ 20,862 42,070
------------------ --------------
Total assets............................................................ $ 3,098,516 $ 2,832,611
------------------ --------------
------------------ --------------
</TABLE>
(Continued on next page)
3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Current portion of long-term debt............................................ $ 71,638 $ 88,144
Current portion of obligations under capital leases.......................... 3,947 2,054
Accounts payable............................................................. 63,018 95,868
Accrued compensation and benefits............................................ 105,985 89,640
Accrued interest............................................................. 24,395 23,666
Accrued self-insurance obligations........................................... 54,332 36,354
Other accrued liabilities.................................................... 123,796 87,397
Income taxes payable......................................................... 22,107 ---
----------------- -------------
Total current liabilities................................................. 469,218 423,123
----------------- -------------
Long-term debt, net of current portion.......................................... 1,501,879 1,607,738
Obligations under capital leases, net of current portion........................ 105,111 101,083
Other long-term liabilities..................................................... 41,603 42,590
Deferred tax liabilities........................................................ 5,758 22,042
----------------- -------------
Total liabilities......................................................... 2,123,569 2,196,576
----------------- -------------
Minority interest............................................................... 17,518 20,838
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely 7% convertible junior subordinated
debentures of the Company.................................................... 345,000 ---
Stockholders' equity:
Preferred stock of $.01 par value, authorized 5,000,000
shares, none issued....................................................... --- ---
Preferred stock, Series B of $9.34 par value, authorized 1,000,000 shares,
99,954 and 298,288 shares outstanding as of September 30, 1998 and
December 31, 1997, respectively.......................................... 934 2,786
Common stock of $.01 par value, authorized 100,000,000 shares, 61,703,696
and 59,220,422 shares issued and outstanding as of September 30, 1998
and December 31, 1997, respectively....................................... 617 592
Additional paid-in capital................................................... 695,787 690,639
Retained earnings (deficit).................................................. (42,380) 1,395
Accumulated other comprehensive income....................................... 9,294 1,766
----------------- -------------
664,252 697,178
----------------- -------------
Less:
Unearned compensation...................................................... 11,160 14,203
Common stock held in treasury, at cost, 2,122,701 and 2,053,207 shares as
of September 30, 1998 and December 31, 1997, respectively............... 26,931 25,574
Grantor stock trust, at market 2,112,522 and 2,178,315 shares as of
September 30, 1998 and December 31, 1997, respectively.................. 13,732 42,204
----------------- -------------
Total stockholders' equity................................................ 612,429 615,197
----------------- -------------
Total liabilities and stockholders' equity................................ $ 3,098,516 $ 2,832,611
----------------- -------------
----------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues..................................................... $ 826,656 $ 555,216
----------------- -------------
Costs and expenses:
Operating........................................................... 683,621 471,449
Corporate general and administrative................................ 46,545 25,915
Provision for losses on accounts receivable......................... 9,616 5,440
Depreciation and amortization....................................... 26,640 15,670
Interest, net....................................................... 33,796 21,165
----------------- -------------
Total costs and expenses......................................... 800,218 539,639
Dividends on convertible preferred securities of subsidiary............ 6,087 ---
----------------- -------------
Earnings before income taxes........................................... 20,351 15,577
Income taxes........................................................... 8,855 11,850
----------------- -------------
Net earnings........................................................... $ 11,496 $ 3,727
----------------- -------------
----------------- -------------
Net earnings per common and common equivalent share:
Basic............................................................ $ 0.20 $ 0.07
----------------- -------------
----------------- -------------
Diluted.......................................................... $ 0.20 $ 0.07
----------------- -------------
----------------- -------------
Weighted average number of common and common equivalent
shares outstanding:
Basic............................................................ 56,772 53,923
----------------- -------------
----------------- -------------
Diluted.......................................................... 79,634 55,900
----------------- -------------
----------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues....................................................... $ 2,463,667 $ 1,536,886
------------------ --------------
Costs and expenses:
Operating............................................................. 2,045,594 1,292,230
Corporate general and administrative.................................. 134,890 68,288
Provision for losses on accounts receivable........................... 28,028 14,010
Depreciation and amortization......................................... 73,069 44,018
Interest, net......................................................... 109,929 54,938
Litigation and investigation costs.................................... 30,256 ---
Merger expenses....................................................... 25,560 ---
Loss on sale of assets................................................ 7,802 ---
------------------ --------------
Total costs and expenses.............................................. 2,455,128 1,473,484
Dividends on convertible preferred securities of subsidiary.............. 9,858 ---
------------------ --------------
Earnings (loss) before income taxes and extraordinary loss............... (1,319) 63,402
Income taxes............................................................. 32,717 31,551
------------------ --------------
Net earnings (loss) before extraordinary loss............................ (34,036) 31,851
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $3,709........................................... 10,120 ---
------------------ --------------
Net earnings (loss).................................................... (44,156) 31,851
Preferred stock dividend --- 135
------------------ --------------
Net earnings (loss) available to common stockholders..................... $ (44,156) $ 31,716
------------------ --------------
------------------ --------------
Net earnings (loss) per common and common equivalent share:
Net earnings (loss) before extraordinary loss:
Basic.............................................................. $ (0.61) $ 0.59
------------------ --------------
------------------ --------------
Diluted............................................................ $ (0.61) $ 0.59
------------------ --------------
------------------ --------------
Net earnings (loss) available to common stockholders:
Basic.............................................................. $ (0.80) $ 0.59
------------------ --------------
------------------ --------------
Diluted............................................................ $ (0.80) $ 0.59
------------------ --------------
------------------ --------------
Weighted average number of common and common equivalent
shares outstanding:
Basic.............................................................. 55,367 53,478
------------------ --------------
------------------ --------------
Diluted............................................................ 55,367 55,060
------------------ --------------
------------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net earnings......................................................... $ 11,496 $ 3,727
Foreign currency translation adjustments, net of tax................. 5,742 5,679
------------- ----------
Comprehensive income................................................. $ 17,238 $ 9,406
------------- ----------
------------- ----------
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net earnings (loss) available to common stockholders................. $ (44,156) $ 31,716
Foreign currency translation adjustments, net of tax................. 7,528 2,415
------------- ----------
Comprehensive income (loss).......................................... $ (36,628) $ 34,131
------------- ----------
------------- ----------
</TABLE>
7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................................. $ (44,156) $ 31,716
Adjustments to reconcile net earnings (loss) to net cash provided
by (used for) operating activities:
Extraordinary loss, net........................................... 10,120 ---
Loss on sale of assets............................................ 7,802 ---
Depreciation and amortization..................................... 73,069 44,018
Provision for losses on accounts receivable....................... 28,028 14,010
Other, net........................................................ 5,970 1,588
Changes in operating assets and liabilities:
Accounts receivable............................................. (118,783) (104,739)
Other current assets............................................ (36,062) 9,246
Other current liabilities....................................... 11,625 44,356
Income taxes ................................................... 6,307 27,075
------------ -----------
Net cash provided by (used for) operating activities............ (56,080) 67,270
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................ (104,821) (63,340)
Acquisitions, net of cash acquired................................... (48,344) (225,984)
Proceeds from sale and leaseback of property and equipment........... 16,833 80,476
Increase in long-term notes receivable............................... (7,680) (34,161)
Other assets expenditures............................................ (24,035) (28,979)
------------ -----------
Net cash used for investing activities.......................... (168,047) (271,988)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings............................................ 215,671 498,230
Long-term debt repayments............................................ (340,451) (300,949)
Net proceeds from issuance of convertible preferred
securities of subsidiary.......................................... 334,044 ---
Net proceeds from issuance of common stock........................... 3,085 8,388
Purchases of treasury stock.......................................... (1,357) (546)
Other financing activities........................................... (5,820) (9,721)
------------ -----------
Net cash provided by financing activities....................... 205,172 195,402
------------ -----------
Effect of exchange rate on cash and cash equivalents.................... (676) (595)
------------ -----------
Net decrease in cash and cash equivalents............................... (19,631) (9,911)
Cash and cash equivalents at beginning of period........................ 32,684 15,209
------------ -----------
Cash and cash equivalents at end of period.............................. $ 13,053 $ 5,298
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
8
<PAGE>
(Continued on next page)
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest net of interest capitalized of $1,489 and $1,424
for the nine months ended September 30, 1998 and 1997,
respectively................................................ $ 118,790 $ 55,741
----------- ----------
----------- ----------
Income taxes................................................... $ 22,740 $ (1,115)
----------- ----------
----------- ----------
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
The Company's acquisitions during the nine months ended
September 30, 1998 and 1997 involved the following:
Fair value of assets acquired.................................. $ 84,509 $ 422,903
Liabilities assumed............................................ (6,341) (216,029)
Cash payments made to former APTA shareholders................. --- 19,300
Fair value of stock and warrants issued........................ (29,824) (190)
----------- ----------
Cash payments made, net of cash received from others........... $ 48,344 $ 225,984
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
9
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management of Sun Healthcare Group, Inc. (the
"Company" or "Sun"), the accompanying interim consolidated financial
statements present fairly the Company's financial position at September 30,
1998 and December 31, 1997, the consolidated results of its operations for
the three and nine month periods ended September 30, 1998 and 1997, and the
consolidated statements of cash flows for the nine months ended September 30,
1998 and 1997. All adjustments are of a normal and recurring nature. These
statements are presented in accordance with the rules and regulations of the
United States Securities and Exchange Commission ("SEC"). Accordingly, they
are unaudited, and certain information and footnote disclosures normally
included in the Company's annual consolidated financial statements have been
condensed or omitted, as permitted under the applicable rules and
regulations. Readers of these statements should refer to the Company's
audited consolidated financial statements and notes thereto for the year
ended December 31, 1997, which are included in the Company's Annual Report on
Form 10-K as amended on Form 10-K/A2 for the year ended December 31, 1997.
The Company's financial statements have been restated to reflect the results
of operations and financial position of Retirement Care Associates, Inc.
("RCA") which was acquired in a business combination accounted for as a
pooling of interests (see Note 2). The results of operations presented in the
accompanying financial statements are not necessarily representative of
operations for an entire year.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a
business during a period from transactions and other events and circumstances
from non-owner sources. Under SFAS 130, the term "comprehensive income" is
used to describe the total of net earnings plus other comprehensive income
which, for the Company, includes foreign currency translation adjustments.
The adoption of SFAS 130 did not impact the calculations of net
earnings or earnings per share, nor did it impact reported assets,
liabilities or total stockholders' equity. It did impact the presentation of
stockholders' equity within the balance sheet and will result in the
presentation of comprehensive income within the annual financial statements,
which must be displayed with the same prominence as other financial
statements. Within the annual financial statements, the Company will report
comprehensive income in the statement of stockholders' equity.
NEWLY ISSUED PRONOUNCEMENTS
On April 3, 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
financial statements for fiscal years beginning after December 31, 1998.
Initial application will result in the estimated write-off of $13.2 million
in pre-opening and organizational costs on January 1, 1999, which will be
reported as a cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Under SFAS 133, which will be effective January 1, 2000, all derivatives are
required to be recognized on the balance sheet at fair value. Gains or losses
from changes in fair value would be recognized in earnings in the period of
change unless the derivative is designated as a hedging instrument. The
Company is studying the impact of the new standard, and is unable to predict
at this time the impact on its financial statements.
10
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SPECIAL CHARGES
MERGER EXPENSES
In connection with the merger of RCA, the Company charged $25.6
million against the earnings of the combined company for transaction costs
and integration expenses. Included were charges related to the elimination of
redundant corporate functions, severance costs related to the headcount
reductions and the write-off of certain intangibles and property and
equipment. At September 30, 1998, liabilities for approximately $2.0 million
of severance and $11.0 million for professional fees and transaction and
integration costs remained on the balance sheet. The Company continues to
complete its consolidation of operations.
LITIGATION AND INVESTIGATION COSTS
The Company recorded a charge of $30.3 million during the nine
months ended September 30, 1998 for professional fees and settlement costs
related to certain legal and regulatory matters. The charge includes amounts
provided for (i) the settlement of shareholder class action litigation
against RCA (see footnote 2) and anticipated costs related to other
shareholder actions against RCA and its former directors, officers and
advisors; (ii) the settlement of a shareholder suit related to the Company's
acquisition in 1995 of SunCare (see footnote 6(b)); (iii) anticipated costs
related to certain state regulatory investigations of RCA's operations for
matters which occurred prior to the Company's acquisition of RCA; and (iv)
estimated costs to resolve the ongoing investigation by the Connecticut
Department of Social Services ("DSS") (see footnote 6(a)).
LOSS ON SALE OF ASSETS
The Company recorded a $5.4 million charge during the nine months ended
September 30, 1998 in connection with the anticipated sale of five nursing
homes and for certain adjustments in the sale price of three nursing homes
sold in 1996. The Company also recorded an additional $2.4 million loss on
its anticipated sale of its outpatient rehabilitation clinics in Canada. In
1997, the Company recorded a $7.0 million loss in order to reduce the
carrying value of its Canadian operations to fair value based on its
estimates of selling value and of costs to sell.
2. ACQUISITIONS
On June 30, 1998, a wholly owned subsidiary of the Company merged
with RCA, an operator of skilled nursing facilities and assisted living
centers in eight states in the southeastern United States. RCA also owned
approximately 65% of Contour Medical, Inc. ("Contour"), a national provider
of medical/surgical supplies. Under the amended terms of the merger agreement
the Company issued approximately 7,611,000 shares of its common stock (valued
at $111.3 million based upon the closing price of $14.625 per share as of
June 30, 1998) for all of the outstanding common stock of RCA and certain
redeemable preferred shares of RCA. The Company also issued 298,334 shares of
its Series B Convertible Preferred Stock in exchange for the outstanding
shares of RCA's Series F Preferred Stock, which were convertible into 287,892
shares of Sun common stock valued at $2.8 million at June 30, 1998. As of
September 30, 1998 198,334 of the Series B Shares had been converted into
191,391 shares of Sun Common Stock. All remaining Series B Shares
automatically converted in October 1998. In addition, the Company
assumed approximately $170.4 million of indebtedness excluding $19.8 million
of indebtedness eliminated in consolidation. The merger was accounted for as
a pooling of interests, and accordingly the financial statements have been
restated to include the accounts and operations of RCA for all periods prior
to the merger.
On June 30, 1998, the Company also acquired the remaining 35% of
Contour. The Company issued approximately 1,886,000 shares of its common
stock (valued at $27.6 million based upon the closing price of $14.625 per
share as of June 30, 1998) for the remaining outstanding Contour common
stock. The acquisition was accounted
11
<PAGE>
for as a purchase and resulted in $23.4 million of additional goodwill.
12
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On November 25, 1997, the Company, RCA and representatives of the
plaintiffs in certain pending class actions against RCA and its management,
reached an agreement in principle to settle the class actions for $9.0
million. In connection with the agreement in principle, the Company escrowed
on behalf of the defendants the settlement amount into an escrow fund. This
amount was expensed in the nine months ended September 30, 1998. The
settlement is subject to, among other things, confirmatory discovery, the
execution of definitive documentation and court approval.
Separate results of operations for the periods presented prior
to the consummation of the RCA merger are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------------------
1997 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Sun....................................... $ 486,172 $ 2,321,415 1,332,354
RCA ...................................... 73,777 176,722 211,448
(less intercompany revenues)........... (4,733) (34,470) (6,916)
----------------- ------------------- ------------
$ 555,216 $ 2,463,667 1,536,886
----------------- ------------------- ------------
----------------- ------------------- ------------
Net earnings (loss):
Sun....................................... $ 19,420 $ 369 $ 53,179
RCA....................................... (15,693) (44,525) (21,463)
----------------- ------------------- ------------
$ 3,727 $ (44,156) $ 31,716
----------------- ------------------- ------------
----------------- ------------------- ------------
</TABLE>
Sun's results for the nine months ended September 30, 1998 include
the results of operations of RCA for the period following the consummation of
the merger.
In October 1997, the Company acquired the capital stock of Regency
Health Services, Inc. ("Regency"), an operator of skilled nursing facilities
and a provider of related specialty healthcare services, including
rehabilitation therapy, pharmacy and home health services in the United
States. Total consideration for the shares acquired was approximately $367.2
million. The total fair value of Regency's assets acquired, including
goodwill of approximately $412.2 million, was approximately $736.6 million,
and liabilities assumed totaled approximately $354.7 million. In connection
with the purchase, the company recorded purchase liabilities including
approximately $11.2 million for severance and related costs and $2.0 million
for costs associated with the shut down of certain acquired pharmacies and
home health service agencies that will be consolidated with the Company's
existing facilities. At September 30, 1998, liabilities for approximately
$1.0 million in severance costs and $1.7 million for facility related costs
remained on the balance sheet. The Company continues to complete its
consolidation of operations.
The acquisition of Regency was accounted for as a purchase and the
operating results of Regency have been included in the consolidated
statements of earnings from the date of acquisition. The following unaudited
proforma results for the three and nine months ended September 30, 1997
assume that the acquisition occurred as of January 1, 1997 (in thousands,
except per share data):
13
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1997 ENDED SEPTEMBER 30, 1997
------------------------ ------------------------
<S> <C> <C>
Net revenues...................................... $ 722,590 $ 2,026,898
Net earnings (loss) available to
common stockholders............................. (7,806) 14,639
Net earnings (loss) per share available to
common stockholders:
Basic.......................................... (0.14) 0.27
Diluted........................................ (0.14) 0.28
</TABLE>
In addition, during the nine months ended September 30, 1998, the
Company acquired from various third parties the net ownership of, leasehold
rights to or the management contracts of two long-term care facilities in the
United States and 15 long-term care facilities in the United Kingdom. Also
during the nine months ended September 30, 1998, the Company acquired nine
pharmacies in the United States. The pro forma impact of these acquisitions
is immaterial.
3. LONG-TERM DEBT AND CONVERTIBLE TRUST ISSUED SECURITIES
In May 1998, the Company issued $345 million of 7% convertible trust
issued preferred securities and $150 million of 9 3/8% Senior Subordinated
Notes due 2008 (yield of 9.425%) (collectively, the "Offerings"). Each
convertible preferred security is convertible into 1.2419 shares of Company
Common Stock, par value $0.01 per share, (equivalent to an initial conversion
price of $20.13 per share of Company Common Stock). Net Offering proceeds of
$300 million were used by the Company to permanently repay certain
outstanding borrowings under the term loan portion of its Senior Credit
Facility and the remaining $179.1 million of the net proceeds from the
Offerings were used to reduce certain outstanding borrowings under the
revolving credit portion of the Company's Senior Credit Facility (which
amounts may be subsequently reborrowed). As a result of the permanent
repayment of borrowings under the term loan portion of the Company's Senior
Credit Facility, the Company recorded an extraordinary loss of $6.4 million,
net of income tax benefit of $3.7 million.
On May 5, 1998 the Company entered into certain interest rate
transactions with an aggregate notional value of $850 million to minimize the
risks and/or costs associated with certain long-term debt of the Company. The
Company does not otherwise utilize financial instruments for trading or other
speculative purposes. The counterparty to these contractual arrangements is a
major international financial institution with which the Company has other
financial relationships. The Company will be exposed to credit loss in the
event of non-performance by the counterparty; however, the Company does not
anticipate non-performance.
The interest rate swap transactions have been designated as hedges
for accounting purposes. The Company will continue to evaluate this
designation on a periodic basis. The amounts to be paid or received are
accrued and are recognized as an adjustment to interest expense.
14
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Under the interest rate swap transactions, the Company will be a
variable rate payor, effectively converting $550 million of fixed rate debt
and $300 million of variable rate Senior Credit Facility debt, which is based
on U.S. LIBOR, into variable rate debt based on an index of foreign interest
rates. The index of foreign interest rates is based on an equally weighted
average of the interest rates of the LIBOR rates of Germany and Switzerland
and the Bank Bill rate of Australia except that on May 1, 2001 the LIBOR of
the United Kingdom will replace the LIBOR of Switzerland with respect to the
$300 million swap having a maturity date of May 2008. All payments will be
denominated in U.S. dollars. Each interest rate swap includes cap protection
limiting the Company's exposure to interest rate fluctuations. The following
summarizes the terms of the various interest rate swap transactions at May 5,
1998:
<TABLE>
<CAPTION>
INTEREST RATE
NOTIONAL MATURITY ------------- MAXIMUM INTEREST
AMOUNT DATE RECEIVE PAY (1) RATE PAID
------ ---- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
$300,000,000 5/2003 5.69%(2) 5.53% 7.0%
$300,000,000 5/2008 7.00%(3) 6.35% 7.0% (5/1998-5/2001)
8.5% (5/2001-5/2008)
$250,000,000 7/2002 9.50%(3) 8.95% 9.5% (5/1998-4/2000)
10.5% (4/2000-7/2002)
</TABLE>
- - -----------
(1) An index of foreign interest rates, reset quarterly (see above
description).
(2) U.S. LIBOR, reset quarterly.
(3) Fixed.
4. COMMITMENTS
(a) CONSTRUCTION COMMITMENTS
As of September 30, 1998, the Company had capital commitments of
approximately $53.5 million, including a corporate office building, a
long-term care facility and various contracts related to improvements at
existing facilities in the United States. Additionally, as of September 30,
1998, the Company had capital commitments of approximately L0.3 million ($0.5
million as of September 30, 1998) in the United Kingdom.
(b) FINANCING COMMITMENTS
Under the terms of an Amended and Restated subordinated Loan Agreement
(the "Subordinated Loan") the Company has advanced $35.1 million and has agreed
to advance up to a total of an additional $40 million, plus $5 million to cover
accrued interest due and owing to the Company and other lenders, to a developer
of assisted living facilities to cover 20% of the costs of the development,
construction and operation of assisted living facilities. Any advances under the
Subordinated Loan have been and are expected to be funded by borrowings under
the Company's Senior Credit Facility and will be subject to certain conditions,
including the approval of each project by the Company. The developer has
mortgage financing for 70% of the cost of each project. The remaining 10% of the
cost of each project will be funded from the developer's own funds. All of the
advances under the Subordinated Loan, whether made before or after the date on
which the Subordinated Loan was amended and restated, bear interest at the rate
of 10% per annum. The portion of the subordinated Loan advanced with respect to
each project is due five (5) years after the first advance is made with respect
to such project for construction related costs. Repayment of the Subordinated
15
<PAGE>
Loan is subordinated to the repayment of the amounts due to the other
lenders. As of September 30, 1998, four facilities had been completed and
were being managed by the Company under fee for service management
agreements, three facilities were under construction and five facilities were
in the evaluation process. In addition, the Company has entered into a lease
option agreement with the developer whereby the Company will pay the
developer $250,000 for the option to lease any of the facilities. The option
payment is due at the time the Company authorizes the developer to proceed
with a project. The option grants the company the right to lease the
facilities for an initial term of 15 years, subject to four renewal terms of
5 years each, for a rent equal to the greater of the fair market value of the
project or the total amount invested by the developer multiplied by the sum
of the interest rate paid by the developer on its permanent financing plus a
spread of 25 basis points. The option is to be exercised upon the developers'
presentation of an option package after a specified period of time, which
generally runs from substantial completion of each facility. The lease option
agreement supersedes in its entirety the purchase option agreement previously
executed by the company and the developer.
16
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is based upon the weighted
average number of common shares outstanding during the period.
Diluted net earnings per share in periods of earnings is based upon
the weighted average number of common shares outstanding during the period
plus the number of incremental shares of common stock contingently issuable
upon exercise of stock options and, if dilutive, including the assumption
that the Company's convertible debentures were converted as of the beginning
of the period. Net earnings, if conversion of the debentures is assumed, is
adjusted for the interest on the debentures, net of interest related to
additional assumed borrowings to fund the cash consideration on conversion of
certain convertible debentures and the related income tax benefits. As the
Company had a net loss for the nine months ended September 30, 1998, the
Company's stock options and convertible debentures were anti-dilutive.
17
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Earnings (loss) per share is calculated as follows for the three and
nine months ended September 30, 1997 and 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC:
Net earnings (loss) before extraordinary
loss.................................... $ 11,496 $ 3,727 $ (34,036) $ 31,851
Net earnings (loss)....................... 11,496 3,727 (44,156) 31,851
Net earnings (loss) available to common
stockholders........................... 11,496 3,727 (44,156) 31,716
Weighted average shares outstanding....... 56,772 53,923 55,367 53,478
Earnings (loss) per share:
Net earnings (loss) before
extraordinary loss................... $ 0.20 $ 0.07 $ (0.61) $ 0.59
Net earnings (loss) available to
common stockholders.................. $ 0.20 $ 0.07 $ (0.80) $ 0.59
DILUTED:
Net earnings (loss) available to common
stock holders used in basic
calculation............................ $ 11,496 $ 3,727 $ (44,156) $ 31,716
Net income impact of assumed conversion... 4,045 88 --- 708
------------------ -------------- -------------- -------------
Adjusted net earnings (loss) available to
common stockholders.................... $ 15,541 $ 3,815 $ (44,156) $ 32,424
Weighted average shares used in basic
calculation............................ 56,772 53,923 55,367 53,478
Effect of dilutive securities:
Stock options and warrants............. 900 1,148 --- 753
Assumed conversion of convertible
debt................................. 21,962 829 --- 829
------------------ -------------- -------------- -------------
Weighted average common and common
equivalent shares outstanding.......... 79,634 55,900 55,367 55,060
Earnings per share:
Net earnings (loss) before
extraordinary loss................... $ 0.20 $ 0.07 $ (0.61) $ 0.59
Net earnings (loss) available to
common stockholders.................. $ 0.20 $ 0.07 $ (0.80) $ 0.59
</TABLE>
18
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
In January 1995, the Company learned that two of its subsidiaries
were the subject of a pending Federal investigation. The investigating
agencies were the United States Department of Health and Human Services'
Office of the Inspector General ("OIG") and the United States Department of
Justice. In July 1997, the Criminal Division of the U.S. Department of
Justice informed the Company that it had completed its investigation of the
Company, and that it would not initiate any actions against the Company or
any individuals. In the summer of 1998, the OIG informed the Company that it
had no present intention of initiating any civil or administrative actions
against the Company or any individuals or seeking monetary damages or other
relief with respect to the issues in the Federal Investigation, and the Civil
Division of the Department of Justice similarly informed the Company that it
has determined not to proceed any further at this time with the Federal
Investigation. No assurance can be given that the government will not proceed
with any investigation at a later time or initiate additional investigations
based on the same or other legal or regulatory concerns.
In 1996, the Connecticut Attorney General's office and the
Connecticut Department of Social Services ("DSS") began an investigation and
initiated a hearing in order to determine whether the Company's long-term
care subsidiary submitted false and misleading fiscal information on its 1993
and 1994 Medicaid cost reports. Since 1997, the investigation has also
covered information for the 1995 cost year as well as cost reporting periods
prior to 1993. The information under review includes submissions and
representations by the long-term care subsidiary and the Company's chief
executive officer. The evidentiary phase of the hearing has concluded. The
Company and the DSS have had settlement discussions. However, the Company is
unable to determine at this time when the proceedings will be concluded or,
if no settlement is reached, whether the DSS will seek further administrative
action or Medicaid reimbursement sanctions. No assurance can be given that a
settlement will in fact occur or whether any such settlement or other outcome
of the investigation will not have a material adverse effect on the Company's
business, financial condition or results of operations.
(b) LITIGATION
On or about January 23, 1996, two former stockholders of SunCare (a
wholly-owned subsidiary of the Company), John Brennan and Susan Bird, filed a
lawsuit (the "SunCare Litigation") against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of Indiana. On May 21, 1998, the Company and the Plaintiffs settled
the action for $7.4 million. On June 9, 1998, the Court approved the
settlement and entered an order of dismissal.
On November 25, 1997, the Company, RCA and representatives of the
plaintiffs in certain pending class actions against RCA and its management
reached an agreement in principle to settle the class actions for $9.0
million. In connection with the agreement in principle, the Company escrowed
on behalf of the defendants the settlement amount into an escrow fund. This
amount was expensed in the nine months ended September 30, 1998. The
settlement is subject to, among other things, confirmatory discovery, the
execution of definitive doucmentation and court approval.
(c) OTHER INQUIRIES
From time to time, fiscal intermediaries and Medicaid agencies
examine cost reports filed by predecessor operators. The Company is currently
the subject of several such examinations. If, as a result of any such
examination, it is concluded that overpayments to a predecessor operator were
made, the Company, as the current operator of such
19
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
facilities, may be held financially responsible for such overpayments. At
this time, the Company is unable to predict the outcome of any examinations.
The Company was notified in 1997 by a law firm representing several
national insurance companies that these companies believed that the Company
had engaged in improper billing and other practices in connection with the
Company's delivery of therapy and related services. In response, the Company
began discussions directly with these insurers and hopes to resolve these
matters without litigation; however, the Company is unable at this time to
predict whether it will be able to do so, what the eventual outcome may be or
the extent of its liability, if any, to these insurers.
7. SUMMARIZED FINANCIAL INFORMATION
The Company acquired The Mediplex Group, Inc. ("Mediplex") on June
23, 1994 and became a co-obligor with Mediplex with respect to the 6 1/2%
Convertible Subordinated Debentures and the 11 3/4% Senior Subordinated Notes
subsequent to the acquisition. Summarized financial information of Mediplex
is provided below (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Current assets................................ $ 109,326 $ 108,232
Noncurrent assets............................. 387,511 391,048
Current liabilities........................... 8,854 26,016
Noncurrent liabilities........................ 70,433 72,373
Due to parent................................. 204,519 165,207
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues................................................. $ 145,053 $ 129,893 $ 440,136 $ 377,841
Costs and expenses........................................... 133,443 122,222 407,096 358,014
---------------------------------------------------------------------
Earnings before intercompany charges and income taxes........ 11,610 7,671 33,040 19,827
Intercompany charges(1)...................................... 23,581 20,197 72,676 54,528
---------------------------------------------------------------------
Earnings (loss) before income taxes.......................... (11,971) (12,526) (39,636) (34,701)
Income taxes (benefit)....................................... (5,182) (4,885) (16,984) (13,533)
----------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings (loss).......................................... $ (6,789) $ (7,641) $ (22,652) $ (21,168)
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
- - ----------------
(1) Through various intercompany agreements entered into by Sun and
Mediplex, Sun provides management services, licenses the use of its
trademarks and acts on behalf of Mediplex to make financing available
for its operations. Sun charged Mediplex for management services
totaling $10.8 million and $8.1 million for the three months ended
September 30, 1998 and 1997, respectively; and $35.0 million and $23.6
million for the nine months ended September 30, 1998 and 1997,
respectively. Royalty fees charged to Mediplex for the three months
ended September 30, 1998 and 1997 for the use of Sun trademarks were
$2.5 million and $1.9 million, respectively; and $8.1 million and $5.4
million for the nine months ended September 30, 1998 and 1997,
respectively. Intercompany interest charged to Mediplex for the three
months ended September 30, 1998 and 1997 for advances from Sun was
$10.3 million and $10.2 million, respectively; and $29.6 million and
$25.6 million for the nine months ended September 30, 1998 and 1997,
respectively.
20
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SUMMARIZED CONSOLIDATING INFORMATION
In connection with the Company's offering of $250.0 million
aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the
"9 1/2% Notes") in July 1997, and $150.0 million aggregate principal amount
of 9 3/8% Senior Subordinated Notes due 2008 in May 1998 (the "9 3/8% Notes,"
collectively the "Notes"), all direct and indirect subsidiaries of the
Company other than the Company's direct and indirect foreign subsidiaries,
CareerStaff Management, Inc. and its direct and indirect subsidiaries, and
certain other immaterial subsidiaries of the Company (the "Guarantors") have,
jointly and severally, unconditionally guaranteed the Notes. These guarantees
are subordinated to all existing and future senior debt and guarantees of the
Guarantors and are unsecured.
The Company conducts substantially all of its business through and
derives virtually all of its income from its subsidiaries. Therefore, the
Company's ability to make required payments with respect to its indebtedness
(including the Notes) and other obligations depends on the financial results
and condition of its subsidiaries and its ability to receive funds from its
subsidiaries. There are no restrictions on the ability of any of the
Company's subsidiaries to transfer funds to the Company, except as provided
by appropriate law.
Pursuant to Rule 3-10 of Regulation S-X, the following summarized
consolidating information is for the Company, the wholly-owned Guarantors,
and the Company's non-Guarantor subsidiaries with respect to the Notes. This
summarized financial information has been prepared from the books and records
maintained by the Company, the Guarantors and the non-Guarantor subsidiaries.
The summarized financial information may not necessarily be indicative of
results of operations or financial position had the Guarantors or
non-Guarantor subsidiaries operated as independent entities. The separate
financial statements of the Guarantors are not presented because management
has determined they would not be material to the investors.
Through various intercompany agreements entered into by the Company,
the Guarantors, and certain of the non-Guarantor subsidiaries Sun provides
management services, and acts on behalf of the Guarantors and certain of the
non-Guarantors subsidiaries to make financing available for their operations.
The Company charged the Guarantors for management services totaling $53.8
million and $29.1 million for the periods ended September 30, 1998 and 1997,
respectively. The Company charged the non-Guarantor subsidiaries for
management services totaling 1.7 million and $0.4 million for the periods
ended September 30, 1998 and 1997, respectively. Intercompany interest
charged to the Guarantors for the periods ended September 30, 1998 and 1997
for advances from the Company were $48.6 million and $24.0 million,
respectively. Intercompany interest charged to the non-Guarantor subsidiaries
for the three months ended September 30, 1998 and 1997 for advances from the
company was $1.2 million and $0.7 million respectively.
21
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ................. $ (1,581) $ 31,674 $ 2,591 $ --- $ 32,684
Restricted cash............................ 9,000 1,823 --- --- 10,823
Accounts receivable, net................... --- 492,534 58,341 (317) 550,558
Other receivables.......................... 11,288 19,590 8,414 --- 39,292
Prepaids and other assets.................. 596 50,537 6,599 --- 57,732
Deferred tax assets........................ 7,176 4,554 --- --- 11,730
------------- ----------- ------------- ----------- -----------
Total current assets.................... 26,479 600,712 75,945 (317) 702,819
------------- ----------- ------------- ----------- -----------
Property and equipment, net................ 30,805 366,529 392,809 --- 790,143
Goodwill, net.............................. --- 876,828 169,401 --- 1,046,229
Notes receivable........................... 60,080 2,784 13,448 --- 76,312
Other assets, net.......................... 80,193 71,012 23,833 --- 175,038
Investment in subsidiaries................. 611,846 --- --- (611,846) ---
Deferred tax assets........................ 39,583 --- 2,487 --- 42,070
------------- ----------- ------------- ----------- -----------
Total assets............................ $ 848,986 $ 1,917,865 $ 677,923 $ (612,163) $ 2,832,611
------------- ----------- ------------- ----------- -----------
------------- ----------- ------------- ----------- -----------
Current liabilities:
Current portion of long-term debt.......... $ 5,000 $ 44,260 $ 38,884 $ - $ 88,144
Current portion of obligations under
capital leases.......................... 262 1,415 377 - 2,054
Accounts payable........................... 34,031 55,374 6,780 (317) 95,868
Accrued compensation and benefits.......... 21,870 61,145 6,625 - 89,640
Accrued interest........................... 16,477 4,448 2,741 - 23,666
Accrued self insurance obligations......... 369 36,187 (202) - 36,354
Other accrued liabilities.................. 6,028 46,090 35,279 - 87,397
------------- ----------- ------------- ----------- -----------
Total current liabilities............... 84,037 248,919 90,484 (317) 423,123
------------- ----------- ------------- ----------- -----------
Long-term debt, net of current portion........ 1,303,377 212,391 91,970 - 1,607,738
Obligations under capital leases, net of
current portion............................ 17 24,284 76,782 - 101,083
Other long-term liabilities................... - 41,917 673 - 42,590
Deferred tax liabilities...................... 8,656 1,099 12,287 - 22,042
------------- ----------- ------------- ----------- -----------
Total liabilities....................... 1,396,087 528,610 272,196 (317) 2,196,576
------------- ----------- ------------- ----------- -----------
Intercompany balances......................... (1,164,154) 1,058,101 113,895 (7,842) -
Minority interest............................. - 4,553 16,285 - 20,838
Total stockholders' equity.................... 617,053 326,601 275,547 (604,004) 615,197
------------- ----------- ------------- ----------- -----------
Total liabilities and stockholders'
equity................................ $ 848,986 $ 1,917,865 $ 677,923 $ (612,163) $ 2,832,611
------------- ----------- ------------- ----------- -----------
------------- ----------- ------------- ----------- -----------
</TABLE>
22
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ (17,463) $ 27,981 $ 2,535 $ --- $ 13,053
Accounts receivable, net............... --- 582,309 69,317 --- 651,626
Other receivables...................... 19,964 38,809 7,531 --- 66,304
Prepaids and other assets.............. 2,408 63,902 7,417 --- 73,727
Deferred tax assets.................... 38,372 --- 1,509 --- 39,881
--------------- ------------- ------------- ------------- --------------
Total current assets................ 43,281 713,001 88,309 --- 844,591
--------------- ------------- ------------- ------------- --------------
Property and equipment, net............ 65,598 387,193 420,909 --- 873,700
Goodwill, net.......................... --- 904,759 178,391 --- 1,083,150
Notes receivable....................... 62,094 9,461 13,448 --- 85,003
Other assets, net...................... 96,731 67,492 26,987 --- 191,210
Investment in subsidiaries............. 604,758 --- --- (604,758) ---
Deferred tax assets.................... 20,862 --- --- --- 20,862
--------------- ------------- ------------- ------------- --------------
Total assets........................ $ 893,324 $ 2,081,906 $ 728,044 $ (604,758) $ 3,098,516
--------------- ------------- ------------- ------------- --------------
--------------- ------------- ------------- ------------- --------------
Current liabilities:
Current portion of long-term debt...... $ --- $ 32,211 $ 39,427 $ --- $ 71,638
Current portion of obligations under
capital leases...................... 1,168 2,380 399 --- 3,947
Accounts payable....................... 43,508 10,625 8,885 --- 63,018
Accrued compensation and benefits 23,701 71,058 11,226 --- 105,985
Accrued interest....................... 16,641 5,532 2,222 --- 24,395
Accrued self-insurance obligations 2,649 51,395 288 ---- 54,332
Other accrued liabilities.............. 22,492 71,268 30,036 --- 123,796
Income taxes payable................... 22,107 --- --- --- 22,107
--------------- ------------- ------------- ------------- --------------
Total current liabilities........... 132,266 244,469 92,483 --- 469,218
--------------- ------------- ------------- ------------- --------------
Long-term debt, net of current portion.... 1,194,732 193,284 113,863 --- 1,501,879
Obligations under capital leases, net of
current portion........................ --- 27,303 77,808 --- 105,111
Other long-term liabilities............... --- 39,167 2,436 --- 41,603
Deferred tax liabilities.................. --- --- 5,758 --- 5,758
--------------- ------------- ------------- ------------- --------------
Total liabilities................... 1,326,998 504,223 292,348 --- 2,123,569
--------------- ------------- ------------- ------------- --------------
Intercompany advances..................... (1,400,642) 1,266,995 133,647 --- ---
Minority interest......................... --- 2,653 14,865 --- 17,518
Company-obligated manditorily redeemable
convertible preferred securities of a
subsidiary trust holding solely 7%
convertible junior subordinated
debentures of the Company.............. 345,000 --- --- --- 345,000
Total stockholders' equity................ 621,968 308,035 287,184 (604,758) 612,429
--------------- ------------- ------------- ------------- --------------
Total liabilities and stockholders'
equity............................ $ 893,324 $ 2,081,906 $ 728,044 $ (604,758) $ 3,098,516
--------------- ------------- ------------- ------------- --------------
--------------- ------------- ------------- ------------- --------------
</TABLE>
23
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues.................... $ 444 $ 468,801 $ 88,024 $ (2,053) $ 555,216
-------------- ------------- ------------- ------------- -------------
Costs and expenses:
Operating.......................... --- 399,657 73,845 (2,053) 471,449
Corporate general and
administrative.................. 15,144 7,456 3,315 --- 25,915
Provision for losses on accounts
receivable...................... --- 5,273 167 --- 5,440
Depreciation and amortization...... 1,053 10,336 4,281 --- 15,670
Interest, net...................... 11,818 4,761 4,586 --- 21,165
Equity interest in (earnings) loss
of subsidiaries................. 13,290 --- --- (13,290) ---
-------------- ------------- ------------- ------------- -------------
Total costs and expenses........ 41,305 427,483 86,194 (15,343) 539,639
-------------- ------------- ------------- ------------- -------------
Earnings (loss) before income taxes
and intercompany charges........... (40,861) 41,318 1,830 13,290 15,577
Intercompany charges.................. (54,374) 53,327 1,047 --- ---
-------------- ------------- ------------- ------------- -------------
Earnings (loss) before income taxes... 13,513 (12,009) 783 13,290 15,577
Income taxes.......................... 9,786 1,419 645 --- 11,850
-------------- ------------- ------------- ------------- -------------
Net Earnings (loss)................... $ 3,727 $ (13,428) $ 138 $ 13,290 $ 3,727
-------------- ------------- ------------- ------------- -------------
-------------- ------------- ------------- ------------- -------------
</TABLE>
24
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues..................... $ 1,800 $ 1,302,355 $ 238,404 $ (5,673) $ 1,536,886
------------ --------------- ----------------- ------------- -------------
Costs and expenses:
Operating........................... --- 1,097,188 200,715 (5,673) 1,292,230
Corporate general and
administrative................... 40,035 18,185 10,068 --- 68,288
Provision for losses on accounts
receivable....................... --- 13,458 552 --- 14,010
Depreciation and amortization....... 3,169 28,946 11,903 --- 44,018
Interest, net....................... 28,430 14,515 11,993 --- 54,938
Equity interest in (earnings) loss
of subsidiaries.................. 12,665 --- --- (12,665) ---
------------ --------------- ----------------- ------------- -------------
Total costs and expenses......... 84,299 1,172,292 235,231 (18,338) 1,473,484
------------ --------------- ----------------- ------------- -------------
Earnings (loss) before income taxes
and intercompany charges............ (82,499) 130,063 3,173 12,665 63,402
Intercompany charges................... (139,872) 136,945 2,927 --- ---
------------ --------------- ----------------- ------------- -------------
Earnings (loss) before income taxes.... 57,373 (6,882) 246 12,665 63,402
Income taxes........................... 25,657 4,884 1,010 --- 31,551
------------ --------------- ----------------- ------------- -------------
Net earnings (loss).................... 31,716 (11,766) (764) 12,665 31,851
Preferred Stock Dividend............... --- 135 --- --- 135
------------ --------------- ----------------- ------------- -------------
Net earnings (loss) available to
common stockholders................. $ 31,716 $ (11,901) $ (764) $ 12,665 $ 31,716
------------ --------------- ----------------- ------------- -------------
------------ --------------- ----------------- ------------- -------------
</TABLE>
25
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues................... $ 745 $ 714,771 $ 115,064 $ (3,924) $ 826,656
-------------- ------------- -------------- -------------- -------------
Costs and expenses:
Operating......................... --- 586,828 100,717 (3,924) 683,621
Corporate general and
administrative................. 29,690 12,209 4,646 --- 46,545
Provision for losses on accounts
receivable..................... --- 8,114 1,502 --- 9,616
Depreciation and amortization..... 2,463 18,112 6,065 --- 26,640
Interest, net..................... 24,763 3,696 5,337 --- 33,796
Equity interest in (earnings)
loss of subsidiaries........... 11,726 --- --- (11,726) ---
-------------- ------------- -------------- -------------- -------------
Total costs and expenses..... 68,642 628,959 118,267 (15,650) 800,218
-------------- ------------- -------------- -------------- -------------
Dividends on convertible preferred
securities of subsidiary.......... 6,087 --- --- --- 6,087
-------------- ------------- -------------- -------------- -------------
Earnings (loss) before income taxes
and intercompany charges.......... (73,984) 85,812 (3,203) 11,726 20,351
Intercompany charges(1).............. (103,815) 100,897 2,918 --- ---
-------------- ------------- -------------- -------------- -------------
Earnings (loss) before income taxes.. 29,831 (15,085) (6,121) 11,726 20,351
Income taxes......................... 18,335 (7,668) (1,812) --- 8,855
-------------- ------------- -------------- -------------- -------------
Net earnings (loss).................. $ 11,496 $ (7,417) $ (4,309) $ 11,726 $ 11,496
-------------- ------------- -------------- -------------- -------------
-------------- ------------- -------------- -------------- -------------
</TABLE>
26
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues................... $ 1,579 $ 2,142,441 $ 331,288 $ (11,641) $ 2,463,667
-------------- ------------- -------------- ------------ -------------
Costs and expenses:
Operating......................... --- 1,768,049 289,186 (11,641) 2,045,594
Corporate general and
administrative................. 85,323 35,962 13,605 --- 134,890
Provision for losses on accounts
receivable..................... --- 25,915 2,113 --- 28,028
Depreciation and amortization..... 5,505 50,262 17,302 --- 73,069
Interest, net..................... 79,787 15,803 14,339 --- 109,929
Loss on sale of assets............ 2,400 5,402 --- --- 7,802
Litigation and investigation costs 22,050 8,206 --- --- 30,256
Merger expenses................... 25,560 --- --- --- 25,560
Equity interest in (earnings)
loss of subsidiaries........... 50,452 --- --- (50,452) ---
-------------- ------------- -------------- ------------ -------------
Total costs and expenses..... 271,076 1,909,600 336,545 (62,093) 2,455,128
Dividends on convertible preferred
securities of subsidiary.......... 9,858 --- --- --- 9,858
-------------- ------------- -------------- ------------ -------------
Earnings (loss) before income taxes,
intercompany charges and
extraordinary loss................ (279,355) 232,841 (5,257) 50,452 (1,319)
Intercompany charges................. (283,581) 277,456 6,125 --- ---
-------------- ------------- -------------- ------------ -------------
Earnings (loss) before income taxes
and extraordinary loss............ 4,226 (44,615) (11,382) 50,452 (1,319)
Income taxes......................... 38,262 (3,231) (2,314) --- 32,717
-------------- ------------- -------------- ------------ -------------
Earnings (loss) before extraordinary
Loss.............................. (34,036) (41,384) (9,068) 50,452 (34,036)
Extraordinary loss................... 10,120 --- --- --- 10,120
-------------- ------------- -------------- ------------ -------------
Net earnings (loss).................. $ (44,156) $ (41,384) $ (9,068) $ 50,452 $ (44,156)
-------------- ------------- -------------- ------------ -------------
-------------- ------------- -------------- ------------ -------------
</TABLE>
27
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................... $ 31,716 $ (11,901) $ (764) $ 12,665 $ 31,716
Adjustments to reconcile net earnings (loss)
to net cash provided by (used for)
operating activities:
Equity in earnings in subsidiaries....... 12,665 --- --- (12,665) ---
Depreciation and amortization............ 3,169 28,946 11,903 --- 44,018
Provision for losses on accounts
receivable............................. --- 13,458 552 --- 14,010
Other, net............................... 3,483 (1,765) (130) --- 1,588
Changes in operating assets and
liabilities:
Accounts receivable.................... --- (90,454) (14,285) --- (104,739)
Other current assets................... 8,646 85 515 --- 9,246
Other current liabilities.............. 41,926 (4,810) 7,240 --- 44,356
Income taxes........................... 34,526 (9,360) 1,909 --- 27,075
------------- ------------- ----------- ----------- ------------
Net cash provided by (used for)
operating activities................. 136,131 (75,801) 6,940 --- 67,270
------------- ------------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................... (2,353) (21,983) (39,004) --- (63,340)
Acquisitions, net of cash acquired.......... --- (57,220) (168,764) --- (225,984)
Proceeds from the sale and leaseback of
property and equipment................... --- 30,639 49,837 --- 80,476
Increase in long-term notes receivable...... (37,494) 3,333 --- --- (34,161)
Other assets expenditures................... 21,824 (6,194) (44,609) --- (28,979)
------------- ------------- ----------- ----------- ------------
Net cash used for investing activities. (18,023) (51,425) (202,540) --- (271,988)
------------- ------------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings................... 493,009 (10,882) 16,103 --- 498,230
Long-term debt repayments................... (242,942) (23,342) (34,665) --- (300,949)
Purchase of treasury stock.................. (546) --- --- --- (546)
Net proceeds from issuance of common stock 8,388 --- --- --- 8,388
Financing fees paid......................... (8,372) (1,100) (249) --- (9,721)
Intercompany advances....................... (375,599) 159,964 215,635 --- ---
------------- ------------- ----------- ----------- ------------
Net cash provided by (used for)
financing activities................. (126,062) 124,640 196,824 --- 195,402
------------- ------------- ----------- ----------- ------------
Effect of exchange rate on cash and cash
equivalents................................. --- --- (595) --- (595)
------------- ------------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................. (7,954) (2,586) 629 --- (9,911)
Cash and cash equivalents at beginning of year 2,226 11,199 1,784 --- 15,209
------------- ------------- ----------- ----------- ------------
Cash and cash equivalents at end of period..... $ (5,728) $ 8,613 $ 2,413 $ --- $ 5,298
------------- ------------- ----------- ----------- ------------
------------- ------------- ----------- ----------- ------------
</TABLE>
28
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................. $ (44,156) $ (41,383) $ (9,069) $ 50,452 $ (44,156)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used for) operating activities:
Extraordinary loss, net.......................... 10,120 --- --- --- 10,120
Loss on sale of assets........................... 2,400 5,402 --- --- 7,802
Equity in earnings in subsidiaries............... 50,452 --- --- (50,452) ---
Depreciation and amortization.................... 5,505 50,262 17,302 --- 73,069
Provision for losses on accounts receivable...... --- 25,915 2,113 28,028
Other, net....................................... 6,881 (954) 43 --- 5,970
Changes in operating assets and liabilities:
Accounts receivable............................ --- (107,149) (11,634) --- (118,783)
Other current assets........................... (16,407) (21,557) 1,902 --- (36,062)
Other current liabilities...................... 63,437 (52,078) 266 --- 11,625
Income taxes................................... 15,136 (5,941) (2,888) --- 6,307
-------------- ------------- ------------ ----------- -------------
Net cash provided by (used for) operating
activities................................... 93,368 (147,483) (1,965) --- (56,080)
-------------- ------------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net........................... (35,150) (54,749) (14,922) --- (104,821)
Acquisitions, net of cash acquired. 283 (42,200) (6,427) --- (48,344)
Proceeds from the sale and leaseback of property
and equipment.................................... --- 16,833 --- --- 16,833
Increase in long-term notes receivable.............. (5,888) (1,476) (316) --- (7,680)
Other assets expenditures........................... (14,445) 83 (9,673) --- (24,035)
-------------- ------------- ------------ ----------- -------------
Net cash used for investing activities......... (55,200) (81,509) (31,338) --- (168,047)
-------------- ------------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings........................... 194,422 6,875 14,374 --- 215,671
Long-term debt repayments........................... (313,976) (16,468) (10,007) --- (340,451)
Net proceeds from issuance of convertible preferred
securities of subsidiary......................... 334,044 --- --- --- 334,044
Net proceeds from issuance of common stock 3,085 --- --- --- 3,085
Purchases of treasury stock......................... (1,357) --- --- --- (1,357)
Other financing activities.......................... (9,745) 3,837 88 --- (5,820)
Intercompany advances............................... (260,523) 231,055 29,468 --- ---
-------------- ------------- ------------ ----------- -------------
Net cash provided by (used for) financing
activities................................... (54,050) 225,299 33,923 --- 205,172
-------------- ------------- ------------ ----------- -------------
Effect of exchange rate on cash and cash equivalents... --- --- (676) --- (676)
-------------- ------------- ------------ ----------- -------------
Net increase (decrease) in cash and cash equivalents... (15,882) (3,693) (56) --- (19,631)
Cash and cash equivalents at beginning of period....... (1,581) 31,674 2,591 --- 32,684
-------------- ------------- ------------ ----------- -------------
Cash and cash equivalents at end of period............. $ (17,463) $ 27,981 $ 2,535 $ --- $ 13,053
-------------- ------------- ------------ ----------- -------------
-------------- ------------- ------------ ----------- -------------
</TABLE>
29
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sun Healthcare Group, Inc., through its direct and indirect
subsidiaries (the "Company" or "Sun"), is a provider of long-term, subacute
and related specialty healthcare services, including rehabilitation and
respiratory therapy services and pharmaceutical and medical supply services.
Long-term care and subacute care services and outpatient therapy services are
provided through affiliated facilities. Therapy services and pharmaceutical
services are provided by the Company in both affiliated and nonaffiliated
facilities located in the United States. The Company also provides long-term
care services in the United Kingdom, Spain and Germany and acute care
services in Australia and pharmaceutical services in the United Kingdom,
Germany and Spain.
The Company's earnings growth has historically resulted from the
acquisition of long-term and subacute care facilities, use of its long-term
and subacute care operations as a base for expansion of its ancillary
services, provision of ancillary services to nonaffiliated facilities and
expansion of ancillary services through acquisitions. Ancillary services,
such as rehabilitation and respiratory therapy services and pharmaceutical
services, have had significantly higher operating margins than the margins
associated with the provision of routine services to patients at long-term
and subacute care facilities and accordingly have historically provided more
than half of the Company's operating profits. In addition, a substantial
portion of the Company's consolidated interest expense was attributable to
the Company's long-term and sub-acute services and its foreign operations due
to the capital intensive nature of these businesses and to related
acquisitions. The higher operating margins from the provision of ancillary
services have been primarily attributable to favorable reimbursement rates
under the Medicare reimbursement system. However, effective July 1, 1998,
Medicare began a four year phase in of a prospective payment system ("PPS")
which will provide reimbursement of all costs including ancillary service and
capital-related costs at a fixed fee. The Company believes that under PPS for
long-term and subacute care services it may be better able than some of its
competitors to respond to the new PPS environment because it provides more
types of ancillary services in-house and to nonaffiliated facilities than
many of its competitors. There can be no assurance that the Company will be
able to maintain its margins or that its margins will not decrease and that
PPS will not have a material adverse effect on the Company's financial
condition or results of operations. See "Effects from Changes in
Reimbursement."
On June 30, 1998, a wholly owned subsidiary of the Company merged
with Retirement Care Associates, Inc. ("RCA"), an operator of 98 skilled
nursing facilities and assisted living centers in eight states in the
southeastern United States. RCA also owned approximately 65% of Contour
Medical, Inc. ("Contour"), a national provider of medical/surgical supplies.
The RCA merger was accounted for as a pooling of interests and accordingly,
the financial statements have been restated to include the accounts and
operations of RCA for all periods prior to the merger. In addition, on June
30, 1998, the Company also acquired the remaining 35% of Contour. The Contour
acquisition was accounted for as a purchase.
The Company's results of operations for the three and nine months
ended September 30, 1998 and 1997 reflect the acquisition of facilities, the
growth of the Company's existing facility operations, the expansion of the
Company's therapy service operations and temporary therapy staffing services,
and the growth of the Company's pharmaceutical and medical supply operations.
In October 1997, the Company acquired Regency Health Services, Inc.
("Regency"), an operator of skilled nursing facilities and a diversified
provider of rehabilitation therapy, pharmacy and home health services. At the
date of acquisition, Regency operated 111 long-term care facilities
(including one managed facility) in the United States and provided
rehabilitation therapy and pharmacy services to both affiliated and
nonaffiliated facilities.
In addition, in January 1997, the Company acquired the portion not
previously owned by the Company of Ashbourne PLC ("Ashbourne"), an operator
of 49 nursing and residential support facilities with 3,613 licensed beds in
the United Kingdom.
30
<PAGE>
At September 30, 1998, the Company operated 421 facilities with
48,049 licensed beds, including 98 RCA facilities with 11,235 licensed beds,
in the United States; 155 facilities with 8,705 licensed beds in the United
Kingdom; nine facilities with 1,530 licensed beds in Spain; 14 facilities
with 1,076 licensed beds in Germany and six facilities with 353 licensed beds
in Australia. During the nine months ended September 30, 1998, the Company
acquired, on a net basis, two facilities with 159 licensed beds in the United
States and 15 facilities with 648 licensed beds in the United Kingdom. Also,
during the nine months ended September 30, 1998, the Company developed and
opened 3 facilities in the United Kingdom with a total of 220 licensed beds.
At December 31, 1997, the Company operated 419 facilities with
47,890 licensed beds including 98 RCA facilities with 11,235 licensed beds in
the United States; 137 facilities with 7,837 licensed beds in the United
Kingdom; eight facilities with 1,328 licensed beds in Spain; 11 facilities
with 930 licensed beds in Germany and six facilities with 353 licensed beds
in Australia. During 1997, in addition to Regency and Ashbourne, the Company
acquired 77 facilities in the United States and nine facilities in the United
Kingdom, resulting in a total increase of 8,932 and 476 licensed beds in the
United States and United Kingdom, respectively. Also, in 1997 the Company
developed and opened one facility in the United States and nine facilities in
the United Kingdom with a total of 154 and 604 licensed beds in the United
States and United Kingdom, respectively.
The Company's therapy service operations, include the provision of
physical, occupational and speech therapy and the provision of respiratory
care. In addition the Company's therapy service operations provide other
additional ancillary healthcare services and the distribution of related
equipment and supplies. As of September 30, 1998, the Company provided its
therapy services to 1,429 nonaffiliated facilities, an increase of 338
facilities from the 1,091 nonaffiliated facilities serviced at September 30,
1997.
The Company's temporary therapy service operations, which provide
temporary therapists, had 33 and 27 division offices at September 30, 1998
and December 31, 1997, respectively. During the nine months ended September
30, 1998, the Company provided approximately 1.9 million temporary therapy
staffing hours to nonaffiliates, an 11% decrease from the 2.1 million
nonaffiliated temporary therapy staffing hours provided during the nine
months ended September 30, 1997. This decrease is a result of the decline in
demand for contract therapy services in response to revised salary
equivalency guidelines issued by HCFA in early 1998 and the transition of
skilled nursing facilities to PPS (See "Effects from Changes in
Reimbursement").
The Company's pharmaceutical and medical supply service operations
include the provision of pharmaceuticals, the distribution of related
supplies and home care. As of September 30, 1998, the Company operated 42
regional pharmacies, four in-house long-term care pharmacies, 13 home health
service agencies, seven medical supply distribution centers, and one
pharmaceutical billing and consulting center in the United States.
The Company's foreign operations, in addition to the nursing home
facilities in the United Kingdom, Spain and Germany and acute care facilities
in Australia, include the provision of pharmaceutical services in the United
Kingdom, Germany and Spain and outpatient therapy services in Canada. During
1997, the Company announced its intention to sell and divest itself of its
outpatient therapy service operations in Canada, as well as in the United
States. As of September 30, 1998, the Company operated 19 pharmacies and one
supply distribution center in the United Kingdom and one pharmacy in Spain.
31
<PAGE>
The following table, as restated to give effect to the RCA Merger,
sets forth certain operating data for the Company as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1998 1997 1997
---- ---- -----
<S> <C> <C> <C>
Long-term Care, Subacute Care and Assisted Living Facility
Operations:
Long-term care, subacute care and assisted living
facilities (including managed facilities):
Domestic operations........................................... 421 290 419
Foreign operations............................................ 184 146 162
-------------- --------- ------------
Total....................................................... 605 436 581
-------------- --------- ------------
-------------- --------- ------------
Licensed beds (including managed facilities):
Domestic operations........................................... 48,049 34,037 47,890
Foreign operations............................................ 11,664 9,293 10,448
-------------- --------- ------------
Total....................................................... 59,713 43,330 58,338
-------------- --------- ------------
-------------- --------- ------------
Therapy Service Operations:
Nonaffiliated facilities served.................................. 1,429 1,091 1,235
Affiliated facilities served..................................... 421 215 330
-------------- --------- ------------
Total....................................................... 1,850 1,306 1,565
-------------- --------- ------------
-------------- --------- ------------
Temporary Therapy Staffing Service Operations:
Hours billed to nonaffiliates (in thousands)
Three months ended Sept 30.................................... 605 735 ---
Nine months ended Sept 30.................................... 1,929 2,104 ---
Twelve months ended December 31............................... --- --- 2,817
-------------- --------- ------------
-------------- --------- ------------
Pharmaceutical and Medical Supply Operations:
Nonaffiliated facilities served.................................. 577 412 533
Affiliated facilities served..................................... 347 166 268
-------------- --------- ------------
Total....................................................... 924 578 801
-------------- --------- ------------
-------------- --------- ------------
</TABLE>
32
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amount and percentages of certain
elements of total net revenues for the periods presented (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ---------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term care, subacute
care and assisted
living services......... 568,315 69% 353,549 64% 1,692,054 69% 976,588 64%
Therapy services to
nonaffiliates........... 84,602 10% 69,090 12% 260,482 11% 198,545 13%
Foreign operations......... 70,995 9% 53,029 10% 207,343 8% 139,119 9%
Temporary therapy staffing
services to
nonaffiliates........... 29,339 4% 35,965 7% 96,493 4% 103,202 7%
Pharmaceutical and medical
supply services to
nonaffiliates........... 69,332 8% 41,221 7% 197,466 8% 111,241 7%
Management fees and other.. 4,073 --- 2,362 --- 9,829 --- 8,191 ---
-------------- ----- ------- ----- --------- ---- --------- -----
Total net revenues... 826,656 100% 555,216 100% 2,463,667 100% 1,536,886 100%
-------------- ----- ------- ----- --------- ---- --------- -----
-------------- ----- ------- ----- --------- ---- --------- -----
</TABLE>
Revenues for long-term care, subacute care and assisted living
services include revenues billed to patients for therapy and pharmaceutical
services provided by the Company's affiliated operations. Revenues for
therapy services provided to domestic affiliated facilities were $100.5
million and $57.3 million for the three months ended September 30, 1998 and
1997, respectively; and $289.9 million and $132.5 million for the nine months
ended September 30, 1998 and 1997, respectively. Revenues provided to
domestic affiliated facilities for pharmaceutical and medical supply services
were $22.0 million and $11.3 million for the three months ended September 30,
1998 and 1997, respectively; and $64.9 million and $27.0 million for the nine
months ended September 30, 1998 and 1997, respectively.
The following table presents the percentage of total net revenues
represented by certain items for the Company for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total net revenues.............................................. 100% 100% 100% 100%
Costs and expenses:
Operating.................................................... 82.7 84.9 83.0 84.1
Corporate general and administrative......................... 5.6 4.7 5.5 4.4
Provision for losses on accounts receivable.................. 1.2 1.0 1.1 0.9
Depreciation and amortization................................ 3.2 2.8 3.0 2.9
Interest, net................................................ 4.1 3.8 4.5 3.6
Merger expenses.............................................. --- --- 1.0 ---
Litigation and investigation costs........................... --- --- 1.2 ---
Loss on sale of assets....................................... --- --- 0.3 ---
------ ------ ------ ------
Total costs and expenses.................................. 96.8 97.2 99.6 95.9
Dividends on Convertible Preferred Securities of subsidiary..... 0.7 --- 0.4 ---
------ ------ ------ ------
Earnings (loss) before income taxes and extraordinary loss...... 2.5 2.8 --- 4.1
Income taxes.................................................... 1.1 2.1 1.4 2.0
------ ------ ------ ------
Net earnings (loss) before extraordinary loss................... 1.4 0.7 (1.4) 2.1
Extraordinary loss from early extinguishment of
debt, net of income taxes...................................... --- --- 0.4 ---
------ ------ ------ ------
Net earnings (loss)............................................. 1.4 0.7 (1.8) 2.1
------ ------ ------ ------
------ ------ ------ ------
Net earnings (loss) available to common stockholders............ 1.4% 0.7% (1.8)% 2.1%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
33
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total net revenues for the three months ended September 30, 1998
increased 49% from approximately $555.2 million for the three months ended
September 30, 1997 to approximately $826.7 million.
Net revenues from long-term care, subacute care and assisted living
services, which include revenues generated from therapy and pharmaceutical
services provided at the Company's facilities, increased from $353.5 million
for the three months ended September 30, 1997 to $568.3 million for the three
months ended September 30, 1998, a 61% increase. Approximately $139.3
million or 65% of this increase results from the 110 leased or owned
facilities acquired from Regency in October 1997 and approximately $50.1
million or 23% of this increase resulted from an additional 84 leased or
owned facilities acquired or opened since December 31, 1996. The remaining
net revenues increase of $27.6 million, after giving effect to a decrease in
net revenues of approximately $2.2 million relating to four facilities sold
during 1997 and six facilities sold during 1998, is primarily attributable to
increases in revenue per patient day and an increase in occupancy levels
since September 1997 on a same facility basis for the 227 leased or owned
facilities in operation for all of 1997 and the three months ended September
30, 1998. The increase in revenue per patient day was a result of payor rate
increases and the expansion of the Company's subacute services.
Net revenues from therapy services to nonaffiliated facilities
increased 22% from $69.1 million for the three months ended September 30,
1997 to $84.6 million for the three months ended September 30, 1998.
Approximately $12.1 million, or 78% of this increase, is a result of an
increase in the number of nonaffiliated facilities served from 1,091
facilities at September 30, 1997 to 1,429 facilities at September 30, 1998.
The remaining net revenue increase is primarily a result of additional other
ancillary services provided since 1997.
Net revenues from foreign operations increased 34% from $53.0
million for the three months ended September 30, 1997 to $71.0 million for
the three months ended September 30, 1998. Approximately $5.4 million or 30%
of this increase was the result of increased net revenues from the operations
in the United Kingdom. Approximately $12.6 million or 70% of this total
increase is the result of the Company's acquisitions of operations in
Germany, Australia and Spain during 1997.
Net revenues from temporary staffing services to non affiliated
facilities for the three months ended September 30, 1998 decreased 27% from
$40.0 million to $29.3 million for the three months ended September 30, 1997.
This decrease is a result of a decline in demand for contract therapy
services in response to revised salary equivalency guidelines issued by HCFA
in early 1998 and the transition of skilled nursing facilities to PPS. (See
"Effects from changes in Reimbursement.")
Net revenues from pharmaceutical and medical supply services to
nonaffiliated facilities increased 68% from $41.2 million for the three
months ended September 30, 1997 to $69.3 million for the three months ended
September 30, 1998. Net revenues increased approximately $29.1 million as a
result of the addition of 15 pharmacies and 14 home health agencies acquired
from Regency. This increase was offset by a $5.3 million decline in medical
supply revenues resulting from a loss of contracts at Contour. The remaining
net revenues increase was primarily a result of an increase in non-affiliated
facilities served as a result of additional acquisitions and expansion since
1997.
Operating expenses, which includes rent expenses of $68.0 million
and $38.3 million for the three months ended September 30, 1998 and 1997,
respectively, increased 45% from approximately $471.4 million for the three
months ended September 30, 1997 to approximately $683.6 million for the three
months ended September 30, 1998. The increase resulted primarily from the net
increase of 131 leased or owned long term care, subacute care, and assisted
living facilities since September 30, 1997 and the growth in foreign
operations, therapy services and pharmaceutical and medical supply services.
Operating expenses as a percentage of net revenues decreased from 84.9% for
the three months ended September 30, 1997 to 82.7% for the three months ended
September 30, 1998. This is primarily due to decreased operating costs at the
former RCA facility since the date of acquisition.
Corporate general and administrative expenses, which include
regional costs related to the supervision of operations, increased 80% from
$25.9 million for the three months ended September 30, 1997 to $46.5 million
for the three months ended September 30, 1998. As a percentage of net
revenues, corporate general and administrative expenses increased from 4.7%
for the three months ended September 30, 1997 to 5.6% for the three months
ended September 30, 1998. The increase was primarily due to an increase in
costs relating to the expansion of the Company's corporate infrastructure to
support newly acquired domestic operations including the acquisition of
Regency and the implementation of new business strategies.
34
<PAGE>
Provision for losses on accounts receivable increased 78% from $5.4
million for the three months ended September 30, 1997 to $9.6 million for the
three months ended September 30, 1998. As a percentage of net revenues,
provision for losses on accounts receivable increased from 1.0% for the three
months ended September 30, 1997 to 1.2% for the three months ended September
30, 1998.
Depreciation and amortization increased 69% from $15.7 million for
the three months ended September 30, 1997 to $26.6 million for the three
months ended September 30, 1998. As a percentage of net revenues,
depreciation and amortization expense increased from 2.8% for the three
months ended September 30, 1997 to 3.2% for the three months ended September
30, 1998. The increase is primarily a result of amortization of goodwill
recorded in connection with the acquisition of Regency in October 1997,
ownership of foreign facilities acquired since 1997 and increased capital
spending.
Net interest expense increased 59% from $21.2 million for the three
months ended September 30, 1997 to $33.8 million for the three months ended
September 30, 1998. As a percentage of net revenues, interest expense
increased from 3.8% for the three months ended September 30, 1997 to 4.1% for
the three months ended September 30, 1998. The increase was related to (i)
the Company's issuance of $150 million of 9 3/8% Notes in May 1998, (ii) an
increase in borrowings under the Company's Senior Credit Facility associated
with various acquisitions during 1997 and 1998 including Regency and
Ashbourne and various acquisitions in Spain, Germany and Australia and (iii)
offset partially by the Company's hedging strategy (see "Liquidity and
Capital Resources").
The Company's effective tax rate was 43.5% for the three months
ended September 30, 1998 compared to 76.1% for the three months ended
September 30, 1997. The decrease in the effective tax rate relates to 1997
losses incurred by RCA prior to acquisition for which no tax benefit was
provided. The Company's effective tax rate, excluding the effect of RCA, was
approximately 39.0% for the three months ended September 30, 1997. Excluding
the effects of RCA, the increase in the Company's effective tax rate was due
to a less favorable mix of state income in the United States than in prior
year and the increased amount of non-deductible goodwill amortization expense
resulting primarily from the acquisition of Regency.
Net earnings available to common stockholders increased 208% from
$3.7 million for the three months ended September 30, 1997 to $11.5 million
for the three months ended September 30, 1998. As a percentage of net
revenues, net earnings before income taxes decreased from 2.8% for the three
months ended September 30, 1997 to 2.5% for the three months ended September
30, 1998. The margin decrease was primarily due to increased borrowings and
borrowing costs, increased depreciation and amortization costs and increased
corporate and general administrative expenses which were partially offset by
a decline in operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total net revenues for the nine months ended September 30, 1998
increased 67% from approximately $1.5 billion for the nine months ended
September 30, 1997 to $2.5 billion.
Net revenues from long-term care, subacute care and assisted living
services, which include revenues generated from therapy and pharmaceutical
services provided at the Company's facilities, increased from $976.6 million
for the nine months ended September 30, 1997 to $1.7 billion for the nine
months ended September 30, 1998, a 74% increase. Approximately $412.4 million
or 56% of this increase results from 110 leased or owned facilities acquired
from Regency in October 1997 and approximately $212.6 million or 29% of this
increase resulted from an additional 84 facilities acquired or opened since
December 31, 1996. The remaining net revenue increase of $109.7 million,
after giving effect to a decrease in net revenues of approximately $11.3
million relating to six facilities sold during 1998 and four facilities sold
during 1997, is primarily attributable to an increase in revenue per patient
day and an increase in occupancy levels since September 30, 1997 on a same
facility basis for the 227 leased or owned facilities in operation for all of
1997 and the nine months ended September 30, 1998. The increase in revenue per
patient day was a result of payor rate increases and the expansion of the
Company's subacute services.
Net revenues from therapy services to nonaffiliated facilities
increased 31% from $198.5 million for the nine months ended September 30,
1997 to $260.5 million for the nine months ended September 30, 1998.
Approximately $45.9 million, or 74% of this increase is a result of an
increase in the number of nonaffiliated facilities served
35
<PAGE>
from 1,091 facilities at September 30, 1997 to 1,429 facilities at September
30, 1998. The remaining net revenue increase is primarily a result of
additional ancillary services provided since 1997.
Net revenues from foreign operations increased 49% from $139.1
million for the nine months ended September 30, 1997 to $207.3 million for
the nine months ended September 30, 1998. Approximately $ 31.5 million or
46% of this increase was the result of increased net revenues from
operations in the United Kingdom. Approximately $ 36.7 million or 54% of
this total increase is the result of the Company's acquisitions of nursing
homes in Germany, Spain and Australia during 1997.
Net revenues from temporary therapy staffing services to
nonaffiliated facilities decreased 7% from $103.3 million for the nine months
ended September 30, 1997 to $96.5 million for the nine months ended September
30, 1998. This decrease is a result of a decline in demand for contract
therapy services in response to revised salary equivalency guidelines issued
by HCFA in early 1998 and the transition of skilled nursing facilities to PPS
(See "Effects From Changes in Reimbursement.")
Net revenues from pharmaceutical and medical supply services to
nonaffiliated facilities increased 78% from $111.2 million for the nine
months ended September 30, 1997 to $197.5 million for the nine months ended
September 30, 1998. Approximately $84.7 million of the increase in net
revenues was the result of the addition of 10 pharmacies and 14 home health
agencies acquired from Regency. This increase was partially offset by a $14.3
million decline in medical supply revenues resulting from a loss of Contracts
at Contour. The remaining increase in net revenues was primarily the result
of the increase in non affiliated facilities served as a result of additional
acquisitions and expansion since 1997.
Operating expenses, which includes rent expense of $192.1 million
and $107.1 million for the nine months ended September 30, 1998 and 1997,
respectively, increased 67% from $1.2 billion for the nine months ended
September 30, 1997 to $2.0 billion for the nine months ended September 30,
1998. The increase resulted primarily from the net increase of 131 leased or
owned facilities since September 30, 1997 and the growth in foreign
operations, therapy services and pharmaceutical and medical supply services.
Operating expenses as a percentage of net revenues decreased from 84.1% for
the nine months ended September 30, 1997 to 83.0% for the nine months ended
September 30, 1998.
Corporate general and administrative expenses, which include
regional costs related to the supervision of operations, increased 98% from
$68.3 million for the nine months ended September 30, 1997 to $134.9 million
for the nine months ended September 30, 1998. As a percentage of net
revenues, corporate general and administrative expenses increased from 4.4%
for the nine months ended September 30, 1997 to 5.5% for the nine months
ended September 30, 1998. The increase was primarily due to an increase in
costs relating to the expansion of the Company's corporate infrastructure to
support newly acquired domestic operations including the acquisition of
Regency and implementation of new business strategies.
Provision for losses on accounts receivable increased 100% from
$14.0 million for the nine months ended September 30, 1997 to $28.0 million
for the nine months ended September 30, 1998. As a percentage of net
revenues, provision for losses on accounts receivable increased from 0.9% for
the nine months ended September 30, 1997 to 1.1% for the nine months ended
September 30, 1998.
Depreciation and amortization increased 66% from $44.0 million for
the nine months ended September 30, 1997 to $73.1 million for the nine months
ended September 30, 1998. As a percentage of net revenues, depreciation and
amortization expense increased from 2.9% for the nine months ended September
30, 1997 to 3.0% for the nine months ended September 30, 1998, respectively.
Net interest expense increased 100% from $54.9 million for the nine
months ended September 30, 1997 to $109.9 million for the nine months ended
September 30, 1998. As a percentage of net revenues, interest expense
increased from 3.6% for the nine months ended September 30, 1997 to 4.5% for
the nine months ended September 30, 1998. The increase was related to (i) an
increase in the Company's weighted average interest rate resulting from the
Company's issuance of $250 million of 9 1/2% Notes in July 1997 and the
Company's issuance of $150 million of 9 3/8% Notes in May 1998, (ii) higher
interest rates and borrowing costs under the Company's Senior Credit Facility
as compared to the old credit facility that was retired in October 1997,
(iii) an increase in borrowings under the Company's
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<PAGE>
Senior Credit Facility associated with various acquisitions during 1997 and
1998 including Regency and Ashbourne and various acquisitions in Spain,
Germany and Australia and (iv) offset partially by the Company's hedging
strategy (see "Liquidity and Capital Resources").
In connection with the merger of RCA, the Company recorded merger
expenses of $25.6 million for transaction costs and integration expenses,
including elimination of redundant corporate functions, severance costs
related to the headcount reductions and the write-off of certain intangibles
and property and equipment.
The Company recorded a charge for litigation and investigation costs
of $30.3 million during the nine months ended September 30, 1998 for
professional fees and settlement costs related to certain legal and
regulatory matters. The charge includes amounts provided for (i) the
settlement of shareholder class action litigation against RCA (see
"Litigation") and anticipated costs related to other shareholder actions
against RCA and its former directors, officers and advisors; (ii) the
settlement of a shareholder suit related to the Company's acquisition in 1995
of SunCare (see "Litigation"); (iii) anticipated costs related to certain
state regulatory investigations of RCA's operations for matters which
occurred prior to the Company's acquisition of RCA; and (iv) estimated costs
to resolve the ongoing investigation by the Connecticut Department of Social
Services ("DSS") (see "Regulation").
The Company recognized a $7.8 million loss on sale of assets in the
nine months ended September 30,1998. Approximately $5.4 million was recorded
in connection with the anticipated sale of five nursing homes and for certain
adjustments in the sale price of three nursing homes in 1996. Approximately,
$2.4 million relates to additional losses on the Company's anticipated sale
of its outpatient rehabilitation clinics in Canada. The Company recorded a
$7.0 million loss in 1997 in order to reduce the carrying value of its
Canadian operations to fair value based on its estimates of selling value and
costs to sell.
In the nine months ended September 30, 1998, the Company recorded an
extraordinary loss of $10.1 million, net of income tax benefit of $3.7
million. Approximately $10.2 million of the gross loss relates to permanent
pay-down of $300 million of the term loan portion of the Company's credit
facility. The remaining $3.7 million of the gross loss relates to the
retirement of $5.0 million of Contour convertible debentures which were
purchased by the Company.
Excluding the loss on sale of assets, litigation and investigation
costs and the merger expenses (collectively the "Special Charges"), the
Company's effective tax rate was 52.5 % for the nine months ended September
30, 1998 compared to 49.8 % for the nine months ended September 30, 1997. The
increase in the effective tax rate was due to a less favorable mix of state
income in the United States than in the prior year and the increased amount
of non-deductible goodwill amortization expense resulting primarily from the
acquisition of Regency. The effective rate in both periods was negatively
impacted by losses incurred by RCA prior to acquisition for which no tax
benefit was provided.
Excluding the Special Charges and the extraordinary loss, net
earnings were $29.6 million for the nine months ended September 30, 1998 as
compared to net earnings of $31.7 million for the nine months ended September
30, 1997. As a percentage of net revenues, net earnings before income taxes
excluding the special charges decreased from 4.1% for the nine months ended
September 30, 1997 to 2.5% for the nine months ended September 30, 1998. The
margin decrease was primarily due to increased borrowings and borrowing
costs, increased depreciation and amortization and increased corporate and
general administrative expenses which were partially offset by a decline in
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $375.9
million, including cash and cash equivalents of $13.1 million, as compared to
working capital of $289.6 million, including cash and cash equivalents of
$32.7 million at December 31, 1997. For the nine months ended September 30,
1998, net cash used for operations was $56.1 million compared to net cash
provided by operations for the nine months ended September 30, 1997 of $ 67.3
million. The net cash used for operations in the nine months ended September
30, 1998 reflects an increase in accounts receivable and inventory
expenditures.
The Company's accounts receivable have increased since December 31,
1997. Accounts receivable increased in part because of the growth in the
Company's inpatient, therapy and pharmaceutical services businesses since
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<PAGE>
December 31, 1997 and in part because of the fact that when long-term care
facilities are acquired by the Company, the fiscal intermediaries are changed
to the Company's fiscal intermediary resulting in temporary delays in timing
of third-party payments. The Company's Regency facilities are still
experiencing delays in payment from the Company's fiscal intermediary.
Accounts receivable for therapy services have also increased in part
because the ability of nonaffiliated facilities to provide timely payments
has been impacted by their receipt of payments from fiscal intermediaries
which, in some instances, have been delayed due to the fiscal intermediaries
conducting reviews of facilities' therapy claims.
Other significant operating uses of cash for the nine months ended
September 30, 1998 were payments of $118.8 million for interest and net
payments totaling $ 22.8 million for income taxes.
The Company incurred $104.8 million in capital expenditures during
the nine months ended September 30, 1998. Expenditures related primarily to
the construction of a corporate office building and to the Company's
long-term care, subacute care and assisted living facility operations
including the construction of two new facilities in the United States and
three new facilities in the United Kingdom as well as routine capital
expenditures. The Company had capital expenditure commitments, as of
September 30, 1998, under various contracts, including approximately $53.5
million in the United States and L0.3 million ($0.5 million as of September
30, 1998) in the United Kingdom. These include contractual commitments to
improve existing facilities and to develop, construct and complete a
corporate office building.
The Company paid approximately a net of $48.3 million in cash for
acquisitions during the nine months ended September 30, 1998. These
acquisitions were funded by borrowings under the Company's Senior Credit
Facility.
On June 30, 1998, a wholly owned subsidiary of the Company merged
with RCA, an operator of skilled nursing facilities and assisted living
centers in eight states in the southeastern United States. RCA also owned
approximately 65% of Contour, a national provider of medical/surgical
supplies. Under the amended terms of the merger agreement the Company issued
approximately 7,611,000 shares of its common stock (valued at $111.3 million
based upon the closing price of $14.625 per share as of June 30, 1998) for
all of the outstanding common stock of RCA and certain redeemable preferred
shares of RCA. The Company also issued 298,334 shares of its Series B
Convertible Preferred Stock in exchange for the outstanding shares of RCA's
Series F Preferred Stock, which was convertible into 287,892 shares of Sun
common stock valued at $2.8 million at June 30, 1998. As of September 30,
1998 198,334 of the Series B Shares had been converted into 191,391 shares
of Sun Common Stock and remaining Series B Shares were automatically
converted in October 1998. In addition, the Company assumed approximately
$170.4 million of indebtedness excluding $19.8 million of indebtedness
eliminated in consolidation. The merger was accounted for as a pooling of
interests and accordingly, the financial statements have been restated to
include the accounts and operations of RCA for all periods prior to the
merger.
On June 30, 1998, the Company also acquired the remaining 35% of
Contour. The Company issued approximately 1,886,000 shares of its common
stock (valued at approximately $27.6 million based upon the closing price of
$14.625 per share as of June 30, 1998) for the remaining outstanding Contour
common stock. The acquisition was accounted for as a purchase and resulted
in $23.4 million of additional goodwill.
On November 25, 1997, the Company, RCA and representatives of the
plaintiffs in certain pending class actions against RCA and its management
reached an agreement in principle to settle the class actions for $9.0
million. In connection with the agreement in principle, the Company escrowed
on behalf of the defendants the settlement amount into an escrow fund which
was expensed in the nine months ended September 30, 1998. The settlement is
subject to, among other things, confirmatory discovery, the execution of
definitive documentation and court approval.
In connection with the merger of RCA, the Company charged against
the earnings of the combined company $25.6 million for transaction costs and
integration expenses, including elimination of redundant corporate functions,
severance costs related to the headcount reductions and the write-off of
certain intangibles and property and equipment. At September 30, 1998,
liabilities for approximately $0.9 million in severance and related costs and
$12.1 million for costs remaining on the balance sheet. The Company continues
to complete its consolidation of operations.
The Company also conducts business in the United Kingdom, Spain,
Australia, Germany and Canada. The foreign operations accounted for 8% and 9%
of the Company's total net revenues during the nine months ended September
30, 1998 and 1997, respectively, and 21% of the Company's consolidated total
assets as of September 30,
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<PAGE>
1998. The Company's financial condition and results of operations are subject
to foreign exchange risk. Because of the Company's foreign growth strategies,
the Company does not expect to repatriate funds invested overseas and,
therefore, foreign currency transaction exposure is not normally hedged.
Exceptional planned foreign currency cash flow requirements, such as
acquisitions overseas, are hedged selectively to prevent fluctuations in the
anticipated foreign currency value. Changes in the net worth of the Company's
foreign subsidiaries arising from currency fluctuations are reflected in the
accumulated other comprehensive income component of stockholders' equity.
Under the terms of an Amended and Restated subordinated Loan
Agreement (the "Subordinated Loan") the Company has advanced $35.1 million
and has agreed to advance up to a total of an additional $40 million, plus $5
million to cover accrued interest due and owing to the Company and other
lenders, to a developer of assisted living facilities to cover 20% of the
costs of the development, construction and operation of assisted living
facilities. Any advances under the Subordinated Loan have been and are
expected to be funded by borrowings under the Company's Senior Credit
Facility and will be subject to certain conditions, including the approval of
each project by the Company. The developer has mortgage financing for 70% of
the cost of each project. The remaining 10% of the cost of each project will
be funded from the developer's own funds. All of the advances under the
Subordinated Loan, whether made before or after the date on which the
Subordinated Loan was amended and restated, bear interest at the rate of 10%
per annum. The portion of the subordinated Loan advanced with respect to each
project is due five (5) years after the first advance is made with respect to
such project for construction related costs. Repayment of the Subordinated
Loan is subordinated to the repayment of the amounts due to the other
lenders. As of September 30, 1998, four facilities had been completed and
were being managed by the Company under fee for service management
agreements, three facilities were under construction and five facilities were
in the evaluation process. In addition, the Company has entered into a lease
option agreement with the developer whereby the Company will pay the
developer $250,000 for the option to lease any of the facilities. The option
payment is due at the time the Company authorizes the developer to proceed
with a project. The option grants the company the right to lease the
facilities for an initial term of 15 years, subject to four renewal terms of
5 years each, for a rent equal to the greater of the fair market value of the
project or the total amount invested by the developer multiplied by the sum
of the interest rate paid by the developer on its permanent financing plus a
spread of 25 basis points. The option is to be exercised upon the developers'
presentation of an option package after a specified period of time, which
generally funds from substantial completion of each facility. The lease
option agreement supersedes in its entirety the purchase option agreement
previously executed by the company and the developer.
At September 30, 1998, the Company had, on a consolidated basis,
$1.7 billion of outstanding indebtedness including capital lease
obligations and $706.2 million of indebtedness under its $886.2 million
Senior Credit Facility. The Company also had $43.0 million of outstanding
standby letters of credit under its Senior Credit Facility as of September
30, 1998.
In May 1998, the Company issued $345 million of 7% convertible trust
issued preferred securities and $150 million of 9 3/8% Senior Subordinated
Notes due 2008 (yield of 9.425%) (collectively the "Offerings"). Each
convertible preferred security is convertible into 1.2419 shares of common
stock, par value $0.01 per share, of Sun, (equivalent to an initial
conversion price of $20.13 per share of Sun common stock). $300 million of
the net proceeds from the Offerings were used by the Company to permanently
repay certain outstanding borrowings under the term loan portion of its
Senior Credit Facility and the remainder of the net proceeds from the
Offerings were used to reduce certain outstanding borrowings under the
revolving credit portion of the Company's Senior Credit Facility (which
amounts may be subsequently reborrowed).
On May 5, 1998 the Company entered into certain interest rate
transactions with an aggregate notional value of $850 million to minimize the
risks and/or costs associated with certain long-term debt of the Company. The
Company does not otherwise utilize financial instruments for trading or other
speculative purposes. The counterparty to these contractual arrangements is a
major international financial institution with which the Company has other
financial relationships. The Company will be exposed to credit loss in the
event of non-performance by the counterparty, however, the Company does not
anticipate non-performance.
The interest rate swap transactions have been designated as hedges
for accounting purposes. The Company will continue to evaluate this
designation on a periodic basis. The amounts to be paid or received are
accrued and are
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<PAGE>
recognized as an adjustment to interest expense.
Under the interest rate swap transactions, the Company will be a
variable rate payor, effectively converting $550 million of fixed rate debt
and $300 million of variable rate Senior Credit Facility debt, which is based
on U.S. LIBOR, into variable rate debt based on an index of foreign interest
rates. The index of foreign interest rates is based on an equally weighted
average of the interest rates of Germany and Switzerland and the Bank Bill
rate of Australia except that on May 1, 2001 the LIBOR of the United Kingdom
will replace the LIBOR of Switzerland with respect to the $300 million swap
having a maturity date of May 2008. All payments will be denominated in U.S.
dollars. Each interest rate swap includes cap protection limiting the
Company's exposure to interest rate fluctuations. The following summarizes
the terms of the various interest rate swap transactions at May 5, 1998:
<TABLE>
<CAPTION>
INTEREST RATE
NOTIONAL MATURITY ------------- MAXIMUM INTEREST
AMOUNT DATE RECEIVE PAY(1) RATE PAID
------ ---- ------- ------ ---------
<S> <C> <C> <C> <C> <C>
$300,000,000 5/2003 5.69%(2) 5.53% 7.0%
$300,000,000 5/2008 7.00%(3) 6.35% 7.0% (5/1998-5/2001)
8.5% (5/2001-5/2008)
$250,000,000 7/2002 9.50%(3) 8.95% 9.5% (5/1998-4/2000)
10.5% (4/2000-7/2002)
</TABLE>
- - -----------
(1) An index of foreign interest rates, reset quarterly (see above
description).
(2) U.S. LIBOR, reset quarterly.
(3) Fixed.
The Company's hedging strategy in entering into the interest rate
swap transactions is to obtain the benefit of less costly variable rate debt
while capping its overall exposure to interest rate fluctuations. The Company
believes that an index of foreign interest rates lessens the volatility of
interest rate fluctuations. However, no assurance can be given that such a
strategy will lower the volatility of interest rate fluctuations or reduce
the cost of capital.
The Company's ongoing capital requirements relate to, among other
things, the costs associated with its facilities under construction, routine
capital expenditures, advances under the Financing Facility, potential
acquisitions and implementation of growth strategies.
Following the Company's acquisition of RCA on June 30, 1998, the
Company's leverage ratio (the ratio of Total Debt to EBITDAR, each as defined
in the Company's Senior Credit Facility) as of June 30, 1998 exceeded the
leverage ratio permitted in the Company's Senior Credit Facility. The lenders
under the Senior Credit Facility promptly waived the Company's non-compliance
of the permitted leverage ratio. The Company and the lenders subsequently
amended the Senior Credit Facility to, among other things, increase the
Company's permitted leverage ratio, with which the Company is currently in
compliance.
The Company believes that its current borrowing capacity under its
Senior Credit Facility, the net proceeds from the Offerings and cash from
operations will be sufficient to satisfy its working capital needs, capital
commitments related to its facilities under construction, routine capital
expenditures, advances under the Financing Facility, current debt service
obligations and to fund potential conversions of 6 1/2% Convertible
Debentures. The Company anticipates that it will fund its construction
commitments as well as its requirements relating to future growth through (i)
the available borrowing capacity under its Senior Credit Facility, (ii) the
use of operating leases and debt or equity related securities in the future
as a means of acquiring facilities and new operations, (iii) the availability
of sale and leaseback financing through real estate investment trusts and
other financing sources and (iv) the sale of debt or equity securities in the
public or private capital markets. There can be no assurance that the Company
will seek or obtain additional sources of financing in the next twelve
months. In addition, such additional financing, if any, may be subject to
certain restrictions including mandatory prepayment provisions in the Senior
Credit Facility or otherwise require approval of various lenders under the
Company's Senior Credit Facility. If such additional sources of financing are
not available, the Company may not be able to pursue growth opportunities as
actively as it has in the past.
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<PAGE>
NEWLY ISSUED PRONOUNCEMENTS
On April 3, 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
financial statements for fiscal years beginning after December 31, 1998.
Initial application will result in the estimated write-off of $13.2 million
in pre-opening and organizational costs on January 1, 1999, which will be
reported as a cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." Under
SFAS 133, which will be effective January 1, 2000, all derivatives are
required to be recognized on the balance sheet at fair value. Gains or losses
from changes in fair value would be recognized in earnings in the period of
change unless the derivative is designated as a hedging instrument. The
Company is studying the impact of the new standard, and is unable to predict
at this time the impact on its financial statements.
EFFECTS FROM CHANGES IN REIMBURSEMENT
The Company derives a substantial percentage of its total revenues
from Medicare, Medicaid and private insurance. The Company's financial
condition and results of operations may be affected by the revenue
reimbursement process, which is complex and can involve lengthy delays
between the recognition of revenue and the time reimbursement amounts are
settled. Net revenues realizable under third-party payor agreements are
subject to change due to examination and retroactive adjustment by payors
during the settlement process. Payors may disallow in whole or in part
requests for reimbursement based on determinations that certain costs are not
reimbursable or reasonable or because additional supporting documentation is
necessary. The Company recognizes revenues from third-party payors and
accrues estimated settlement amounts in the period in which the related
services are provided. The Company estimates these settlement balances by
making determinations based on its prior settlement experience and its
understanding of the applicable reimbursement rules and regulations. The
majority of third-party payor balances are settled two to three years
following the provision of services. The Company has experienced differences
between the net amounts accrued and subsequent settlements, which differences
are recorded in operations at the time of settlement. For example, in the
fourth quarter of 1997, the Company recorded negative revenue adjustments
totaling approximately $15.0 million resulting from changes in accounting
estimates of amounts realizable from third-party payors. These changes in
accounting estimates primarily arose out of the settlement in late 1997 of
certain facility cost reports for 1994 and 1995 and also include estimated
charges for projected settlements in 1996. Accounts receivable have also
increased in part because the ability of nonaffiliated facilities to provide
timely payments has been impacted by their receipt of payments from fiscal
intermediaries which, in some instances, have been delayed due to the fiscal
intermediaries conducting reviews of facilities' therapy claims.
The Company's financial condition and results of operations would be
materially and adversely affected if the amounts actually received from
third-party payors in any reporting period differed materially from the
amounts accrued in prior periods. The Company's financial condition and
results of operations may also be affected by the timing of reimbursement
payments and rate adjustments from third-party payors. The Company has from
time to time experienced delays in receiving final settlement and
reimbursement from government agencies.
Various cost containment measures adopted by governmental and
private pay sources have begun to restrict the scope and amount of
reimbursable healthcare expenses and limit increases in reimbursement rates
for medical services. Any reductions in reimbursement levels under Medicaid,
Medicare or private payor programs and any changes in applicable government
regulations or interpretations of existing regulations could significantly
affect the Company's profitability. Furthermore, government programs are
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially affect the rate of payment to the Company's facilities and its
therapy and pharmaceutical businesses. There can be no assurance that
payments under governmental or private payor programs will remain at levels
comparable to present levels or will be adequate to cover the costs of
providing services to patients eligible for assistance under such programs.
Significant
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<PAGE>
decreases in utilization, changes in reimbursement, including salary
equivalency and PPS, could have a material adverse effect on the Company's
financial condition and results of operations, including the possible
impairment of certain assets.
In the Balanced Budget Act of 1997 (the "BBA"), Congress passed
numerous changes to the reimbursement policies applicable to exempt hospital
services, skilled nursing, therapy and other ancillary services. The BBA
generally provides for a phase-in of a prospective payment system for skilled
nursing facilities over a four year period. PPS will become effective for the
Company's facilities on January 1, 1999, other than the facilities acquired
with RCA for which PPS became effective July 1, 1998. Under PPS, Medicare
will pay skilled nursing facilities a fixed fee per patient per day, based on
the acuity level of the patient, to cover all post-hospital extended care
routine service costs (i.e. Medicare Part A patients), including ancillary
and capital related costs for beneficiaries receiving skilled services. The
per diem rate will also cover substantially all items and services furnished
during a covered stay for which reimbursement is currently made separately
under Medicare. Such services are currently reimbursed on a "pass through"
basis. During the phase-in, payments will be based on a blend of the
facility's historical costs and a federally established per diem rate.
Interim final regulations, including the federal per diem rate, were
published on May 12, 1998. Although it is unclear what the long-term impact
of PPS will be, the transition to PPS for RCA facilities on July
1, 1998 negatively impacted the Company's earnings for the quarter ended
September 30, 1998. There can be no assurance that PPS will not have a
material adverse effect on the results of operations and financial condition
of the Company.
The Company's revenues from its inpatient facilities will be
significantly affected by the federally established per diem rate. The new
per diem rate will set limits on the amount of certain types of care the
government will pay for per patient per day. The Company expects that the per
diem reimbursement rate will generally be less than the amount the Company's
inpatient facilities currently receive on a daily basis under cost based
reimbursement. In response, the Company intends to take various actions to
reduce its costs, including the elimination of therapy positions. Moreover,
since the Company treats a greater percentage of higher acuity patients than
many nursing homes, the Company may also be adversely impacted if the federal
per diem rates for higher acuity patients do not adequately compensate the
Company for the additional expenses and risks for caring for such patients.
As a result, there can be no assurance that the Company's financial condition
and results of operations will not be materially and adversely affected by
the implementation of PPS.
The Company's response to the implementation of PPS includes the
establishment SunSolution. SunSolution will offer to provide ancillary
services for a fixed fee to nonaffiliated facilities. There can be no
assurance that there will be a market for the SunSolution products and
services or whether a change in the demand for the Company's services
following the imposition of PPS will not adversely affect the Company's
revenues. Even if there is a market for SunSolution's services, no assurance
can be given that the costs of providing the contracted for services will be
less than the fixed fee received by the Company for such services. Given the
importance of the profitability of Sun's ancillary services, there can be no
assurance that the Company's margins and ultimately the Company's results of
operations and financial condition will not be materially and adversely
affected by the implementation of PPS.
Effective January 1, 1999, for all Medicare patients not receiving
post-hospital extended care services (i.e., Medicare Part B patients),
reimbursement for ancillary services, including rehabilitation therapy,
medical supplies, pharmacy, temporary staffing for rehabilitation therapy,
and other ancillary services, will be made pursuant to fee schedules
published on November 2, 1998. In addition, effective January 1, 1999, there
will be an annual per beneficiary cap of $1,500 on Medicare reimbursement for
outpatient physical therapy and speech therapy and an annual per beneficiary
cap of $1,500 on Medicare reimbursement for occupational therapy. Facilities
will be permitted to bill patients directly for services rendered in excess
of these caps; however, there can be no assurance that the Company will
receive any payments in excess of these caps. There also can be no assurance
that such fee schedules and caps will not have a material adverse effect on
the Company.
The Company's growth strategy relies heavily on the acquisition of
long-term and subacute care facilities. Regardless of the legal form of the
acquisition, the Medicare and Medicaid Programs often require that the
Company assume certain obligations relating to the reimbursement paid to the
former operators of the facilities acquired by the Company. From time to
time, fiscal intermediaries and Medicaid agencies examine cost reports filed
by such predecessor operators. The Company is currently the subject of
several such examinations. If, as a result of any such examinations, it is
concluded that overpayments to a predecessor operator were made, the Company,
as the current operator of such facilities, may be held financially
responsible for such overpayments. At this time the Company is
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unable to predict the outcome of any examinations.
Prior to the effective date of PPS for any facility, reimbursement
for therapy services is currently evaluated under Medicare's reasonable cost
principles. Under current law, the reasonable costs for physical therapy and
respiratory services may not exceed an amount equal to the salary that would
reasonably have been paid to a therapist for providing the services (together
with certain additional costs) within each geographical area. Salary
equivalency guidelines are the amounts published by HCFA which reflect the
prevailing salary, fringe benefit and expense factors as determined by HCFA.
HCFA then uses the salary equivalency guidelines to determine the
reimbursement rates for physical therapy and respiratory therapy services.
Although salary equivalency guidelines will no longer be effective following
the implementation of PPS for Part A and fee schedule reimbursement for Part
B, HCFA has published new salary equivalency guidelines.
In January, 1998, HCFA revised salary equivalency guidelines for
respiratory therapy and physical therapy, and for the first time published
new salary equivalency guidelines for speech therapy and occupational
therapy. The new salary equivalency guidelines apply to all services rendered
on or after April 10, 1998. Implementation of these guidelines has increased
reimbursement rates for respiratory therapy and physical therapy, but
effectively reduced reimbursement rates for speech therapy and occupational
therapy. The effect of the changes could have a material adverse impact on
the Company's results of operations and to date have resulted in a decline in
the demand for contract therapy services. The salary equivalency guidelines
rates will have no continuing impact on reimbursement for therapy services
rendered to a Medicare patient receiving post-hospital extended care services
following the commencement of PPS, because under PPS, therapy services will
be bundled into each facility's per diem reimbursement from Medicare. In
addition, the salary equivalency guidelines will have no continuing impact on
therapy services rendered to all other Medicare patients after the
institution of fee schedule reimbursement for therapy services on January 1,
1999.
Additionally, the salary equivalency guidelines adopted could have
an adverse effect on the cash flow of the facilities to whom the Company
provides services, thereby potentially adversely affecting the collectibility
of amounts owed to the Company.
In 1995, and periodically since then, HCFA has provided information
to intermediaries for use in determining reasonable costs for occupational
and speech therapy. This information, although not intended to impose limits
on such costs, suggests that fiscal intermediaries should carefully review
costs which appear to be in excess of what a "prudent buyer" would pay for
those services. While the effect of these directives is still uncertain, they
are a factor considered by such intermediaries in evaluating the
reasonableness of amounts paid by providers for the services of the Company's
rehabilitation therapy subsidiary. When PPS and fee schedules are
implemented, reimbursement for these services will no longer be on a "pass
through" basis and the HCFA directives and reasonable cost guidelines
discussed in this paragraph will become moot as to services rendered after
their effectiveness. In addition, some intermediaries require facilities to
justify the cost of contract therapists versus employed therapists as an
aspect of the "prudent buyer" analysis. With respect to rehabilitation
therapy services provided to affiliated facilities, a retroactive adjustment
of Medicare reimbursement could be made for some prior periods. With respect
to nonaffiliated facilities, an adjustment of reimbursement rates for therapy
services could result in indemnity claims against the Company, based on the
terms of substantially all of the Company's existing contracts with such
facilities, for payments previously made by such facilities to the Company
that are reduced by Medicare in the audit process. Any change in
reimbursement rates resulting from implementation of the HCFA directives or a
reduction in reimbursement as a result of a change in application of
reasonable cost guidelines could have a material adverse effect on the
Company's financial condition and results of operations (depending on the
rates adopted) and customers' ability to pay for prior and continuing
services. When PPS with respect to Medicare Part A (effective for the
Company's facilities on January 1, 1999, other than the facilities acquired
with RCA for which PPS became effective July 1, 1998) and fee schedules with
respect to Medicare Part B (effective January 1, 1999) are implemented, the
Company's facilities' current reimbursement will no longer be affected by
salary equivalency guidelines and the cost reporting settlement process.
Current Medicare regulations that apply to transactions between
related parties, such as the Company's subsidiaries, are relevant to the
amount of Medicare reimbursement that the Company is entitled to receive for
the rehabilitation and respiratory therapy and pharmaceutical services that
it provides to Company-operated facilities. These related party regulations
require that, among other things, a substantial part of the rehabilitation
and respiratory
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therapy services or pharmaceutical services, as the case may be, of the
relevant subsidiary be transacted with nonaffiliated entities in order for
the Company to receive reimbursement for services provided to
Company-operated facilities at the rates applicable to services provided to
nonaffiliated entities. The related party regulations do not indicate a
specific level of services that must be provided to nonaffiliated entities in
order to satisfy the "substantial part" requirement of such regulations. In
instances where this issue has been litigated by others, no consistent
standard has emerged as to the appropriate threshold necessary to satisfy the
"substantial part" requirement.
The Company's net revenues from rehabilitation therapy services,
including net revenues from temporary therapy staffing services, provided to
nonaffiliated facilities represented 58%, 70% and 74% of total rehabilitation
and temporary therapy staffing services net revenues for the nine months
ended September 30, 1998 and the years ended December 31, 1997 and 1996,
respectively. Respiratory therapy services provided to nonaffiliated
facilities represented 50%, 63% and 55% of total respiratory therapy services
net revenues for the nine months ended September 30, 1998 and the years ended
December 31, 1997 and 1996, respectively. Net revenues from pharmaceutical
services billed to nonaffiliated facilities represented 78%, 79% and 78% of
total pharmaceutical services revenues for the nine months ended September
30, 1998 and the years ended December 31, 1997 and 1996, respectively. The
above ratios were calculated in accordance with HCFA guidelines and
therefore, consider RCA as a non-affiliated entity for all periods prior to
acquisition. The Company believes that it satisfies the requirements of these
regulations regarding nonaffiliated business. Consequently, it has claimed
and received reimbursement under Medicare for rehabilitation and respiratory
therapy and pharmaceutical services provided to patients in its own
facilities at a higher rate than if it did not satisfy these requirements. If
the Company were deemed to not have satisfied these regulations, the
reimbursement that the Company receives for rehabilitation and respiratory
therapy and pharmaceutical services provided to its own facilities would be
significantly reduced, as a result of which the Company's financial condition
and results of operations would be materially and adversely affected. If,
upon audit by Federal or state reimbursement agencies, such agencies find
that these regulations have not been satisfied, and if, after appeal, such
findings are sustained, the Company could be required to refund some or all
of the difference between its cost of providing these services to any entity
found to be subject to the related party regulations and the higher amount
actually received. While the Company believes that it has satisfied and will
continue to satisfy these regulations, there can be no assurance that its
position would prevail if contested by relevant reimbursement agencies. The
foregoing statements with respect to the Company's ability to satisfy these
regulations are forward looking and could be affected by a number of factors,
including the interpretation of Medicare regulations by Federal or state
reimbursement agencies and the Company's ability to provide services to
nonaffiliated facilities. When PPS and the fee schedules are implemented, the
Medicare impact of the related party rule will be significantly reduced.
The Office of the Inspector General of the U.S. Department of Health
and Human Services ("OIG") has announced an intention to conduct a national
medical review that will assess the medical necessity of physical and
occupational therapy services provided to skilled nursing facility patients.
The OIG has indicated the results of the review will be used to quantify
overpayments for therapy services and to develop baseline data that can be
used to asses the impact of the BBA. The Company is unable to determine what
if any impact this review might have on the company, including its
prospective payment rates.
REGULATION
The Company's subsidiaries, including those which provide subacute
and long-term care, rehabilitation and respiratory therapy and pharmaceutical
services, are engaged in industries which are extensively regulated. As such,
in the ordinary course of business, the operations of these subsidiaries are
continuously subject to state and Federal regulatory scrutiny, supervision
and control. Such regulatory scrutiny often includes inquiries,
investigations, examinations, audits, site visits and surveys, some of which
may be non-routine. The Company's subsidiaries are currently the subject of
several such investigations. In addition to being subject to the direct
regulatory oversight of state and Federal regulatory agencies, these
industries are frequently subject to the regulatory supervision of fiscal
intermediaries.
If a provider is ever found to have engaged in improper practices,
it could be subjected to civil, administrative, or criminal fines, penalties
or restitutionary relief, and reimbursement authorities could also seek the
suspension or exclusion of the provider or individuals from participation in
their program. If a facility is decertified, the facility will not be
reimbursed by the Federal government for caring for residents that were
covered by Medicare and Medicaid, and the facility would be forced to care
for such residents without being reimbursed or to transfer such residents.
The
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Company currently has several facilities that are the subject of
decertification efforts by HCFA which the Company is contesting. The Company
believes that the decertification of one or more of its facilities, if any,
would not have a material adverse effect on the Company's business, financial
condition or results of operations;
It is the policy of the Company to comply with all applicable laws
and regulations, and the Company believes that its subsidiaries are in
substantial compliance with all material laws and regulations which are
applicable to their businesses. However, given the extent to which the
interpretation and implementation of applicable laws and regulations vary and
the lack of clear guidance in many of the areas which are the subject of
regulatory scrutiny, there can be no assurance that the business activities
of the Company's subsidiaries will not from time to time become the subject
of regulatory scrutiny, or that such scrutiny will not result in
interpretations of applicable laws or regulations by government regulators or
intermediaries which differ materially from those taken by the Company's
subsidiaries.
In 1996, the Connecticut Attorney General's office and the
Connecticut Department of Social Services ("DSS") began an investigation and
initiated a hearing in order to determine whether the Company's long-term
care subsidiary submitted false and misleading fiscal information on its 1993
and 1994 Medicaid cost reports. Since 1997, the investigation has also
covered information for the 1995 cost year as well as cost reporting periods
prior to 1993. The information under review includes submissions and
representations by the long-term care subsidiary and the Company's chief
executive officer. The evidentiary phase of the hearing has concluded. The
Company and the DDS have had settlement discussions. However, the Company is
unable to determine at this time when the proceedings will be concluded or,
if no settlement is reached, whether the DSS will seek further administrative
action or Medicaid reimbursement sanctions. No assurance can be given that a
settlement will in fact occur or whether any such settlement or other outcome
of the investigation will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Pursuant to the Health Insurance Portability and Accountability Act
of 1996, Congress has provided additional funding to Medicare and Medicaid
enforcement units to investigate potential cases of reimbursement abuse in
the health care services industry. The Act also sets guidelines to encourage
federal, state, and local law enforcement agencies to share general
information and to coordinate specific law enforcement activities including
conducting investigations, audits, evaluations, and inspections relating to
the delivery of and payment for health care. From time to time enforcement
agencies conduct audits, inspections and investigations with respect to the
reimbursement activities of the subsidiaries of the Company. The Company's
subsidiaries are currently the subject of several such investigations. It is
the Company's practice to cooperate fully in such matters.
LITIGATION
Between August 25, 1997 and October 24, 1997, ten putative class
action lawsuits (the "Actions") were filed in the United States District
Court for the Northern District of Georgia on behalf of persons who purchased
RCA Common Stock, naming RCA and certain of its officers and directors as
defendants. The complaints have overlapping defendants and largely
overlapping (although not identical) class periods. The complaints allege
violations of Federal securities laws by the defendants for disseminating
allegedly false and misleading financial statements for RCA's fiscal year
ended June 30, 1996 and its first three quarters of fiscal year 1997, which
the plaintiffs allege materially overstated RCA's profitability. Generally,
each of the Actions seeks unspecified compensatory damages, pre-judgment and
post-judgment interest, attorneys' fees and costs and other equitable and
injunctive relief.
On November 25, 1997, RCA, the Company and representatives of the
plaintiffs entered into a Memorandum of Understanding ("MOU"). Pursuant to
the MOU, the Company paid $9 million into an interest-bearing escrow account
maintained by the Company (the "Escrow Account") to settle the Actions (the
"Settlement"). RCA also agreed to assign coverage under its directors' and
officers' liability insurance policy for these specific claims to the
plaintiffs. The Settlement is contingent upon confirmatory discovery and is
subject to the execution of definitive documentation and court approval. Upon
satisfaction of the conditions precedent to the Settlement, all claims by the
class that were or could have been asserted by the plaintiffs against RCA or
any of the other defendants in the Actions will be settled and
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released, and the Actions will be dismissed in their entirety with prejudice
in exchange for the release of all funds from the Escrow Account to the
Plaintiffs. Plaintiffs commenced their confirmatory discovery in July 1998.
No assurance can be given that the Settlement will become final. There can be
no assurance that additional actions will not be filed against RCA and its
former officers and directors. However, the Actions are styled as class
actions, and should the Settlement become final, any additional class actions
would be precluded, although individual plaintiffs may opt out of the
Settlement.
The Company was notified in 1997 by a law firm representing several
national insurance companies that these companies believed that the Company
had engaged in improper billing and other practices in connection with the
Company's delivery of therapy and related services. In response, the Company
began discussions directly with these insurers and hopes to resolve these
matters without litigation; however, the Company is unable at this time to
predict whether it will be able to do so, what the eventual outcome may be or
the extent of its liability, if any, to these insurers.
YEAR 2000 RISK
STATE OF READINESS. The Company has implemented a process to address
its Year 2000 compliance issues. The process includes (i) an inventory and
assessment of the compliance of the essential systems and equipment of the
Company and of critical suppliers, customers, and other third parties, (ii)
the remediation of non-compliant systems and equipment, and (iii) contingency
planning. The Company has completed most of its inventory and assessment of
its information technology ("IT") systems and equipment and non-IT systems
and equipment (embedded technology) and approximately 50% of its inventory
and assessment of the systems and equipment of critical suppliers, customers,
and other third parties.
With respect to the Year 2000 compliance of critical third parties,
the Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. Congress' General Accounting Office recently concluded
that it is highly unlikely that all Medicare systems will be compliant on
time to ensure the delivery of uninterrupted benefits and services into the
Year 2000.
The Company has begun the remediation process for critical IT and
non-IT systems and equipment. The Company has also begun contingency planning
in the event that essential systems and equipment fail to be year 2000
compliant. The Company is planning to be Year 2000 complaint for all its
essential systems and equipment by June 30, 1999, although there can be no
assurance that it will achieve its objective by such date or by January 1,
2000 or that such potential non-compliance will not have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition there can be no assurance that all of the Company's
critical suppliers, customers and other third parties will be Year 2000
complaint by January 1, 2000, or that such potential non-compliance will not
have a material adverse effect on the Company's business, financial condition
or results of operations.
COSTS. The Company currently estimates that its aggregate costs
directly related to Year 2000 compliance efforts will be approximately $20
million, of which approximately $900 thousand has been spent through
September 30, 1998. Of these costs, the Company estimates that approximately
$7.0 million will be spent to repair systems and equipment and $13.0 million
will be spent to replace systems and equipment. The Company's Year 2000
efforts are ongoing and its overall plan and cost estimations will continue
to evolve, as new information becomes available. The Company's analysis of
its Year 2000 issues is based in part on information from third party
suppliers and customers; there can be no assurance that such information is
accurate or complete.
RISKS. The failure of the Company or third parties to be fully Year
2000 compliant for essential systems and
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equipment by January 1, 2000 could result in interruptions of normal business
work operations. The Company's potential risks include (i) the inability to
deliver critical care, resulting in death or personal injury of residents of
the Company's facilities and in non-affiliated facilities, (ii) the delayed
receipt of reimbursement from the Federal or State governments, private
payors, or intermediaries, (iii) the failure of security systems, elevators,
heating systems or other operational systems and equipment, resulting in
death or personal injury of residents of the Company's facilities and (iv)
the inability to receive critical equipment and supplies from vendors. Each
of these events could have a material adverse affect on the Company's
business, results of operations and financial condition.
CONTINGENCY PLANS. Contingency plans for the Company's Year
2000-related issues have been and continue to be developed and include, but
are not limited to, identification of alternate suppliers, alternate
electronic processes and alternate manual systems. The Company is planning to
have contingency plans completed for essential systems and equipment by April
1, 1999; however, there can be no assurance that it will meet this objective
by such date or by January 1, 2000.
FORWARD-LOOKING STATEMENTS. The Year 2000 disclosure set forth above
contains forward-looking statements. Specifically, such statements are
contained in sentences including the words "plans", "expects" or
"anticipates." Such forward-looking statements are subject to inherent risks
and uncertainties that may cause actual results differ materially from these
contemplated by the forward-looking statements. Factors that may cause actual
results to differ materially from those contemplated by the forward-looking
statements include availability and cost of personnel trained in this area,
and the failure of third parties to (i) respond to the Company's inquiries as
to whether the systems and equipment supplied to the Company are compliant
and (ii) adequately remediate Year 2000 issues. The Company could experience
material adverse affects to its business, results of operations, and
financial condition if it is unable to identify and remediate all
non-compliant essential systems and equipment on the time schedule currently
planned.
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT. The Year 2000
disclosure set forth above is intended to be a "year 2000 statement" as such
term is defined in the Year 2000 Information and Readiness Disclosure Act of
1998 (the "Year 2000 Act") and, to the extent such disclosure relates to year
2000 processing of the Company or to products or services offered by the
Company, is also intended to be a "year 2000 readiness disclosure" as such
term is defined in the Year 2000 Act.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is found in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
is incorporated by reference herein.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the Company's Stockholders was held July 22, 1998.
(b) John Bingaman, Martin Mand, James Tolbert, III and R. James Woolsey were
re-elected to the Board of Directors to three-year terms expiring at
the annual meeting of stockholders in 2001.
Zev Karkomi, Lois E. Silverman and Mark G. Wimer have terms on the
Board that expire at the annual meeting of stockholders in 1999.
Andrew L. Turner, William R. Anixter and Robert A. Woltil have terms
on the Board that expire at the annual meeting of stockholders in 2000.
(c) The other matters voted at the meeting and the results were as follows:
1. Ratification of the appointment of Arthur Andersen LLP as
independent public accountants of the Company for the fiscal year
ended December 31, 1998.
For Against Abstain
--- ------- -------
40,394,358 203,372 60,807
(d) Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.1) Employment Agreement dated June 2, 1998 between Andrew L. Turner and
the Company.
(10.2) Fourth Amendment to Credit Agreement dated as of October 30, 1998
among the Company, the lenders and co-agents named therein and
NationsBank, N.A. as Administrative Agent
(27.1) Financial Data Schedule (included herein).
(b) Reports on Form 8-K
Report dated June 30,1998 and filed on July 21,1998 reporting the
acquisition of Retirement Care Associates, Inc. and Contour Medical,
Inc.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN HEALTHCARE GROUP, INC.
Date: 11/16/98 By: /s/ Robert D. Woltil
--------------------- -------------------------------------
Robert D. Woltil
CHIEF FINANCIAL OFFICER
- - -----------
* Signing on the behalf of the Registrant and as principal financial officer.
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SUN HEALTHCARE GROUP, INC.
June 2, 1998
Mr. Andrew L. Turner
9 Sandia Heights Drive, N.E.
Albuquerque, NM 87122
EMPLOYMENT AGREEMENT
Dear Mr. Turner:
The following sets forth the agreement (this "AGREEMENT") between Sun
Healthcare Group, Inc. (the "COMPANY") and you regarding the terms and
provisions of your employment as an officer and employee of the Company and the
consequences of a termination thereof. Capitalized words which are not
otherwise defined herein shall have the meanings assigned to such words in
Section 10 of this Agreement.
1. TERM OF EMPLOYMENT UNDER THE AGREEMENT. The term of your employment
under this Agreement shall commence on June 2, 1998 (the "EFFECTIVE DATE") and
shall continue until the fifth anniversary of the Effective Date (the
"EMPLOYMENT TERM") unless earlier terminated by either you or the Company
pursuant to the terms of Section 9 hereof. The term of the severance
obligations provided under Section 4(ii) under this Agreement shall commence on
the Effective Date and shall survive expiration of the Employment Term.
Notwithstanding the foregoing, in the event of a Change in Control the two-year
period commencing on the Change in Control Date shall be referred to herein as
the "CHANGE IN CONTROL TERM."
2. EMPLOYMENT. During the Employment Term, you shall be employed as
Chief Executive Officer of the Company and shall report directly to the Board of
Directors of the Company (the "BOARD"), and your duties and responsibilities to
the Company shall be consistent in all respects with such position. Your
principal duties and responsibilities shall be to assume and exercise general
supervisory control of the day-to-day business and affairs of the Company. You
may be elected or appointed to serve as an officer of any Affiliate of the
Company, provided that the terms of such appointment or election are
satisfactory to you. You shall devote substantially all of your business time,
attention, skills, and efforts to the business and affairs of
<PAGE>
the Company. Your principal place of employment shall be the executive offices
of the Company as established from time to time, although you understand and
agree that you may be required to travel from time to time for business
purposes.
3. COMPENSATION DURING THE EMPLOYMENT TERM.
(a) BASE SALARY.
(i) As compensation to you for all services rendered to the
Company, the Company shall pay you a base salary (the "SALARY") at the rate of
$700,000 per annum for the period from the Effective Date through March 31,
1999, $850,000 per annum for the period from April 1, 1999 through March 31,
2000, and $1,000,000 per annum for the period commencing April 1, 2000 through
the remainder of the Initial Term. Such Salary shall be reviewed annually by
the Board or, if such authority has been so delegated, by the compensation
committee, (the "COMPENSATION COMMITTEE") and may be increased but not decreased
by the Board or Compensation Committee on the basis of such review. Your Salary
shall be paid to you in accordance with the Company's regular payroll practices
applicable to its executive officers.
(ii) Should you become partially disabled (which for purposes of
this Section 3(a) means your inability because of any physical or emotional
illness to perform your assigned duties under this Agreement more than 20 hours
per week) the Salary shall nevertheless be paid in full until your termination
pursuant to Section 9 below. If, during any period of partial disability, you
receive any periodic payments representing lost compensation under any health
and accident policy or under any salary continuation policy the premiums for
which have been paid by the Company, the amount of salary that you would be
entitled to receive from the Company during the continuance of such partial
disability shall be decreased by the amounts of such payments.
(b) COMPANY CAR. The Company shall lease or purchase and insure at
its own expense and provide for your exclusive use an automobile of which make,
model, and year shall be mutually acceptable to you and to the Company. The
Company shall be responsible for all maintenance, gasoline, repair, and other
similar costs of ownership and operation of such automobile.
(c) ANNUAL BONUS. As additional compensation, the Company shall pay
to you an annual bonus pursuant to a formula which shall be established and
revised from time to
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time by the Board or by the Compensation Committee. Such bonus compensation
shall be prorated during any partial fiscal years of the Company covered by the
Employment Term.
(d) LIFE AND HEALTH INSURANCE. The Company, in its discretion, may
apply for and procure in its own name and for its own benefit, life insurance on
your life in any amount considered advisable by the Company, and you hereby
agree that, in connection therewith, you shall submit to any medical or other
examination and execute and deliver any application or other instrument in
writing reasonably necessary to effectuate such insurance. The Company shall
provide you with health insurance, including major medical coverage. All such
benefits provided by the Company to you shall be at least equivalent to the
benefits that are offered to other executive employees of the Company.
(e) EXPENSES. The Company shall pay or reimburse you for all
reasonable and necessary expenses incurred by you in the performance of the
duties and responsibilities pursuant to this Agreement.
(f) PERSONAL LEAVE. You shall be entitled to take such vacation and
personal leave from your employment duties hereunder at and for such periods as
shall be consistent with any policy or practice of the Company with regard
thereto, or in the absence thereof, as are enjoyed by persons serving in
comparable executive positions in the healthcare industry, but in no event shall
any such vacation and personal leave unreasonably interfere with the performance
of your duties and responsibilities hereunder.
4. EFFECT OF TERMINATION.
(a) INVOLUNTARY TERMINATION.
(i) ACCRUED COMPENSATION AND BENEFITS. In the event of your
Involuntary Termination, the Company shall pay you within 15 days of the date of
such Involuntary Termination the full amount of any earned but unpaid salary
through the date of such Involuntary Termination, plus a cash payment
(calculated on the basis of your salary at the rate then in effect) for all
unused paid time off which you may have earned (in accordance with Company
policy) as of the date of such Involuntary Termination, and a cash payment for
any unreimbursed expenses. The Company shall also pay you within 15 days of the
date of such Involuntary Termination, in accordance with current policy, a pro
rata portion of your annual bonus compensation for the year in which your
Involuntary Termination occurs, determined by multiplying the bonus compensation
received by you in the preceding year by a fraction, the numerator of which
shall be the number of calendar days in the year in which your Involuntary
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Termination occurs that precede such Involuntary Termination, and the
denominator of which shall be the total number of days in such year.
(ii) SEVERANCE PAYMENT. In the event of your Involuntary
Termination, the Company shall also pay you an additional amount (the "SEVERANCE
PAYMENT") as set forth in either Section 4(a)(ii)(A) or 4(a)(ii)(B) below. The
Severance Payment shall be in lieu of any other severance payments which you are
entitled to receive under any other severance pay plan or arrangement sponsored
by the Company and its subsidiaries.
(A) INVOLUNTARY TERMINATION. In the event of your
Involuntary Termination, the Company shall pay you, within 15 days of the date
of such Involuntary Termination, a Severance Payment equal to two (2) times your
Salary at the rate then in effect. Notwithstanding the foregoing, your right to
receive the Severance Payment described in this Section 4(a)(ii)(A) shall be
conditioned upon your execution of a release in favor of the Company, which
shall not be inconsistent with the terms of this Agreement, and which is not
revoked by you within the revocation period specified therein.
(B) INVOLUNTARY TERMINATION ON OR AFTER THE CHANGE IN
CONTROL DATE. In the event of your Involuntary Termination on or after the
Change in Control Date, the Company shall pay you, within 15 days of the date of
such Involuntary Termination, a Severance Payment equal to three (3) times your
Salary at the rate then in effect.
(iii) BENEFIT PAYMENT. In the event of your Involuntary
Termination, you and your eligible dependents shall continue to be eligible to
participate during the Benefit Continuation Period (as hereinafter defined) in
the medical, dental, health, life and other fringe benefit plans and
arrangements applicable to you immediately prior to your Involuntary Termination
on the same terms and conditions in effect for you and your dependents
immediately prior to such Involuntary Termination. For purposes of the previous
sentence, "BENEFIT CONTINUATION PERIOD" means the period beginning on the date
of such Involuntary Termination and ending on the earlier to occur of (A)(1) in
the event of your Involuntary Termination, the second anniversary of the date of
such Involuntary Termination or (2) in the event of your Involuntary Termination
on or after the Change in Control Date, the third anniversary of the date of
such Involuntary Termination, and (B) the date that you and your dependents are
eligible and elect coverage under the plans of a subsequent employer which
provide substantially equivalent or greater benefits to you and your dependents.
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(c) OTHER TERMINATION. In the event that your employment with the
Company terminates in accordance with Section 9 hereof, other than due to your
Involuntary Termination under Section 9(a)(i) hereof, the Company shall pay you
the full amount of any earned but unpaid salary through the date of such
termination, plus a cash payment (calculated on the basis of your salary at the
rate then in effect) for all unused paid time off which you may have earned (in
accordance with Company policy) as of the date of such termination, and a cash
payment for any unreimbursed expenses. As of the date of such termination, you
shall immediately relinquish the right to any additional payments or benefits
from the Company under this Agreement.
(d) NO MITIGATION OR OFFSET. You shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, not shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by you as the result
of employment by another employer or by pension benefits paid by the Company or
another employer after the date of termination or otherwise except as
specifically provided in clause (B) of the last sentence of Section 4(a)(iii).
5. ADDITIONAL PAYMENTS.
(a) GROSS-UP PAYMENT. Notwithstanding anything herein to the
contrary, if it is determined that any Change in Control Payment would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties with respect to such excise tax (such excise tax, together with any
interest or penalties thereon, is herein referred to as an "EXCISE TAX"), then
you shall be entitled to an additional payment (a "GROSS-UP PAYMENT") in an
amount that shall place you in the same after-tax economic position that you
would have enjoyed if the Excise Tax had not applied to the Change in Control
Payment. The amount of the Gross-Up Payment shall be determined by the
Accounting Firm using such formula as the Accounting Firm deems appropriate. No
Gross-Up Payment shall be payable hereunder if the Accounting Firm determines
that the Change in Control Payments are not subject to an Excise Tax.
(b) DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 5(c), all determinations required under this Section 5, including
whether a Gross-Up Payment is required, the amount of the Change in Control
Payments constituting excess parachute payments, and the amount of the Gross-Up
Payment, shall be made by the Accounting Firm, which shall provide detailed
supporting calculations both to you and the Company within fifteen days of the
change in the ownership or effective control of the Company or in the ownership
of a substantial portion of the assets of the Company (within the meaning of
such terms under Section 280G of
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the Code), your date of termination or any other data reasonably requested by
you or the Company on which a determination under this Section 5 is necessary or
advisable. The Company shall pay to you the initial Gross-Up Payment within 5
days of the receipt by you and the Company of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by you, the Company shall cause the Accounting Firm to provide you and the
Company with an opinion that the Company and you have substantial authority
under the Code and Regulations not to report an Excise Tax on your federal
income tax return. Any determination by the Accounting Firm shall be binding
upon you and the Company. If the initial Gross-Up Payment is insufficient to
cover the amount of the Excise Tax that is ultimately determined to be owing by
you with respect to any Change in Control Payment (hereinafter, an
"UNDERPAYMENT"), the Company, after exhausting its remedies under Section 5(c)
below, shall promptly pay to you an additional Gross-Up Payment in respect of
the Underpayment.
(c) PROCEDURES. You shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of a Gross-Up Payment. Such notice shall be given as soon as
practicable after you know of such claim and shall apprise the Company of the
nature of the claim and the date on which the claim is requested to be paid.
You agree not to pay the claim until the expiration of the thirty-day period
following the date on which you notify the Company, or such shorter period
ending on the date the Taxes with respect to such claim are due (the "NOTICE
PERIOD"). If the Company notifies you in writing prior to the expiration of the
Notice period that it desires to contest the claim, you shall: (i) give the
Company any information reasonably requested by the Company relating to the
claim, (ii) take such action in connection with the claim as the Company may
reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to you, (iii) cooperate with the Company
in good faith in contesting the claim, and (iv) permit the Company to
participate in any proceedings relating to the claim. You shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, you agree either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; PROVIDED, HOWEVER, that, if the Company directs you to
pay such claim and pursue a refund, the Company shall advance the amount of such
payment to you on an after-tax and interest-free basis (the "ADVANCE"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the
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Gross-Up Payment and you shall be entitled to settle or contest, as the case may
be, any other issues raised by the Internal Revenue Service or other taxing
authority. If the Company does not notify you in writing prior to the end of
the Notice Period of its desire to contest the claim, the Company shall pay to
you an additional Gross-Up Payment in respect of the excess parachute payments
that are the subject of the claim, and you agree to pay the amount of the Excise
Tax that is the subject of the claim to the applicable taxing authority in
accordance with applicable law.
(d) REPAYMENTS. If, after receipt by you of an Advance, you become
entitled to a refund with respect to the claim to which such Advance relates,
you shall pay the Company the amount of the refund (together with any interest
paid or credited thereon after Taxes applicable thereto). If, after receipt by
you of an Advance, a determination is made that you shall not be entitled to any
refund with respect to the claim and the Company does not promptly notify you of
its intent to contest the denial of refund, then the amount of the Advance shall
not be required to be repaid by you and the amount thereof shall offset the
amount of the additional Gross-Up Payment then owing to you.
(e) FURTHER ASSURANCES. The Company shall indemnify you and hold you
harmless, on an after-tax basis, from any costs, expenses, penalties, fines,
interest or other liabilities ("LOSSES") incurred by you with respect to the
exercise by the Company of any of its rights under this Section 5, including,
without limitation, any Losses related to the Company's decision to contest a
claim or any imputed income to you resulting from any Advance or action taken on
your behalf by the Company hereunder. The Company shall also pay all of the
fees and expenses of the Accounting Firm, including, without limitation, the
fees and expenses related to the opinion referred to in Section 5(b).
6. PROTECTION OF THE COMPANY'S INTERESTS.
(a) NO COMPETING EMPLOYMENT.
(i) As long as you are employed by the Company and continuing
for either (i) two years after the termination of your employment for any reason
or (ii) in the event of a Change in Control, two years after the termination of
your employment other than due to your Involuntary Termination under Section
9(a)(i) hereof on or after the Change in Control Date (such period being
referred to hereinafter as the "RESTRICTED PERIOD"), you shall not, unless you
receive the prior written consent of the Board, directly or indirectly, own an
interest in, manage, operate, join, control, lend money, or render financial or
other assistance to or participate in or be
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connected with as an officer, or employee, partner, stockholder, consultant or
otherwise, any individual, partnership, firm, corporation or other business
organization or entity that competes (as defined in subsection (ii) below) with
the Company.
(ii) The term "COMPETE" means engaging in any manner
whatsoever in the same or any similar business as the Company or any of its
Affiliates within a geographic area of 50 miles of any office, branch, or
other facility of the Company or any of its Affiliates, or any other location
at which the Company or any of its Affiliates provides services to patients
or customers, including, without limitation, as a proprietor, investor,
shareholder, director, officer, employee, consultant, independent contractor,
or otherwise, other than (A) as a passive investor owning less than five
percent (5%) equity interest in any one entity or enterprise, (B) as an
owner, either directly or indirectly, of less than five percent of any class
of securities which are listed on a national securities exchange or quoted on
the automated quotation system of the National Association of Securities
Dealers, Inc., or (C) as an employee of an entity that competes with the
Company in a capacity which does not facilitate the generation of operating
revenue.
(iii) Any investment or activity which is not in violation of
Section 6(a)(i) immediately prior to a Company Action (as hereinafter defined),
shall not become a violation of Section 6(a)(i) solely as a result of such
Company Action. This subsection (iii) shall not apply to an action by you which
causes a violation of Section 6(a)(i) on the date of such action. For purposes
of this Section 6(a)(iii), the term "Company Action" means any action on the
part of the Company or any Affiliate.
(b) NO INTERFERENCE. During the Restricted Period, you shall not,
whether for your own account or for the account of any other individual,
partnership, firm, corporation or other business organization (other than the
Company), intentionally solicit, endeavor to entice away from the Company, or
otherwise interfere with the relationship of the Company with, any person who is
employed by or otherwise engaged to perform services for the Company or any
person or entity who is, or was within the then most recent twelve-month period,
a customer, client or supplier of the Company.
(c) CONFIDENTIALITY. You hereby covenant and agree that you shall
not at any time, except in performance of your obligations to the Company
hereunder or with the prior written consent of the Board, directly or indirectly
disclose to any person any secret or "confidential information" that you may
learn or have learned by reason of your association with the Company. The term
"CONFIDENTIAL INFORMATION" means any information not previously disclosed to the
public or to the trade by the Company's management with respect to the
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Company's products, facilities and methods, trade secrets and other intellectual
property systems, procedures, manuals, confidential reports, product price
lists, customer lists, financial information (including the revenues, costs or
profits associated with any of the Company's products), business plans,
prospects or opportunities.
(d) EXCLUSIVE PROPERTY. You hereby confirm that all confidential
information is and shall remain the exclusive property of the Company. All
business records, papers and documents kept or made by you relating to the
business of the Company shall be and remain the property of the Company. Upon
the termination of your employment with the Company for any reason, or upon the
request of the Company at any time, you shall promptly deliver to the Company
and shall not without the consent of the Board retain copies of any written
materials not previously made available to the public or records and documents
made by you or coming into your possession concerning the business or affairs of
the Company.
(e) RELIEF. Without intending to limit the remedies available to the
Company, you acknowledge that a breach of any of the covenants contained in this
Section 6 may result in material irreparable injury to the Company for which
there is no adequate remedy at law, that it shall not be possible to measure
damages for such injuries precisely and that, in the event of such a breach or
threat thereof, the Company shall be entitled to obtain a temporary restraining
order and/or a preliminary or permanent injunction restraining you from engaging
in activities in violation of this Section 6 or such other relief as may be
required to specifically enforce any of the covenants in this Section 6.
7. LEGAL FEES AND EXPENSES. The Company shall pay or reimburse you on an
after-tax basis for all costs and expenses (including, without limitation, court
costs and reasonable legal fees and expenses which reflect common practice with
respect to the matters involved) incurred by you as a result of any claim,
action or proceeding (i) arising out of your termination of employment, (ii)
contesting, disputing or enforcing any right, benefits or obligations under this
Agreement or, (iii) arising out of or challenging the validity, advisability or
enforceability of this Agreement or any provision hereof; PROVIDED, HOWEVER,
that this provision shall not apply if the relevant trier-of-fact determines
that your claim or position was frivolous and without reasonable foundation.
8. SUCCESSORS; BINDING AGREEMENT.
(a) ASSUMPTION BY SUCCESSOR. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or
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substantially all of the business or assets of the Company (and may require any
subsidiary of the Company to which you have devoted a substantial portion of
your business time that is being spun off) expressly to assume and to agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place;
PROVIDED, HOWEVER, that no such assumption shall relieve the Company of its
obligations hereunder. As used in this Agreement, the "COMPANY" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
(or subsidiary that is spun off) as aforesaid, which assumes and agrees to
perform this Agreement by operation of law or otherwise.
(b) ENFORCEABILITY BENEFICIARIES. This Agreement shall be binding
upon and inure to the benefit of you (and your personal representatives and
heirs) and the Company and any organization which succeeds to substantially all
of the business or assets of the Company, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Company or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or, if there is no such designee, to your estate.
9. TERMINATION.
(a) TERMINATION EVENTS. Your employment by the Company pursuant to
the terms of this Agreement shall terminate:
(i) upon your Involuntary Termination;
(ii) upon notice to you, in accordance with and subject to
Section 9(b), that the Company is terminating your employment for Cause; and
(iii) at your election upon six (6) months' advance written
notice to the Company (or such other notice period as the parties may agree).
(b) TERMINATION FOR CAUSE.
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(i) Any claimed termination of your employment for Cause
pursuant to Section 9(a)(ii) hereof shall be communicated to you by written
notice from the Company. Such notice shall recite the facts and circumstances
claimed to provide the basis for such termination, and shall specify the Date of
Termination. As used in this Agreement, "DATE OF TERMINATION" shall mean the
date specified in the notice of termination, which date shall be not less than
thirty (30) nor more than sixty (60) days from the date the notice of
termination is given.
(ii) If, within thirty (30) days from the date the notice of
termination specified in subsection (i) is received, you notify the Company that
you dispute that the basis set forth in such notice of termination exists, the
Date of Termination shall be the date on which the dispute is finally resolved
in accordance with subsection (iii) hereof.
(iii) In the event that you dispute the existence of Cause, then
upon written notice to the American Arbitration Association given within ninety
(90) days after your receipt of notice of termination for Cause in accordance
with subsection (i), such issues shall be submitted to binding arbitration
pursuant to the Commercial Arbitration Rules of the American Arbitration
Association, and the costs of such arbitration proceedings shall be borne by the
non-prevailing party therein.
(iv) The Date of Termination shall be extended by a notice of
dispute in accordance with subsection (ii) hereof, provided that such notice is
given in good faith and you in fact submit such dispute to binding arbitration
within 90 days after your receipt of notice of termination for Cause.
(v) During the pendency of any dispute, the Company will
continue to pay your full salary in effect as of the date of the notice of
termination, and shall continue your participation in all other compensation,
benefit, and insurance plans in which you were participating at such date, until
the final resolution of such dispute in accordance with subsection (iii).
Subject to the provisions of the preceding sentence, at any time on or after the
date that a notice of termination is given by the Company, the Company shall be
entitled, at its option, to relieve you from any or all duties of employment
hereunder.
10. DEFINITIONS. For purposes of this Agreement, the flowing capitalized
words shall have the meanings set forth below:
"ACCOUNTING FIRM" shall mean Arthur Andersen LLP, or, if such firm is
unable or unwilling to perform such calculations, such other national accounting
firm as shall be designated by agreement between you and the Company.
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"AFFILIATE" shall mean any legal entity that directly, or indirectly
through one or more intermediaries, controls, is controlled by, or is under
control with the Company, including, without limitation, any wholly or
majority-owned subsidiaries of the Company.
"CAUSE" shall mean a termination of your employment which is a result
of (i) your felony conviction, (ii) a determination by the Board that you have
violated any of the protective covenants set forth in Section 6 of this
Agreement or (iii) your continued failure substantially to perform the duties
reasonably requested by the Company (other than any such failure resulting from
your incapacity due to physical or mental illness or any such actual or
anticipated failure resulting from a resignation by you for Good Reason) after a
written demand for substantial performance is delivered to you by the Board,
which demand specifically identifies the manner in which the Board believes that
you have not substantially performed your duties, and which performance is not
substantially corrected by you within 30 days of receipt of such demand;
PROVIDED, HOWEVER, that, during the Change in Control Term, any such failure
shall not constitute cause unless such failure is willful. For purposes of the
previous sentence, no act or failure to act on your part shall be deemed
"willful" unless done, or omitted to be done, by you not in good faith and
without reasonable belief that your action or omission was in the best interest
of the Company.
A "CHANGE IN CONTROL" shall be deemed to have occurred if there is a
"change in control" of the Company within the meaning of Section 280G of the
Code and the Regulations; or
(i) 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;
(ii) 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
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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;
(iii) 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;
(iv) 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 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 notwithstanding parts (i), (ii), (iii) and (iv) of this
definition, a Change in Control shall not be deemed to have occurred in the
event of:
(x) 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
(y) 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.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs; PROVIDED that if your employment with the Company terminates
prior to the Change in Control Date and it is reasonably demonstrated that your
termination of employment (i) was at the request of the third party who has
taken steps reasonably calculated to effect the Change in Control or (ii)
otherwise arose in connection with or in anticipation of the Change in Control,
then the Change in Control Date shall mean the date immediately prior to the
date of your termination of employment.
"CHANGE IN CONTROL PAYMENT" means (i) any amount due or paid to you
under this Agreement, (ii) any amount that is due or paid to you under any plan,
program, or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity
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Plans), and (iii) any amount or benefit that is due or payable to you under this
Agreement, or under any plan, program or arrangement of the Company and its
subsidiaries not otherwise covered under clause (i) or (ii) hereof which must
reasonably be taken into account under Section 280G of the Code and the
Regulations in determining the amount of the "parachute payments" received by
you, including, without limitation, any amounts which must be taken into account
under the Code and Regulations as a result of (A) the acceleration of the
vesting of any option, restricted stock or other Equity Award granted under the
Equity Plans or otherwise, (B) the acceleration of the time at which any payment
or benefit is receivable by you, or (C) any contingent severance or other
amounts that are payable to you.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
any successor provisions thereto.
"COMMON STOCK" shall mean the common stock of the Company.
"DISABILITY" shall mean your inability to engage in substantial
gainful activity by reason of any medically determinable mental or physical
impairment which can be expected to result in death or which has lasted or can
be expected to last a continuous period of not less than twelve (12) months.
"EQUITY AWARDS" shall mean options, restricted stock or other grants
or awards which consist of, or relate to, equity securities of the Company and
which have been granted to you under the Equity Plans. For purposes of this
Agreement, Equity Awards shall also include any securities acquired upon the
exercise of an option, warrant or similar right that constitutes an Equity
Award.
"EQUITY PLAN CHANGE IN CONTROL" shall mean a change in control of the
Company as defined in the applicable Equity Plan.
"EQUITY PLANS" shall mean any equity-based incentive plan or
arrangement adopted by the Company.
"GOOD REASON" shall mean a resignation of your employment as a result
of any of the following:
(i) (A) a meaningful and detrimental alteration in your position
or the nature or status of your responsibilities, or a meaningful and
detrimental change in your reporting responsibilities or titles, as in effect
immediately prior to such alteration or change, or (B) during
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the Change in Control Term, a meaningful and detrimental alteration in your
position or the nature or status of your responsibilities, or a meaningful and
detrimental change in your reporting responsibilities or titles, as in effect
immediately prior to the Change in Control Date;
(ii) a reduction by the Company in your annual base salary as in
effect from time to time; a reduction in your target annual bonus (expressed as
a percentage of base salary) as in effect from time to time; or a failure by the
Company to provide you with any other form of compensation or benefit being
provided to you from time to time; PROVIDED that, in the event of your
resignation following a Change in Control of the Company, any such reduction in
your salary, target annual bonus or any other form of compensation or benefit
from the rate or level in effect immediately prior to the Change in Control Date
shall constitute Good Reason;
(iii) the relocation of the office of the Company outside of
Albuquerque, New Mexico; or a significant increase in the amount of time that
you are required to travel for business purposes;
(iv) the failure of the Company to obtain an agreement
reasonably satisfactory to you from any successor to assume and agree to
perform this Agreement, as contemplated in Section 8(a) hereof;
(v) any termination of your employment which is not effected
pursuant to the terms of this Agreement; or
(vi) a material breach by the Company of the provisions of this
Agreement;
PROVIDED, HOWEVER, that an event described above in clause (vi) shall not
constitute Good Reason unless it is communicated by you to the Company in
writing and is not corrected by the Company in a manner which is reasonably
satisfactory to you (including full retroactive correction with respect to any
monetary matter) within 10 days of the Company's receipt of such written notice
from you.
"INVOLUNTARY TERMINATION" shall mean (i) the termination of your
employment by the Company other than for Cause, including, without limitation,
by reason of your Disability, or (ii) your resignation of employment with the
Company for Good Reason.
"REGULATIONS" shall mean the proposed, temporary and final regulations
under Section 280G of the Code or any successor provision thereto.
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"TAXES" shall mean the federal, state and local income taxes to which
you are subject at the time of determination, calculated on the basis of the
highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which you are then subject.
11. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Chairperson of the Compensation Committee, with a copy to the General Counsel of
the Company, or to you at the address set forth on the first page of this
Agreement or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
12. MISCELLANEOUS.
(a) AMENDMENTS, WAIVERS, ETC. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No arrangements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement
and this Agreement shall supercede all prior agreements, negotiations,
correspondences, undertakings and communications of the parties, oral or
written, with respect to the subject matter hereof; PROVIDED, HOWEVER, that
except as expressly set forth herein, this Agreement shall not supercede the
terms of Equity Awards previously granted to you.
(b) VALIDITY. The invalidity or unenforceablilty of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
(c) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
(d) WITHHOLDING. Amounts paid to you hereunder shall be subject to
all applicable federal, state and local withholding taxes.
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<PAGE>
(e) SOURCE OF PAYMENTS. All payments provided under this Agreement,
other than payments made pursuant to a plan which provides otherwise, shall be
paid in cash from the general funds of the Company, and no special or separate
fund shall be established, and no other segregation of assets made, to assure
payment. You shall have no right, title or interest whatsoever in or to any
investments which the Company may make to aid it in meeting its obligations
hereunder. To the extent that any person acquires a right to receive payments
from the Company hereunder, such right shall be no greater than the right of an
unsecured creditor of the Company.
(f) HEADINGS. The headings contained in this Agreement are intended
solely for convenience of reference and shall not affect the rights of the
parties to this Agreement.
(g) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
and understanding of the parties hereto with respect to the matters covered
hereby and supersedes all prior agreements and understanding of the parties with
respect to the subject matter hereof, including, without limitation, the
Employment Agreement with the Company dated June 2, 1993 and the Severance
Agreement with the Company dated January 2, 1997; PROVIDED, HOWEVER, that the
parties hereto understand and agree that the Indemnity Agreement dated July 3,
1996 between you and the Company and any Equity Award agreements that are in
effect as of the Effective Date pertain to matters that are not covered by this
Agreement and therefore shall remain in effect after the Effective Date
according to the respective terms of such agreements.
(h) GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of New
Mexico applicable to contracts entered into and performed in such State.
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<PAGE>
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter which
shall then constitute our agreement on this subject.
Sincerely,
SUN HEALTHCARE GROUP, INC.
By: /s/ Lois E. Silverman
---------------------------------
Name: Lois E. Silverman
Title: Chair, Compensation
Committee
Agreed to as of the date first above written.
/s/ Andrew L. Turner
- - ---------------------------------------------
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<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Fourth Amendment"), dated
as of October 30, 1998, is entered into among Sun Healthcare Group, Inc., a
Delaware corporation ("Borrower"), the entities listed on the signature pages
hereto as Lenders (collectively, "Lenders"), the co-agents listed on the
signature pages hereto as Co-Agents (collectively, the "Co-Agents"), and
NationsBank, N.A. (successor by merger to NationsBank of Texas, N.A.), as
Administrative Agent (in said capacity, "the Administrative Agent").
BACKGROUND
1. The Borrower, the Lenders, the Co-Agents and the Administrative Agent
are parties to that certain Credit Agreement, dated as of October 8, 1997, as
amended by that certain First Amendment to Credit Agreement, dated as of
November 12, 1997, that certain Second Amendment to Credit Agreement, dated as
of March 27, 1998, and that certain Third Amendment to Credit Agreement, dated
as of May 29, 1998 (the "Credit Agreement"; the terms defined in the Credit
Agreement and not otherwise defined herein shall be used herein as defined in
the Credit Agreement)
2. The Borrower, the Lenders, the Co-Agents and the Administrative Agent
desire to (a) amend the Credit Agreement to make certain changes therein and (b)
provide a waiver with respect to the Acquisition by the Borrower of all of the
issued and outstanding capital stock of Alpha Healthcare Limited, which stock is
not owned by the Borrower on October 30, 1998, whereby Alpha Healthcare Limited
shall become a wholly-owned Subsidiary of the Borrower, for an Acquisition
Consideration not to exceed $60,000,000 (the "Alpha Acquisition").
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Lenders, the Co-Agents and the Administrative Agent covenant and agree as
follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
(1) The definition of "APPLICABLE LIBOR RATE MARGIN" set forth in
SECTION 1.1 of the Credit Agreement is hereby amended to read as follows:
"'APPLICABLE LIBOR RATE MARGIN' means the following per annum
percentages, applicable in the following situations:
<PAGE>
<TABLE>
<CAPTION>
Facility A Term
Loan Advances Facility B Facility C
and Revolving Term Loan Term Loan
Applicability Credit Advances Advances Advances
------------- --------------- -------- --------
<S> <C> <C> <C>
(a) INITIAL PRICING PERIOD 2.50% 2.75% 3.00%
(b) SUBSEQUENT PRICING PERIOD
(i) The Leverage Ratio is equal 2.75% 3.00% 3.25%
to or greater than
6.50 to 1
(ii) The Leverage Ratio is less 2.50% 2.75% 3.00%
than 6.50 to 1 but is
equal to or greater
than 6.00 to 1
(iii) The Leverage Ratio is less 2.25% 2.75% 3.00%
than 6.00 to 1 but is
equal to or greater
than 5.50 to 1
(iv) The Leverage Ratio is less 2.00% 2.75% 3.00%
than 5.50 to 1 but is
equal to or greater
than 5.00 to 1
(v) The Leverage Ratio is less 1.75% 2.75% 3.00%
than 5.00 to 1 but is
equal to or greater
than 4.50 to 1
(vi) The Leverage Ratio is less 1.50% 2.50% 2.75%
than 4.50 to 1 but is
equal to or greater
than 4.00 to 1
(vii) The Leverage Ratio is less 1.25% 2.25% 2.50%
than 4.00 to 1 but is
equal to or greater
than 3.50 to 1
(viii) The Leverage Ratio is less 1.00% 2.25% 2.50%
than 3.50 to 1 but is
equal to or greater
than 3.00 to 1
(ix) The Leverage Ratio is less 0.75% 2.25% 2.50%
than 3.00 to 1
</TABLE>
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<PAGE>
During the Subsequent Pricing Period, the Applicable LIBOR Rate Margin
payable by the Borrower on the LIBOR Advances outstanding hereunder shall
be subject to reduction or increase, as applicable and as set forth in the
table above, on a quarterly basis according to the Leverage Ratio;
PROVIDED, that (A) each adjustment in the Applicable LIBOR Rate Margin
shall be effective as of the fifth day following the date of receipt by the
Administrative Agent of the financial statements required pursuant to
SECTION 6.1 or 6.2 hereof (and corresponding Compliance Certificate), as
appropriate and (B) from and including October 30, 1998 until any
adjustment in the Applicable LIBOR Rate Margin as provided in clause (A)
immediately preceding, the Applicable LIBOR Rate Margin shall be determined
as if the Leverage Ratio is equal to or greater than 6.50 to 1. If
financial statements (and corresponding Compliance Certificate setting
forth the Leverage Ratio) are not received by the Administrative Agent by
the fifth day following the date required pursuant to SECTION 6.1 or 6.2
hereof, as appropriate, the Applicable LIBOR Rate Margin shall be
determined as if the Leverage Ratio is equal to or greater than 6.50 to 1
until such time as such financial statements and Compliance Certificate are
received."
(2) The definition of "COMPLIANCE CERTIFICATE" set forth in SECTION 1.1 of
the Credit Agreement is hereby amended to read as follows:
"'COMPLIANCE CERTIFICATE' means a certificate, signed by the Chief
Financial Officer, Vice President-Finance or Treasurer of the Borrower in
substantially the form of EXHIBIT G hereto, appropriately completed. For
purposes hereof, all references in this Agreement to chief financial officer as
related to the Compliance Certificate shall also mean and include the Vice
President-Finance or the Treasurer of the Borrower."
(3) The definition of "DOMESTIC EBITDA" set forth in SECTION 1.1 of the
Credit Agreement is hereby amended to read as follows:
"'DOMESTIC EBITDA' means, for any period, determined in accordance
with GAAP on a consolidated basis for the Borrower and its Restricted
Subsidiaries, the sum of (a) pre-tax net income (excluding therefrom (i)
any items of extraordinary gain, including net gains on the sale of assets
other than asset sales in the ordinary course of business, (ii) any items
of extraordinary loss, including net losses on the sale of assets other
than asset sales in the ordinary course of business, and charges and
expenses related to this Agreement, (iii) charges related to settlement of
the Shareholder Lawsuits and the Golden Care or SunCare Litigation as
described in the Borrower's Form 10-K filed immediately prior to the
Agreement Date not to exceed in aggregate amount the remainder of
$31,000,000 minus any insurance proceeds received in connection with any
such settlement, (iv) charges related to the RCA Acquisition, the Contour
Acquisition, the Acquisition of Regency and non-recurring items recognized
by RCA which would have qualified as purchase accounting adjustments had
the RCA Acquisition been accounted for as a purchase rather than a pooling
not to exceed $65,000,000 in aggregate amount and (v) charges taken by RCA
not to exceed $20,000,000 in aggregate amount related to
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<PAGE>
impairment loss, as determined by Statement of Financial Accounting
Standards No. 121, provided that items, charges and expenses set forth
above (including, without limitation, the charges set forth in clauses
(iii), (iv) and (v) immediately preceding) shall apply to the period in
which such items, charges and expenses are set forth in the financial
statements delivered to the Lenders pursuant to SECTION 6.1 or 6.2 hereof,
as appropriate), plus (b) interest expense, whether or not capitalized
(including interest expense pursuant to Capitalized Lease Obligations),
Depreciation and amortization, plus (c) to the extent included in
determining pre-tax net income, Dividends paid in respect of the Sun
Financing Preferred Securities, in each case for the four fiscal quarters
immediately preceding the date of determination. For purpose of the
calculation of Domestic EBITDA with respect to assets not owned at all
times during the four fiscal quarters immediately preceding the date of
determination, Domestic EBITDA shall be adjusted, on a pro-forma basis, to
(i) include the Domestic EBITDA attributable to an Acquisition which
occurred during any such fiscal quarter for the twelve month period
preceding the date of determination, provided the Acquisition Consideration
for such Acquisition is in excess of $5,000,000 and (ii) exclude the
Domestic EBITDA of any asset or group of related assets disposed of in one
transaction or a series of related transactions during any such fiscal
quarter for the twelve month period preceding the date of determination,
provided the consideration received from the disposition of such asset or
group of related assets is in excess of $5,000,000."
(4) The definition of "EBITDA" set forth in SECTION 1.1 of the Credit
Agreement is hereby amended to read as follows:
"'EBITDA' means, for any period, determined in accordance with GAAP on
a consolidated basis for the Borrower and its Subsidiaries, the sum of (a)
pre-tax net income (excluding therefrom (i) any items of extraordinary
gain, including net gains on the sale of assets other than asset sales in
the ordinary course of business, (ii) any items of extraordinary loss,
including net losses on the sale of assets other than asset sales in the
ordinary course of business, and charges and expenses related to this
Agreement, (iii) charges related to settlement of the Shareholder Lawsuits
and the Golden Care or SunCare Litigation as described in the Borrower's
Form 10-K filed immediately prior to the Agreement Date not to exceed in
aggregate amount the remainder of $31,000,000 minus any insurance proceeds
received in connection with any such settlement, (iv) charges related to
the RCA Acquisition, the Contour Acquisition, the Acquisition of Regency
and non-recurring items recognized by RCA which would have qualified as
purchase accounting adjustments had the RCA Acquisition been accounted for
as a purchase rather than a pooling not to exceed $65,000,000 in aggregate
amount, and (v) charges taken by RCA not to exceed $20,000,000 in aggregate
amount related to impairment loss, as determined by Statement of Financial
Accounting Standards No. 121, provided that items, charges and expenses set
forth above (including, without limitation, the charges set forth in
clauses (iii), (iv) and (v)immediately preceding) shall apply to the period
in which such items, charges and expenses are set forth in the financial
statements
-4-
<PAGE>
delivered to the Lenders pursuant to SECTION 6.1 or 6.2 hereof, as
appropriate), plus (b) interest expense, whether or not capitalized
(including interest expense pursuant to Capitalized Lease Obligations),
Depreciation and amortization, plus (c) to the extent included in
determining pre-tax net income, Dividends paid in respect of the Sun
Financing Preferred Securities, in each case for the four fiscal quarters
immediately preceding the date of calculation. For purpose of the
calculation of EBITDA with respect to assets not owned at all times during
the four fiscal quarters immediately preceding the date of determination,
EBITDA shall be adjusted, on a pro-forma basis, to (i) include the EBITDA
attributable to an Acquisition which occurred during any such fiscal
quarter for the twelve month period preceding the date of determination,
provided the Acquisition Consideration for such Acquisition is in excess of
$5,000,000 and (ii) exclude the EBITDA of any asset or group of related
assets disposed of in one transaction or a series of related transactions
during any such fiscal quarter for the twelve month period preceding the
date of determination, provided the consideration received from the
disposition of such asset or group of related assets is in excess of
$5,000,000."
(5) The definition of "NET WORTH" set forth in SECTION 1.1 of the Credit
Agreement is hereby amended to read as follows:
"'NET WORTH' means, for the Borrower and its Subsidiaries, on a
consolidated basis (provided that if Non-Guaranteeing Subsidiary EBITDAR
shall ever equal or exceed 15% of EBITDAR, Net Worth shall be calculated
for the Borrower and its Restricted Subsidiaries on a consolidated basis,
but adjusted to exclude (i), (ii) and (iii) immediately following for
Non-Guaranteeing Restricted Subsidiaries), determined in accordance with
GAAP, the sum of (i) capital stock taken at par value, plus (ii) capital
surplus, plus (iii) retained earnings less treasury stock; provided,
however, notwithstanding the above, for purposes of calculation of Net
Worth (but without duplication) there shall be added to Net Worth an amount
equal to 50% of the aggregate liquidation amount of the outstanding Sun
Financing Preferred Securities."
(6) The definition of "PERMITTED LIENS" set forth in SECTION 1.1 of the
Credit Agreement is hereby amended by deleting all references to "Section
7.1(k)" in clause (f) thereof and inserting "Section 7.1(l)" in lieu thereof.
(7) SECTION 1.1 of the Credit Agreement is hereby amended by adding the
following defined term thereto in proper alphabetical order:
"'ISRAEL INVESTMENT' means the direct or indirect Investment by the
Borrower in the capital stock of a Company located in Israel not to exceed
$5,000,000 in aggregate amount."
(8) SECTION 2.5(c) of the Credit Agreement is hereby amended to read as
follows:
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<PAGE>
"(c) PREPAYMENTS FROM SALES OF ASSETS. Concurrently with the receipt
of Net Cash Proceeds from the sale or disposition by the Borrower or any
Restricted Subsidiary of the Borrower of any assets, including any Equity
of any Subsidiary, whether through the conversion of Indebtedness or
otherwise (other than sales or dispositions of assets permitted pursuant to
(A) clauses (i) through (iii) of SECTION 7.4(a) hereof, (B) clause (viii)
of SECTION 7.4(a) hereof, to the extent that the aggregate book value of
assets sold pursuant to such clause (viii) during any fiscal year does not
exceed $5,000,000, (C) SECTION 7.16 hereof, and (D) the Regency Sale
Leaseback, the Borrower shall apply (i) an amount equal to 100% of such
aggregate Net Cash Proceeds at any time that the Leverage Ratio set forth
in the Compliance Certificate received by the Lenders immediately preceding
such sale or disposition (as adjusted to give effect, on a pro forma basis,
to the application of the Net Cash Proceeds thereof as provided herein and
as certified to the Lenders by the chief financial officer of the Borrower
prior to such application of such Net Cash Proceeds) is equal to or greater
than 5.50 to 1 or (ii) an amount equal to 50% of such aggregate Net Cash
Proceeds (excluding, however, any amount of such Net Cash Proceeds which
are used within 180 days of such sale or disposition to purchase assets to
be used in the business of the Borrower and its Restricted Subsidiaries
described in SECTION 4.1(d) hereof) at any time that the Leverage Ratio set
forth in the Compliance Certificate received by the Lenders immediately
preceding such sale or disposition (as adjusted to give effect, on a pro
forma basis, to the application of the Net Cash Proceeds thereof as
provided herein and as certified to the Lenders by the chief financial
officer of the Borrower prior to such application of such Net Cash
Proceeds) is less than 5.50 to 1 to prepay Facility A Term Loan Advances,
Facility B Term Loan Advances and Facility C Term Loan Advances (and,
thereafter, Revolving Credit Advances (or provide cash collateral in the
amount of such Net Cash Proceeds for the outstanding Reimbursement
Obligations to the extent that Revolving Credit Advances are not
outstanding) when there are no Facility A Term Loan Advances, Facility B
Term Loan Advances and Facility C Term Loan Advances outstanding). Each
such prepayment of Facility A Term Loan Advances, Facility B Term Loan
Advances and Facility C Term Loan Advances shall be applied PRO RATA to all
of the unpaid scheduled installment payments of the Facility A Term Loan
Advances, Facility B Term Loan Advances and Facility C Term Loan Advances,
in each case PRO RATA based upon the respective principal amounts of such
installment payments then unpaid. Any prepayment of Revolving Credit
Advances (or cash collateral provided in respect of Reimbursement
Obligations) pursuant to this SECTION 2.5(c) shall permanently reduce the
Revolving Credit Commitment by the amount of such prepayment or cash
collateral."
(9) SECTION 7.1(i) of the Credit Agreement is hereby amended to read as
follows:
"(i) Guaranties by the Borrower of obligations of Foreign Subsidiaries
(including Indebtedness pursuant to letters of credit in respect of
obligations of Foreign Subsidiaries, and to the extent that such Guaranty
relates to Operating Leases, such Guaranty to be calculated as an amount
equal to the product of rental expense for the four fiscal quarters
immediately preceding the date of calculation subject to the terms of such
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<PAGE>
Guaranty multiplied by eight), together with net Investments pursuant to
SECTION 7.3(j) which are in Foreign Entities and Acquisition Consideration
for all Foreign Subsidiaries pursuant to SECTION 7.5(b) hereof, not to
exceed (i) for fiscal year 1998, the sum of (A) $55,000,000 plus (B) the
Israel Investment, and (ii) for each fiscal year thereafter, (A)
$60,000,000 or (B) $75,000,000 if the Leverage Ratio as of the end of any
fiscal quarter during such fiscal year is less than 5.50 to 1; PROVIDED,
HOWEVER, the aggregate amount of any such individual Guaranty shall not
exceed $30,000,000;"
(10) SECTION 7.1(l) of the Credit Agreement is hereby amended to read as
follows:
"(l) other Indebtedness not to exceed in aggregate principal amount
outstanding at any time 5% of the Total Assets of the Borrower and its
Restricted Subsidiaries on a consolidated basis; PROVIDED, HOWEVER, the
aggregate amount of such Indebtedness which is not used to finance existing
Indebtedness or finance as a Synthetic Lease the obligations with respect
to which were previously classified as an Operating Lease may not exceed 3%
of the Total Assets of the Borrower and its Restricted Subsidiaries on a
consolidated basis."
(11) SECTION 7.3(j) of the Credit Agreement is hereby amended to read as
follows:
"(j) other Investments primarily related to the business of providing
healthcare services, including nursing care, rehabilitation therapy and
other specialized healthcare services (i) in Domestic Entities (including
Non-Guaranteeing Restricted Subsidiaries), not to exceed, together with the
aggregate Acquisition Consideration for all Non-Guaranteeing Restricted
Subsidiaries (other than Sun Financing) acquired pursuant to SECTION
7.5(a)(ii) hereof, $50,000,000 in aggregate principal amount, and (ii) in
Foreign Entities (calculated net of any repayment of loans and advances by
Foreign Entities) together with the Acquisition Consideration for all
Foreign Subsidiaries acquired pursuant to SECTION 7.5(b) hereof and
obligations in respect of Guaranties pursuant to SECTION 7.1(i) hereof, not
to exceed (A) for fiscal year 1998, the sum of (y) $55,000,000 plus (z) the
Israel Investment, and (B) for each fiscal year thereafter, (y) $60,000,000
or (z) $75,000,000 if the Leverage Ratio as of the end of any fiscal
quarter during such fiscal year is less than 5.50 to 1; PROVIDED, HOWEVER,
that no individual Investment in any Foreign Entity shall exceed
$30,000,000."
(12) SECTION 7.4(a) of the Credit Agreement is hereby amended by deleting
"$1,000,000" from the penultimate line thereof and inserting "$5,000,000" in
lieu thereof.
(13) SECTION 7.5 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.5 ACQUISITIONS. The Borrower shall not, and shall not
permit any of its Restricted Subsidiaries to, make, in one or more
transactions, any (a) Acquisition during any fiscal year, unless (i) the
Acquisition is set forth on SCHEDULE 14 hereto or
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<PAGE>
(ii)(A) the Acquisition is of a Restricted Subsidiary or of the assets of a
Domestic Entity, (B) the Acquisition Consideration therefor is less than
(y) $75,000,000 or (z) $100,000,000 if the Leverage Ratio as of the end of
any fiscal quarter during such fiscal year is less than 5.50 to 1, (C) the
sum of the Acquisition Consideration therefor, together with the
Acquisition Consideration given for all other such Acquisitions during such
fiscal year, is less than (y) $100,000,000 or (z) $150,000,000 if the
Leverage Ratio as of the end of any fiscal quarter during such fiscal year
is less than 5.50 to 1, (D) each of such Restricted Subsidiary and its
Restricted Subsidiaries (in each case other than a Non-Guaranteeing
Restricted Subsidiary), if any, becomes a party to a Subsidiary Guaranty
and the Intercompany Line of Credit and all the capital stock of, or equity
interest in, such Restricted Subsidiary (other than CareerStaff
Subsidiaries unless otherwise required by SECTION 5.11) and its Restricted
Subsidiaries, if any (other than CareerStaff Subsidiaries unless otherwise
required by SECTION 5.11) shall be pledged pursuant to a Pledge Agreement,
and (E) notwithstanding clauses (B) and (C) immediately above, if the
Acquisition is of a Restricted Subsidiary which is a Non-Guaranteeing
Restricted Subsidiary, the aggregate Acquisition Consideration for all
Non-Guaranteeing Restricted Subsidiaries (other than Sun Financing),
together with the aggregate Investments made pursuant to SECTION 7.3(j)(i)
hereof, is less than or equal to $50,000,000 in aggregate amount at all
times; or (b) Acquisition of a Foreign Subsidiary, during any fiscal year,
unless (i) the Acquisition Consideration for all such Acquisitions,
together with the aggregate amount of obligations incurred in respect of
Guaranties pursuant to SECTION 7.1(i) and Investments made pursuant to
SECTION 7.3(j) which are in Foreign Entities, does not exceed (A) for
fiscal year 1998, the sum of (y) $55,000,000 plus (z) the Israel
Investment, and (B) for each fiscal year thereafter, (y) $60,000,000 or (z)
$75,000,000 if the Leverage Ratio as of the end of any fiscal quarter
during such fiscal year is less than 5.50 to 1; (ii) the Acquisition
Consideration for any single Acquisition or series of related Acquisitions
does not exceed $30,000,000 and (iii) to the extent such Foreign Subsidiary
is not an Inactive Subsidiary or a Subsidiary of a Foreign Subsidiary, an
amount of the capital stock of such Foreign Subsidiary necessary to cause
the Administrative Agent to have a security interest in, and pledge of, all
of the capital stock of, or other equity interest in, such Foreign
Subsidiary owned by the pledgor or such lesser amount such that in any case
not more than 66% of all of the capital stock of, or other equity interest
in, such Foreign Subsidiary, shall be pledged pursuant to a Foreign
Subsidiary Pledge Agreement."
(14) SECTION 7.9 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.9 FIXED CHARGE COVERAGE RATIO. The Borrower shall not
permit the Fixed Charge Coverage Ratio to be less than (a) 1.25 to 1 at the
end of the fiscal quarter ending September 30, 1998 and at the end of any
fiscal quarter thereafter through and including September 30, 2000, (b)
1.35 to 1 at the end of any fiscal quarter thereafter through and including
September 30, 2001, (c) 1.40 to 1 at the end of any fiscal quarter
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<PAGE>
thereafter through and including September 30, 2003, and (d) 1.50 to 1 at the
end of any fiscal quarter thereafter."
(15) SECTION 7.10 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.10 LEVERAGE RATIO. The Borrower shall not permit the
Leverage Ratio to be greater than (a) 6.90 to 1 at the end of the fiscal
quarter ending September 30, 1998 and at the end of any fiscal quarter
thereafter through and including March 31, 1999, (b) 6.75 to 1 at the end
of the fiscal quarters ending June 30, 1999 and September 30, 1999, (c)
6.50 to 1 at the end of any fiscal quarter thereafter through and including
September 30, 2000, (d) 6.25 to the end of any fiscal quarter thereafter
through and including September 30, 2001, (e) 6.00 to 1 at the end of any
fiscal quarter thereafter through and including September 30, 2002, (f)
5.50 at the end of any fiscal quarter thereafter through and including
September 30, 2003, (g) 5.25 to 1 at the end of any fiscal quarter
thereafter through and including September 30, 2004 and (h) 5.00 to 1 at
the end of any fiscal quarter thereafter."
(16) SECTION 7.11 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.11 NET WORTH. The Borrower shall not permit Net Worth at
the end of any fiscal quarter to be less than $491,000,000, plus (a) an
amount equal to 50% of the aggregate liquidation amount of the outstanding
Sun Financing Preferred Securities, plus (b) an amount equal to 75% of
cumulative Net Income for the period from July 1, 1998 through the end of
such fiscal quarter (but excluding from the calculation of such cumulative
Net Income the effect of any fiscal quarter for which Net Income was a
negative number), plus (c) an amount equal to 100% of the net worth of any
Person that becomes a Subsidiary of the Borrower or is merged into or
consolidated with the Borrower or any of its Subsidiaries or substantially
all of the assets of which are acquired by the Borrower or any of its
Subsidiaries to the extent the purchase price therefor is paid in equity
securities of the Borrower or any of its Subsidiaries, plus (d) 75% of the
increase in shareholders' equity of the Borrower pursuant to offerings of
equity securities of the Borrower or any of its Subsidiaries or pursuant to
the conversion or exchange of any convertible subordinated debt or
redeemable preferred stock into equity securities of the Borrower or any of
its Subsidiaries."
(17) SECTION 7.18 of the Credit Agreement is hereby amended to read as
follows:
"Section 7.18 SENIOR DEBT TO EBITDAR RATIO. The Borrower shall not
permit the Senior Debt to EBITDAR Ratio to be greater than (a) 5.75 to 1 at
the end of the fiscal quarter ending September 30, 1998 and at the end of
any fiscal quarter thereafter through and including September 30, 1999, (b)
5.50 to 1 at the end of any fiscal quarter thereafter through and including
September 30, 2000, (c) 5.25 to 1 at the end of any fiscal quarter
thereafter through and including September 30, 2001, (d) 5.00 to 1 at the
end of any fiscal
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<PAGE>
quarter thereafter through and including September 30, 2002, and (e) 4.50
to 1 at the end of any fiscal quarter thereafter."
(18) The Compliance Certificate is hereby amended to be in the form of
EXHIBIT G hereto.
2. WAIVER. Subject to the terms hereof, the Lenders hereby agree that
the Alpha Acquisition shall be excluded from the restrictions set forth in
SECTIONS 7.1(i), 7.3(j) and 7.5(b) hereof.
3. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1 and the waiver contemplated by the foregoing Section 2:
(1) the representations and warranties contained in the Credit Agreement
and the other Loan Documents are true and correct on and as of the date hereof
as if made on and as of such date;
(2) no event has occurred and is continuing which constitutes a Default or
an Event of Default;
(3) the Borrower has full power and authority to execute and deliver this
Fourth Amendment, and the Credit Agreement, as amended hereby, the execution,
delivery and performance of this Fourth Amendment and the Credit Agreement, as
amended hereby, has been duly authorized by all corporate action of the
Borrower, and this Fourth Amendment and the Credit Agreement, as amended hereby,
constitute the legal, valid and binding obligations of the Borrower, enforceable
in accordance with their respective terms, except as enforceability may be
limited by applicable Debtor Relief Laws and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law) and except as rights to indemnity may be limited by federal or state
securities laws;
(4) neither the execution, delivery and performance of this Fourth
Amendment or the Credit Agreement, as amended hereby, nor the consummation of
any transactions contemplated herein or therein, will contravene or conflict
with any law, rule or regulation to which the Borrower or any of its
Subsidiaries is subject, or any indenture, agreement or other instrument to
which the Borrower or any of its Subsidiaries or any of their respective
property is subject; and
(5) no authorization, approval, consent, or other action by, notice to, or
filing with, any governmental authority or other Person (including the Board of
Directors of the Borrower or any Guarantor), is required for the (i) execution,
delivery or performance by the Borrower of this Fourth Amendment and the Credit
Agreement, as amended hereby, or (ii) acknowledgment of this Fourth Amendment by
each Guarantor.
-10-
<PAGE>
4. CONDITIONS OF EFFECTIVENESS. This Fourth Amendment shall be effective
(and the adjustment of the Applicable LIBOR Rate Margin provided herein) as of
October 30, 1998, subject to the following:
(1) the Administrative Agent shall have received counterparts of this
Fourth Amendment executed by the Determining Lenders; provided, however,
notwithstanding this Section 4, the amendment of SECTION 2.5(c) of the Credit
Agreement provided for in SECTION 1(h) of this Fourth Amendment shall not be
effective unless and until Lenders whose Total Specified Percentages aggregate
at least 66-2/3% shall have executed counterparts of this Fourth Amendment;
(2) the Administrative Agent shall have received counterparts of this
Fourth Amendment executed by the Borrower and acknowledged by each Guarantor;
(3) the representations and warranties set forth in Section 3 of this
Fourth Amendment shall be true and correct; and
(4) the Administrative Agent shall have received, in form and substance
satisfactory to the Administrative Agent and its counsel, such other documents,
certificates and instruments as Administrative Agent shall require.
5. AMENDMENT FEE. The Borrower covenants and agrees to pay an amendment
fee to the Lenders which execute and deliver this Fourth Amendment to the
Administrative Agent (or its counsel) not later than 5:00 p.m., Dallas time,
October 28, 1998 in an amount equal to the product of (a) 0.25% multiplied by
(b)(i) with respect to each Lender having a portion of the Revolving Credit
Commitment, an amount equal to such Lender's portion of the Revolving Credit
Commitment and (ii) with respect to each Lender which is owed Facility A Term
Loan Advances, Facility B Term Loan Advances or Facility C Term Loan Advances,
the aggregate principal amount of Facility A Term Loan Advances, Facility B Term
Loan Advances and Facility C Term Loan Advances owed to such Lender. Such
amendment fee shall be paid in immediately available funds and shall be due and
payable to each Lender no later than one Business Day after the date which this
Fourth Amendment becomes effective. The Borrower agrees that the failure to pay
the amendment fee provided in this Section 5 shall be an Event of Default under
SECTION 8.1(b)(i) of the Credit Agreement.
6. REFERENCE TO THE CREDIT AGREEMENT.
(1) Upon the effectiveness of this Fourth Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", or words of like import shall
mean and be a reference to the Credit Agreement, as amended by this Fourth
Amendment.
-11-
<PAGE>
(2) The Credit Agreement, as amended by this Fourth Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
7. GUARANTOR'S ACKNOWLEDGMENT. By signing below, each of the Guarantors
(a) acknowledges, consents and agrees to the execution, delivery and performance
by the Borrower of this Fourth Amendment, and (b) acknowledges and agrees that
its obligations in respect of its Subsidiary Guaranty or any other Loan
Documents executed by it are (i) not released, diminished, waived, modified,
impaired or affected in any manner by this Fourth Amendment, (ii) hereby
ratified and confirmed and (iii) not subject to any claims, offsets, defenses or
counterclaims.
8. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all
costs and expenses of the Administrative Agent in connection with the
preparation, reproduction, execution and delivery of this Fourth Amendment and
the other instruments and documents to be delivered hereunder (including the
reasonable fees and out-of-pocket expenses of counsel for the Administrative
Agent with respect thereto and with respect to advising the Administrative Agent
as to its rights and responsibilities under the Credit Agreement, as amended by
this Fourth Amendment).
9. EXECUTION IN COUNTERPARTS. This Fourth Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument.
10. GOVERNING LAW; BINDING EFFECT. This Fourth Amendment shall be
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Borrower, the Co-Agents, the Administrative Agent and
each Lender and their respective successors and assigns.
11. HEADINGS. Section headings in this Fourth Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Fourth Amendment for any other purpose.
12. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FOURTH
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment as
the date first above written.
SUN HEALTHCARE GROUP, INC.
By:
-------------------------------------
Robert D. Woltil
Chief Financial Officer
NATIONSBANK, N.A., as Administrative
Agent and as a Lender
By:
-------------------------------------
F. Scott Singhoff
Senior Vice President
700 Louisiana Street, 8th Floor
Houston, Texas 77002
Attn: F. Scott Singhoff
Senior Vice President
BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION, as a Co-Agent and as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
555 South Flower Street, 11th Floor
Los Angeles, California 90071
Attn: Lucy B. Nixon
-13-
<PAGE>
SCOTIABANC INC., as a Co-Agent and as a
Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
600 Peachtree Street, N.E., Suite 2700
Atlanta, Georgia 30308-2214
Attn: Dana Maloney
BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a
Co-Agent and as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
US Corporate Banking Division
1251 Avenue of the Americas, 12th Floor
New York, New York 10020-1104
Attn: Douglas J. Weir
CREDIT LYONNAIS NEW YORK BRANCH, as a
Co-Agent and as a Lender
By:
-------------------------------------
Farboud Tavangar
First Vice President
1301 Avenue of the Americas, 18th Floor
New York, New York 10019-6022
Attn: Farboud Tavangar
First Vice President
-14-
<PAGE>
CREDIT SUISSE FIRST BOSTON, as a Co-Agent and
as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
11 Madison Avenue, 20th Floor
New York, New York 10010
Attn: Robert B. Potter
THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS
ANGELES AGENCY, as a Co-Agent and as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
350 South Grand Avenue, Suite 3000
Los Angeles, California 90071
Attn: Yoshiaki Kozano
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
a Co-Agent and as a Lender
By:
-------------------------------------
Douglas E. Maher
Vice President
-15-
<PAGE>
60 Wall Street, 22nd Floor
New York, New York 10260
Attn:
-------------------------------------
PNC BANK, NATIONAL ASSOCIATION, as a Co-Agent
and as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
1 PNC Plaza - 6th Floor
Mail Stop P1-POPP-06-7
620 Liberty Avenue
Pittsburgh, Pennsylvania 15265
Attn: Pete Tsludis
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK NEDERLAND",
NEW YORK BRANCH, as a Co-Agent
and as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
245 Park Avenue
New York, New York 10167-0062
Attn: Corporate Services Department
with a copy to:
-16-
<PAGE>
13355 Noel Road
One Galleria Tower, Suite 1000
Dallas, Texas 75240
Attn: David Thomas
THE SUMITOMO BANK, LIMITED, as a Co-Agent and
as a Lender
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
777 South Figueroa Street, Suite 2600
Los Angeles, California 90017
Attn: Gary Perkins
PARIBAS
By:
-------------------------------------
Glenn Mealey
Director
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
1200 Smith, Suite 3100
Houston, Texas 77002
Attn: Glenn Mealey
Director
BHF-BANK AKTIENGESELLSCHAFT
-17-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
111 West Ocean Boulevard, Suite 1325
Long Beach, California 90802
Attn: L. John Stewart
Vice President
with a copy to:
590 Madison Avenue
New York, New York 10022-2540
Attn: Dan Dobrjanskyj
Assistant Vice President
DRESDNER BANK AG, NEW YORK BRANCH AND GRAND
CAYMAN BRANCH
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
75 Wall Street, 25th Floor
New York, New York 10005
Attn:
---------------------------------------
FINOVA CAPITAL CORPORATION
-18-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
311 South Wacker Drive, Suite 4400
Chicago, Illinois 60606
Attn: Brian T. Williamson
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
1251 Avenue of the Americas
New York, New York 10020-1104
Attn: Jennifer McNamara
THE MITSUBISHI TRUST AND BANKING CORPORATION,
LOS ANGELES AGENCY
By:
-------------------------------------
Yasushi Satomi
Senior Vice President and Chief
Manager
801 South Figueroa Street, Suite 500
Los Angeles, California 90071
Attn: Dean Kawai
Vice President
-19-
<PAGE>
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
505 Main Street, Suite 300
Fort Worth, Texas 76102
Attn: Susan Sheffield
Vice President
AMSOUTH BANK
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
1900 Fifth Avenue North, AST7FL
Birmingham, Alabama 35203
Attn: Shannon O. Clark
Assistant Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
3379 Peachtree Road N.E., Suite 560
Atlanta, Georgia 90326
Attn: Holly Kaczmarczyk
-20-
<PAGE>
NATEXIS BANQUE BFCE
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
333 Clay Street, Suite 4340
Houston, Texas 77002
Attn:
-------------------------------------
with a copy to:
Natexis Banque BFCE, New York Branch
645 Fifth Avenue, 20th Floor
New York, New York 10022
Attn: Joan Rankine
THE ROYAL BANK OF SCOTLAND, plc
By:
-------------------------------------
David Dougan
Vice President
Wall Street Plaza, 26th Floor
88 Pine Street
New York, New York 10005-1801
Attn: David Dougan
THE SANWA BANK, LIMITED
-21-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
55 East 52nd Street
New York, New York 10036
Attn: John Feeney
Vice President
SUMMIT BANK
By:
-------------------------------------
Thomas P. Hanrahan
Vice President
250 Moore Street, 2nd Floor
Hackensack, New Jersey 07601
Attn: Healthcare Financial Services
TORONTO DOMINION (TEXAS), INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
909 Fannin Street, Suite 1700
Houston, Texas 77010
Attn: Sonja R. Jordan
Manager, Credit Administration
with a copy to:
31 West 52nd Street, 18th Floor
New York, New York 10019
Attn: David Perlman
Senior Associate
-22-
<PAGE>
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
1295 State Street, 1st Floor
Springfield, Massachusetts 01111
Attn: Steven J. Katz
METROPOLITAN LIFE INSURANCE COMPANY
By:
-------------------------------------
James Dingler
Director
334 Madison Avenue
Convent Station, New Jersey 07961-0633
Attn: Frank Monfalcone
with a copy to:
Metropolitan Life Insurance Company
1 Madison Avenue, Area 7H
New York, New York 10010
Attn: Bill Ding, Esq.
KZH III LLC (formerly known as KZH HOLDING
CORPORATION III)
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
-23-
<PAGE>
New York, New York 10001
Attn: Virginia Conway
KZH SHENKMAN LLC
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001
Attn: Virginia Conway
PARIBAS CAPITAL FUNDING LLC
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
787 7th Avenue, 32nd Floor
New York, New York 10019
Attn: Francois Gauvin
with a copy to:
Richard Wagman
State Street Bank & Trust Co.
Two International Place
Boston, Massachusetts 02110
Telephone: (617) 664-5410
Fax: (617) 664-5366/67/68
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME
TRUST
-24-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
One Parkview Plaza
Oakbrook Terrace, Illinois 60602
Attn: Jeffrey W. Maillet
PFL LIFE INSURANCE COMPANY
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o AEGON USA Investment Management, Inc.
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499-5335
Attn: John Bailey
PEOPLES SECURITY LIFE INSURANCE COMPANY
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Peoples Security Life Insurance Company
c/o AEGON USA Investment Management, Inc.
400 West Market Street
Louisville, Kentucky 40202
Attn: Securities Department - 10th Floor
THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY
-25-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attn: Securities Department
ROYALTON COMPANY
By: Pacific Investment Management Company,
as its Investment Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
840 Newport Center Drive
Newport Beach, California 92656
Attn: Melissa Fejdasz
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Merrill Lynch Asset Management
800 Scudders Mill Road - Area 1B
Plainsboro, New Jersey 08536
Attn: Gilles Marchand
SENIOR HIGH INCOME PORTFOLIO, INC.
-26-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Merrill Lynch Asset Management
800 Scudders Mill Road - Area 1B
Plainsboro, New Jersey 08536
Attn: Gilles Marchand
DEBT STRATEGIES FUND, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Merrill Lynch Asset Management
800 Scudders Mill Road - Area 1B
Plainsboro, New Jersey 08536
Attn: Gilles Marchand
BANKBOSTON, N.A.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
100 Federal Street, Mail Stop: 01-08-05
Boston, Massachusetts 02110
Attn:
-------------------------------------
CYPRESSTREE INVESTMENT PARTNERS I, LTD.
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
-27-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
125 High Street, 14th Floor
Boston, Massachusetts 02110
Attn: Philip Robbins
with a copy to:
State Street Bank & Trust
Corporate Trust Department
Two International Place
Boston, Massachusetts 02110
Attn: John Tavares, for the account of
FAFLIC
DEEPROCK & CO.
By: Eaton Vance Management, as Investment
Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
24 Federal Street
Boston, Massachusetts 02110
Attn:
------------------------------------
FRANKLIN FLOATING RATE TRUST
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
-28-
<PAGE>
777 Mariners Island Boulevard, 7th Floor
San Mateo, California 94404
Attn:
-------------------------------------
ORIX USA CORPORATION
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
780 Third Avenue, 48th Floor
New York, New York 10017-7088
Attn: Kiyomi Kosaka
Vice President
PILGRIM AMERICA PRIME RATE TRUST
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Pilgrim America Investments, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Attn:
-------------------------------------
NORTHERN LIFE INSURANCE COMPANY
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
100 Washington Avenue South, Suite 800
Minneapolis, Minnesota 55401
Attn: Tim Warrick
-29-
<PAGE>
ING HIGH INCOME PRINCIPAL PRESERVATION
OFFERING, L.P.
By: ING Capital Advisors, Inc., as
Investment Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o ING Capital Advisors, Inc.
233 South Wacker Drive, Suite 5200
Chicago, Illinois 60606
Attn: Jane Musser Nelson
Portfolio Manager
ML CLO XII PILGRIM AMERICA (CAYMAN) LTD.
By: Pilgrim America Investments, Inc., as
its Investment Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Pilgrim America Investments, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-3444
with a faxed copy to:
State Street Bank and Trust Company
Corporate Trust Department
Attn: Ray Welliver
Ref: Paramount Company
Fax: (617) 664-5366/5367/5368
-30-
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research, as
Investment Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Boston Management and Research, as
Investment Advisor
24 Federal Street
Boston, Massachusetts 02110
CYPRESSTREE INVESTMENT FUND, LLC
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
CypressTree Investment Management Company,
Inc.
125 High Street, 14th Floor
Boston, Massachusetts 02110
ML CBO IV (CAYMAN) LTD.
By: Highland Capital Management, L.P., as
Collateral Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
-31-
<PAGE>
Highland Capital Management, L.P.
1150 Two Galleria Tower
13455 Noel Road, LB #45
Dallas, Texas 75240
Attn: Mark Okada
PAMCO CAYMAN LTD.
By: Highland Capital Management, L.P., as
Collateral Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Highland Capital Management, L.P.
1150 Two Galleria Tower
13455 Noel Road, LB #45
Dallas, Texas 75240
Attn: Mark Okada
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Merrill Lynch Prime Rate Portfolio
800 Scudders Mill Road - Area 1B
Plainsboro, New Jersey 08536
Attn: Jill Montanye
-32-
<PAGE>
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
250 Vesey Street
World Financial Center
16th Floor, North Tower
New York, New York 10281
Attn: Janet Hansen
INDOSUEZ CAPITAL FUNDING III, LIMITED
By: Indosuez Capital Luxembourg, as
Collateral Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Queensgate Bank & Trust Company Limited
P.O. Box 30464 SMB/South Church Street
Ugland House, 5th Floor
George Town
Grand Cayman, Cayman Islands
British West Indies
with copies to:
Indosuez Capital Funding III, Limited
c/o Texas Commerce Bank N.A.
Attn: Joe Elston, Asset Backed Group
A/C 17499
600 Travis Street, 8th Floor
Houston, Texas 77002-8039
-33-
<PAGE>
and
Indosuez Capital
1211 Avenue of the Americas, 7th Floor
New York, New York 10036-8701
Attn: Francoise Berthelot
ARES LEVERAGED INVESTMENT FUND, L.P.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attn: Jeff Moore
Principal
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as
Collateral Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o ING Capital Advisors, Inc.
333 South Grand Avenue, Suite 4250
Los Angeles, California 90071
Attn: Jane Musser Nelson
Portfolio Manager
BANK POLSKA KASA OPIEKI, S.A.
PEKAO S.A. GROUP, NEW YORK BRANCH
-34-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
470 Park Avenue South, 15th Floor
New York, New York 10016
ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN
AG - NEW YORK
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
280 Park Avenue
West Building, 32nd Floor
New York, New York 10017
ROYAL BANK OF CANADA
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
One Financial Square
New York, New York 10005-3531
Attention: Linda Swanston
-35-
<PAGE>
VAN KAMPEN CLO I, LIMITED
By: VAN KAMPEN AMERICAN CAPITAL MANAGEMENT,
INC., as Collateral Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Attention: Brian Murphy
with a copy to:
Texas Commerce Bank N.A.
Trust Clearing Account
600 Travis, 8th Floor
Houston, Texas 77002
Attention: Elaine Mah
BALANCED HIGH-YIELD FUND I LTD.
By: BHF-BANK AKTIENGESELLSCHAFT, acting
through its New York Branch, as
attorney-in-fact
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
-36-
<PAGE>
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o State Street Bank & Trust Company
Two International Place
Boston, Massachusetts 02110
Attention: Steve O'Brien
with a copy to:
Balanced High-Yield Fund I Ltd.
c/o BHF-Bank Aktiengesellschaft
590 Madison Avenue
New York, New York 10022
Attention: Dan Dobrjanskyj
DELANO COMPANY
By: Pacific Investment Management Company,
as its Investment Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Pacific Investment Management Co.
840 Newport Center Drive
Newport Beach, California 92658
with a copy to:
Chase Bank of Texas National Association
601 Travis Street, 8th Floor
Houston, Texas 77002
Attention: Delano Company
MERRILL LYNCH GLOBAL INVESTMENT SERIES:
INCOME STRATEGIES PORTFOLIO
-37-
<PAGE>
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
c/o Merrill Lynch Asset Management
800 Scudders Mill Road - Area 1B
Plainsboro, New Jersey 08536
Attention: Ann Marie Smith - Trade Closing
Colleen Wade - Daily Loan
Activity
with a copy to:
Sheri Smith
MLAS Accounting
68-70 Boulevard de la Petrruase
L-2320 Luxembourg
DEBT STRATEGIES FUND II, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
PAM CAPITAL FUNDING LP
By: Highland Capital Management, L.P., as
Collateral Manager
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
-38-
<PAGE>
Highland Capital Management, L.P.
1150 Two Galleria tower
13455 Noel Road, LB #45
Dallas, Texas 75240
Attn: Mark Okada
VAN KAMPEN AMERICAN CAPITAL SENIOR INCOME
TRUST
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Attn: Sean Kelley
FRANKLIN FLOATING RATE FUND
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
777 Mariners Island Boulevard, 7th Floor
San Mateo, California 94404
Attn:
-------------------------------
BARCLAYS BANK PLC
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
-39-
<PAGE>
Barclays Bank PLC
222 Broadway
New York, New York 10038
Attn: Hema DiVatia
CAPTIVA III FINANCE, LTD., as advised by
Pacific Investment Management Company
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
State Street Bank and Trust Co.
2 International Place, 6th Floor
Boston, Massachusetts 02110
Attn: Mike Abril
with a copy to:
Travis Carr
Captiva III Finance, Ltd.
c/o Pacific Investment Management Co.
840 Newport Center Drive
Newport Beach, California 92658
ACKNOWLEDGED AND AGREED:
Sundance Rehabilitation Corporation, a Connecticut corporation
SunQuest Consulting, Inc., a New Mexico corporation
Sunrise Healthcare Corporation, a New Mexico corporation
SunScript Pharmacy Corporation, a New Mexico corporation
Sunrise Rehab of Colorado, Inc., a Colorado corporation
Sunrise Healthcare of Colorado, Inc., a Colorado corporation
Sunrise Healthcare of Florida, Inc., a Florida corporation
LTC Staffinders, Inc., a Connecticut corporation
SunSpectrum Outpatient Rehabilitation-Concord, Inc., a Massachusetts corporation
Nursing Home Inc., a Washington corporation
Living Services, Inc., a Washington corporation
Bay Colony Health Service, Inc., a Massachusetts corporation
Bergen Eldercare, Inc., a New Jersey corporation
Community Re-Entry Services of Cortland, Inc., a Delaware corporation
G-WZ of Stamford, Inc., a Connecticut corporation
-40-
<PAGE>
Manatee Springs Nursing Center, Inc., a Florida corporation
Mediplex Management, Inc., a Massachusetts corporation
Mediplex Management of Palm Beach County, Inc., a Florida corporation
Mediplex Management of Texas, Inc., a Texas corporation
Sun Healthcare Inc., a Colorado corporation
Mediplex of Concord, Inc., a Massachusetts corporation
Mediplex of Connecticut, Inc., a Connecticut corporation
Mediplex of Kentucky, Inc., a Kentucky corporation
Mediplex of Maryland, Inc., a Maryland corporation
Mediplex of Massachusetts, Inc., a Massachusetts corporation
Mediplex of New Hampshire, Inc., a New Hampshire corporation
Mediplex of New Jersey, Inc., a New Jersey corporation
Mediplex of New York, Inc., a New York corporation
Mediplex of Ohio, Inc., an Ohio corporation
Mediplex of Tennessee, Inc., a Tennessee corporation
Mediplex Atlanta Rehabilitation Institute, Inc., a Georgia corporation
Mediplex Rehabilitation of Massachusetts, Inc., a Massachusetts corporation
P.M.N.F. Management, Inc., a New Jersey corporation
Quality Care Holding Corp., a Massachusetts corporation
Quality Nursing Care of Massachusetts, Inc., a Massachusetts corporation
Spofford Land, Inc., a New Hampshire corporation
Sun Care Corp., a Delaware corporation
HSR Management, Inc., a Delaware corporation
CareerStaff Management, Inc., a Delaware corporation
PRI, Inc., a Texas corporation
CareerStaff Unlimited, Inc., a Delaware corporation
CareerStaff HSR, Inc., a Delaware corporation
Healthcare Staff Resources, Inc., a Texas corporation
SunBridge, Inc., a New Mexico corporation
SunMark of New Mexico, a New Mexico corporation
SunChoice Medical Supply, Inc., a New Mexico corporation
HTA of New Jersey, Inc., a New Jersey corporation
New Bedford Acquisition Corp., a Massachusetts corporation
New Bedford Nursing Center, Inc., a Massachusetts corporation
Worcester Nursing Center, Inc., a Massachusetts corporation.
Cal-Med, Inc., a California corporation
Clipper Home Affiliates, Inc., a New Hampshire corporation
Clipper Home of North Conway, Inc., a New Hampshire corporation
Clipper Home of Portsmouth, Inc., a New Hampshire corporation
Clipper Home of Rochester, Inc., a New Hampshire corporation
Clipper Home of Wolfeboro, Inc., a New Hampshire corporation
Golan Healthcare Group, Inc., a Massachusetts corporation
Goodwin Nursing Home, Inc., a New Hampshire corporation
HC, Inc., a Kansas corporation
-41-
<PAGE>
Langdon Place of Dover, Inc., a New Hampshire corporation
Langdon Place of Exeter, Inc., a New Hampshire corporation
Langdon Place of Nashua, Inc., a New Hampshire corporation
Masthead Corporation, a New Mexico corporation
Mediplex of Virginia, Inc., a Virginia corporation
Oakview Treatment Centers of Kansas, Inc., a Kansas corporation
Pharmacy Factors of California, Inc., a California corporation
Pharmacy Factors of Florida, Inc., a Florida corporation
Pharmacy Factors of Texas, Inc., a Texas corporation
PHS Continuing Education, Inc., a Texas corporation
Premier Health Staff, Inc., a Texas corporation
SHG International Holdings, Inc., a Delaware corporation
Special Medical Services, Inc., a Texas corporation
SunAlliance Health care Services, Inc., a Delaware corporation
SunCare Respiratory Services, Inc., an Indiana corporation
SunFactors, Inc., a Florida corporation
Sun Lane Purchase Corporation, a New Mexico corporation
SunSolution, Inc., a Delaware corporation
The Mediplex Group, Inc., a Massachusetts corporation
Hospital Therapy Service of Texas, Inc., a Texas corporation
Regency Health Services, Inc, a Delaware corporation
Braswell Enterprises, Inc., a California corporation
Brittany Rehabilitation Center, Inc., a California corporation
Carmichael Rehabilitation Center, a California corporation
Coalinga Rehabilitation Center, a California corporation
Covina Rehabilitation Center, a California corporation
Evergreen Rehabilitation Center, a California corporation
Fairfield Rehabilitation Center, a California corporation
Fullerton Rehabilitation Center, a California corporation
Glendora Rehabilitation Center, a California corporation
Grand Terrace Rehabilitation, a California corporation
Hallmark Health Services, Inc., a California corporation
Harbor View Rehabilitation Center, a California corporation
Hawthorne Rehabilitation Center, a California corporation
Heritage Rehabilitation Center, a California corporation
Huntington Beach Convalescent Hospital, a California corporation
Jackson Rehabilitation Center, Inc., a California corporation
Linda-Mar Rehabilitation Center, a California corporation
Meadowbrook Rehabilitation Center, a California corporation
Newport Beach Rehabilitation Center, a California corporation
North State Home Health Care, Inc., a California corporation
Paradise Rehabilitation Center, Inc., a California corporation
Paso Robles Rehabilitation Center, a California corporation
Regency-North Carolina, Inc., a North Carolina corporation
-42-
<PAGE>
Regency Rehab Properties, Inc., a California corporation
Regency-Tennessee, Inc., a Tennessee corporation
RHS Management Corporation, a California corporation
Rosewood Rehabilitation Center, Inc., a California corporation
Shandin Hills Rehabilitation Center, a California corporation
Stockton Rehabilitation Center, Inc., a California corporation
Vista Knoll Rehabilitation Center, Inc., a California corporation
Willowview Rehabilitation Center, a California corporation
First Class Pharmacy, Inc., a California corporation
Care Enterprises, Inc., a Delaware corporation
Americare Homecare, Inc., an Ohio corporation
Care Finance, Inc., a California corporation
Circleville Health Care Corp., an Ohio corporation
Glenville Health Care Corp., a West Virginia corporation
Marion Health Care Corp., an Ohio corporation
New Lexington Health Care Corp., an Ohio corporation
Americare of West Virginia, Inc., a West Virginia corporation
Dunbar Health Care Corp., a West Virginia corporation
Beckley Health Care Corp., a West Virginia corporation
Putnam Health Care Corp., a West Virginia corporation
Salem Health Care Corp., a West Virginia corporation
Care Enterprises West, a Utah corporation
Care Home Health Services, a California corporation
SCRS & Communicology Inc., of Ohio, an Ohio corporation
Regency Rehab Hospitals, Inc., a California corporation
Orange Rehabilitation Hospital, Inc., a Delaware corporation
San Bernadino Rehabilitation Hospital, Inc., a Delaware corporation
Regency Outpatient Services, Inc., a California corporation
Heritage-Torrance Rehabilitation Center
Oasis Mental Health Treatment Center, Inc.
Regency High School, Inc.
Pacific Beach Physical Therapy, Inc.
Peachwood Physical Therapy, Inc.
Regency Rehabilitation Management and Consulting Services, Inc.
By:
--------------------------------------------------
Robert D. Woltil
Chief Financial Officer
-43-
<PAGE>
Accelerated Care Plus, LLC, a Delaware limited liability company
By: Cal-Med, Inc., a California corporation and HC, Inc., a Kansas corporation,
members
By:
----------------------------------------
Robert D. Woltil
Chief Financial Officer
Hospital Therapy Service of Michigan, LLC, a Michigan limited liability company
By: SunCare Respiratory Services, Inc., an Indiana corporation, member
By:
----------------------------------------
Robert D. Woltil
Chief Financial Officer
Therapists Unlimited-Baltimore/Washington, D.C., L.P., a Texas limited
partnership
Therapists Unlimited-Chicago II, L.P., a Texas limited partnership
Therapists Unlimited-Detroit II, L.P., a Texas limited partnership
Therapists Unlimited-Fresno, L.P., a Texas limited partnership
Therapists Unlimited-Indianapolis, L.P., a Texas limited partnership
Therapists Unlimited-New Orleans, L.P., a Texas limited partnership
Therapists Unlimited-Philadelphia, L.P., a Texas limited partnership
Therapists Unlimited-San Francisco, L.P., a Texas limited partnership
Therapists Unlimited-Seattle, L.P., a Texas limited partnership
Therapists Unlimited-Travelers, L.P., a Texas limited partnership
HSR Partners, L.P.
By: CareerStaff Management, Inc., a Delaware corporation and the general
partner of the above-listed limited partnership Guarantors
By:
----------------------------------------
Robert D. Woltil
Chief Financial Officer
-44-
<PAGE>
West Jersey/Mediplex Rehabilitation, L.P.
By: Mediplex of New Jersey, Inc., a New Jersey corporation and its general
partner
By:
---------------------------------------------
Robert D. Woltil
Chief Financial Officer
Address for all Guarantors:
101 Sun Lane, N.E.
Albuquerque, New Mexico 87109
Attn: Chief Financial Officer
-45-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SUN
HEALTHCARE GROUP, INC. SEPTEMBER 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,053
<SECURITIES> 0
<RECEIVABLES> 717,417
<ALLOWANCES> 65,791
<INVENTORY> 0
<CURRENT-ASSETS> 844,591
<PP&E> 873,700
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,098,516
<CURRENT-LIABILITIES> 469,218
<BONDS> 1,606,990
934
0
<COMMON> 617
<OTHER-SE> 611,812
<TOTAL-LIABILITY-AND-EQUITY> 3,098,516
<SALES> 0
<TOTAL-REVENUES> 2,463,667
<CGS> 0
<TOTAL-COSTS> 2,455,128
<OTHER-EXPENSES> 9,858
<LOSS-PROVISION> 28,028
<INTEREST-EXPENSE> 109,929
<INCOME-PRETAX> (1,319)
<INCOME-TAX> 32,717
<INCOME-CONTINUING> (34,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 10,120
<CHANGES> 0
<NET-INCOME> (44,156)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
