<PAGE>
Filed Pursuant to
Rule 424(b)(5)
Registration No. 333-37721
PROSPECTUS
SUN HEALTHCARE GROUP, INC.
---------------
Offer to Exchange 9 1/2% Series B Senior Subordinated Notes due 2007, which
have been registered under the Securities Act of 1933, as amended, for any and
all outstanding 9 1/2% Series A Senior Subordinated Notes due 2007.
The Exchange Offer will expire at 5:00 p.m., New York City time, on July 31,
1998, unless extended.
The 9 1/2% Series B Senior Subordinated Notes due 2007 (the "New Notes") of
Sun Healthcare Group, Inc. ("Sun" or the "Company"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
a Registration Statement of which this Prospectus is a part, are hereby offered,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying letter of transmittal (the "Letter of Transmittal" and,
together with this Prospectus, the "Exchange Offer"), in exchange for an equal
principal amount of outstanding 9 1/2% Series A Senior Subordinated Notes due
2007 (the "Old Notes"), of which $250,000,000 aggregate principal amount is
outstanding as of the date hereof. The New Notes and the Old Notes are
collectively referred to herein as the "Notes."
Any and all Old Notes that are validly tendered and not withdrawn on or
prior to 5:00 p.m., New York City time, on the date the Exchange Offer expires,
which will be July 31, 1998 (at least 20 business days following the
commencement of the Exchange Offer) unless the Exchange Offer is extended (such
date, including as extended, the "Expiration Date") will be accepted for
exchange. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time on the Expiration Date. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain customary conditions, which
may be waived by the Company, and to the terms of the Registration Rights
Agreement (the "Registration Rights Agreement"), dated as of July 8, 1997, among
the Company, the Guarantors named therein (the "Guarantors") and Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston
Corporation, J.P. Morgan Securities, Inc. and NationsBanc Capital Markets, Inc.
(the "Initial Purchasers"). Old Notes may be tendered only in integral multiples
of $1,000. See "The Exchange Offer."
The New Notes will be entitled to the benefits of the same Indenture (as
defined herein) that governs the Old Notes and will govern the New Notes. The
form and terms of the New Notes are the same in all material respects as the
form and terms of the Old Notes, except that the New Notes do not contain terms
with respect to the liquidated damages provisions and the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof. See "The Exchange Offer" and "Description of
New Notes."
(CONTINUED ON FOLLOWING PAGE)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF
THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED PRIVATE
NOTES NOT WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON JULY 31, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE
"EXPIRATION DATE"). TENDERS OF PRIVATE NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER IS
NOT CONDITIONED UPON ANY MINIMUM PRINCIPAL AMOUNT OF PRIVATE NOTES BEING
TENDERED FOR EXCHANGE. PRIVATE NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES
OF $1,000. IN THE EVENT THE COMPANY TERMINATES THE EXCHANGE OFFER AND DOES NOT
ACCEPT FOR EXCHANGE ANY PRIVATE NOTES, THE COMPANY WILL PROMPTLY RETURN ALL
PREVIOUSLY TENDERED PRIVATE NOTES TO THE HOLDERS THEREOF.
--------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 30, 1998
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(CONTINUED FROM PREVIOUS PAGE)
The New Notes will initially be represented by global notes in fully
registered form and will be deposited with the Trustee as custodian for and
registered in the name of a nominee of The Depository Trust Company (the "DTC").
Beneficial interests in the global notes will be shown on, and transfers thereof
will be effected through, records maintained by the DTC and its participants.
Interest is payable in cash semi-annually in arrears on January 1 and July 1
of each year commencing January 1, 1998. The New Notes will mature on July 1,
2007. On or after July 1, 2002, the Company may redeem the New Notes, in whole
or in part, at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined herein), if any, to the date of
redemption. In addition, upon a Change of Control (as defined herein), each
holder of Notes will have the right to require the Company to repurchase all or
any part of such holder's Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase.
The New Notes will be senior subordinated, unsecured, general obligations of
the Company, and, as such, subordinated in right of payment to all existing and
future Senior Debt (as defined herein) of the Company. The New Notes will rank
PARI PASSU with all existing and future senior subordinated indebtedness of the
Company and will rank senior to all other existing and future subordinated
indebtedness of the Company. The New Notes will be fully and unconditionally
guaranteed on an unsecured, senior subordinated and joint and several basis (the
"Guarantees") by all existing and future material Subsidiaries (as defined) of
Sun other than the CareerStaff Companies (as defined herein) and the Foreign
Companies (as defined herein) (collectively, the "Guarantors"), each of which is
listed on Schedule A hereto. The New Notes will also be effectively subordinated
to (i) all existing and future liabilities of the Company's subsidiaries which
are not Guarantors and (ii) all existing and future Senior Debt of the
Guarantors. As of March 31, 1998, after giving effect to the offering of 9 3/8%
Senior Subordinated Notes due 2008 (the "2008 Notes Offerings" and the offering
of Convertible Trust Issued Preferred Securities in May 1998 (the "Convertible
Preferred Securities Offering" and together with the 2008 Notes Offering, the
"May Offerings") the aggregate amount of indebtedness (excluding intercompany
indebtedness) that effectively ranked senior to the New Notes and the Guarantees
was approximately $855.5 million. As of March 31, 1998 after giving effect to
the May 2008 Offerings approximately $155.7 million of indebtedness ranking PARI
PASSU in right of payment with the New Notes and/or the Guarantees and $104.0
million of indebtedness ranking subordinate in right of payment to the New Notes
and/or the Guarantees was outstanding. If the RCA and Contour Mergers (as
defined) had been consummated, Sun's consolidated long-term debt would have
increased by $177.3 million as of March 31, 1998, $177.3 million of which would
have effectively ranked senior to the New Notes and/or the Guarantees (based on
Retirement Care's March 31, 1998 balance sheet and assuming Sun acquires the
remaining 35% of Contour for Common Stock). All of the Guarantors have
guaranteed the Company's obligations under the Company's Senior Credit Facility
as have the CareerStaff Companies (which entities are not Guarantors).
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission"), as set forth in no-action letters issued to third
parties, including Exxon Capital Holdings Corporation, SEC No-Action Letter
(available April 13, 1988), Morgan Stanley & Co. Incorporated, SEC No-Action
Letter (available June 5, 1991) and Shearman & Sterling, SEC No-Action Letter
(available July 2, 1993) (collectively, the "Exchange Offer No-Action Letters"),
the Company believes that the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by holders thereof
(other than a broker-dealer who acquires such New Notes directly from the
Trustee for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act or any holder that is an
"affiliate" of the Company as defined in Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders are not engaged in, and do not
intend to engage in, a distribution of such New Notes and have no arrangement or
understanding with any person to participate in a distribution of such New
Notes. By tendering the Old Notes in exchange for New Notes, each holder, other
than a broker-dealer, will represent to the Company that: (i) it is not an
affiliate of the Company (as defined in Rule 405 under the Securities Act) or a
broker-dealer tendering Old Notes acquired directly from the Company for its own
account; (ii) any New Notes to be received by it will be acquired in the
ordinary course of its business; and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes. If a holder of
Old Notes is
2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
engaged in or intends to engage in a distribution of the New Notes or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer (a
"Participating Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities. Pursuant to
the Registration Rights Agreement, the Company has agreed that starting on the
Expiration Date it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
The Company will not receive any proceeds from this offering. The Company
has agreed to pay the expenses of the Exchange Offer. No underwriter is being
utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL SEPTEMBER 28, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS OFFERING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN
CONNECTION THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Old Notes have been designated as eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages market. Prior to this
Exchange Offer, there has been no public market for the New Notes. If such a
market were to develop, the New Notes could trade at prices that may be higher
or lower than their principal amount. Sun does not intend to apply for listing
of the New Notes on any securities exchange or for quotation of the New Notes
through The Nasdaq Stock Market's National Market or otherwise. The Initial
Purchasers have previously made a market in the Old Notes and Sun has been
advised that the Initial Purchasers currently intend to make a market in the New
Notes, as permitted by applicable laws and regulations, after consummation of
the Exchange Offer. The Initial Purchasers are not obligated, however, to make a
market in the Old Notes or the New Notes and any such market making activity may
be discontinued at any time without notice at the sole discretion of the Initial
Purchasers. There can be no assurance as to the liquidity of the public market
for the New Notes or that any active public market for the New Notes will
develop or continue. If an active public market does not develop or continue,
the market price and liquidity of the New Notes may be adversely affected. See
"Risk Factors--Absence of a Public Market for the New Notes."
3
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SCHEDULE A
Accelerated Care Plus, LLC
Americare of West Virginia, Inc.
Americare Homecare, Inc.
Bay Colony Health Service, Inc.
Beckley Health Care Corp.
Bergen Eldercare, Inc.
Braswell Enterprises, Inc.
Brittany Rehabilitation Center, Inc.
Cal-Med, Inc.
Care Enterprises, Inc.
Care Enterprises West
Care Home Health Services
Care Enterprises West
Carmichael Rehabilitation Center
Circleville Health Care Corp.
Clipper Home of North Conway, Inc.
Clipper Home of Portsmouth, Inc.
Clipper Home of Rochester, Inc.
Clipper Home of Wolfeboro, Inc.
Coalinga Rehabilitation Center
Community Re-Entry Services of Cortland, Inc.
Covina Rehabilitation Center
Dunbar Health Care Corp.
Evergreen Rehabilitation Center
Fairfield Rehabilitation Center
First Class Pharmacy, Inc.
Fullerton Rehabilitation Center
Glendora Rehabilitation Center
Glenville Health Care Corp.
G-WZ of Stamford, Inc.
Golan Healthcare Group, Inc.
Goodwin Nursing Home, Inc.
Grand Terrace Rehabilitation Center
Hallmark Health Services, Inc.
Harbor View Rehabilitation Center
Hawthorne Rehabilitation Center
HC, Inc.
Heritage Rehabilitation Center
Heritage - Torrance Rehabilitation Center
HTA of New Jersey, Inc.
Huntington Beach Convalescent Hospital
Jackson Rehabilitation Center, Inc.
Linda-Mar Rehabilitation Center
Living Services, Inc.
LTC Staffinders, Inc.
Manatee Springs Nursing Center, Inc.
Marion Health Care Corp.
Masthead Corporation
Meadowbrook Rehabilitation Center
4
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SCHEDULE A CONTINUED
Mediplex Atlanta Rehabilitation Institute, Inc.
Mediplex Management, Inc.
Mediplex Management of Palm Beach County, Inc.
Mediplex Management of Texas, Inc.
Mediplex of Concord, Inc.
Mediplex of Connecticut, Inc.
Mediplex of Kentucky, Inc.
Mediplex of Maryland, Inc.
Mediplex of Massachusetts, Inc.
Mediplex of New Hampshire, Inc.
Mediplex of New York, Inc.
Mediplex of New Jersey, Inc.
Mediplex of Ohio, Inc.
Mediplex of Tennessee, Inc.
Mediplex of Virginia, Inc.
Mediplex Rehabilitation of Massachusetts, Inc.
New Bedford Nursing Center, Inc.
New Lexington Health Care Corp.
Newport Beach Rehabilitation Center
Nursing Home, Inc.
Oakview Treatment Centers of Kansas, Inc.
Oasis Mental Health Treatment Center, Inc.
Orange Rehabilitation Hospital, Inc.
Pacific Beach Physical Therapy, Inc.
Paradise Rehabilitation Center, Inc.
Paso Robles Rehabilitation Center
Peachwood Physical Therapy Corporation
Pharmacy Factors of California, Inc.
Pharmacy Factors of Florida, Inc.
Pharmacy Factors of Texas, Inc.
P.M.N.F. Management, Inc.
Putnam Health Care Corp.
Quality Care Holding Corporation
Quality Nursing Care of Massachusetts, Inc.
Regency High School, Inc.
Regency - North Carolina, Inc.
Regency Health Services, Inc.
Regency Rehab Hospitals, Inc.
Regency Outpatient Services, Inc.
Regency Rehab Properties, Inc.
Regency Rehabilitation Management & Consulting Services, Inc.
Regency - Tennessee, Inc.
RHS Management Corporation
Rosewood Rehabilitation Center, Inc.
Salem Health Care Corp.
San Bernadino Rehabilitation Hospital, Inc.
SCRS & Communicology Inc. of Ohio
Shandin Hills Rehabilitation Center
SHG International Holding, Inc.
Special Medical Services, Inc.
5
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SCHEDULE A CONTINUED
Spofford Land, Inc.
Stockton Rehabilitation Center, Inc.
SunAlliance Healthcare Services, Inc.
SunBridge, Inc.
Sun Care Corp.
SunCare Respiratory Services, Inc.
SunChoice Medical Supply, Inc.
SunDance Rehabilitation Corporation
SunFactors, Inc.
Sun Healthcare Group, Inc.
Sun Healthcare, Inc.
Sun Lane Purchase Corporation
Sunmark of New Mexico
SunPlus Home Health Services, Inc.
SunQuest Consulting, Inc.
Sunrise Healthcare Corporation
Sunrise Healthcare of Colorado, Inc.
Sunrise Healthcare of Florida, Inc.
Sunrise Rehab of Colorado, Inc.
SunScript Pharmacy Corporation
SunSolution, Inc.
SunSpectrum Outpatient Rehabilitation-Concord, Inc.
The Mediplex Group, Inc.
Vista Knoll Rehabilitation Center, Inc.
Willowview Rehabilitation Center
Worcester Nursing Center, Inc.
6
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AVAILABLE INFORMATION
Sun is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the following public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy statements and other
information regarding registrants that file electronically with the Commission,
including Sun. In addition, reports, proxy statements and other information
concerning Sun may be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments and exhibits, the "Registration Statement") filed
by Sun with the Commission, through the Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR"), under the Securities Act, with respect to the New
Notes offered hereby. This Prospectus omits certain of the information contained
in the Registration Statement, and reference is hereby made to the Registration
Statement for further information with respect to Sun and the securities offered
hereby. Although statements concerning and summaries of certain documents are
included herein, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-1204) are
incorporated herein by reference:
1. Sun Healthcare Group, Inc.'s Amendment No. 2 to the Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997 filed May 22,
1998.
2. Sun Healthcare Group, Inc.'s Amendment No. 1 to the Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997 filed April 30,
1998;
3. Sun Healthcare Group, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1997;
4. Sun Healthcare Group, Inc. Amendment No. 2 to the Quarterly Report Form
10-Q/A for the fiscal months ended March 31, 1998;
5. Sun Healthcare Group, Inc.'s Amendment No. 1 to the Quarterly Report on
Form 10-Q/A for the three months ended March 31, 1998 filed April 30,
1998;
6. Sun Healthcare Group, Inc.'s Quarterly Report on Form 10-Q for the three
months ended March 31, 1998;
7. Sun Healthcare Group, Inc.'s Current Reports on Form 8-K filed March 20,
1998, April 10, 1998, April 16, 1998, April 30, 1998 and June 25, 1998
and .
8. Sun Healthcare Group, Inc.'s Amendment to its Current Report on Form
8-K/A filed April 16, 1998, May 15, 1998 and May 15, 1998.
All reports and any definitive proxy or information statements filed by Sun
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Registration Statement and prior to the termination of the
offering of the New Notes offered hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any
7
<PAGE>
statement contained in a document incorporated or deemed to be incorporated
herein by reference, or contained in this Prospectus, shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available without charge to
any person to whom a Prospectus is delivered, upon request from Sun Healthcare
Group, Inc., 101 Sun Avenue, N.E., Albuquerque, New Mexico 87109, Attention:
Secretary, telephone (505) 821-3355. In order to ensure timely delivery of the
documents, any request should be made by July 24, 1998 (five business days prior
to the Expiration Date).
8
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE PURCHASERS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH OR REFERRED TO UNDER THE HEADING
"RISK FACTORS." OTHER THAN STATEMENTS OF HISTORICAL FACT, STATEMENTS CONTAINED
IN THIS PROSPECTUS, INCLUDING STATEMENTS AS TO FUTURE FINANCIAL PERFORMANCE,
CONSTITUTE FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS PROSPECTUS, THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUN'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS PROSPECTUS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN
THE SECTION SET FORTH UNDER THE HEADING "RISK FACTORS." PROSPECTIVE PURCHASERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS PROSPECTUS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE
REQUIRES, ALL REFERENCES TO "SUN" OR THE "COMPANY" INCLUDE SUN HEALTHCARE GROUP,
INC. AND ITS DIRECT AND INDIRECT SUBSIDIARIES.
Sun is a leading provider of high quality and cost efficient long-term,
subacute and related specialty healthcare services in the United States and the
United Kingdom and also has operations in Spain, Germany and Australia. At March
31, 1998, Sun operated 318 long-term and subacute care facilities (which
includes assisted living and managed facilities) with 36,488 licensed beds in
the United States and 177 long-term and acute care facilities with 11,132
licensed beds internationally. Sun is one of the largest providers of ancillary
services to long-term care providers in the United States, including the
provision of rehabilitation therapy (the provision of physical, occupational and
speech therapy), respiratory therapy (the provision of respiratory therapy and
the distribution of related equipment and supplies), temporary therapy staffing
services and pharmaceutical products and services. Sun provides these services
to over 1,600 affiliated and nonaffiliated long-term and subacute care
facilities in the United States.
Sun's inpatient care facilities provide a broad range of healthcare
services, including nursing care, subacute care, therapy and other specialized
services such as care to patients with Alzheimer's disease. Sun's long-term and
subacute care operations have experienced significant growth since Sun's
inception in 1989, primarily from acquisitions of additional facilities. See
"Business--Acquisitions" in Sun's Annual Report on Form 10-K for the year ended
December 31, 1997 . Sun believes its inpatient care operations provide it with a
platform to expand its therapy and pharmaceutical businesses (which include
dispensing pharmaceuticals for such purposes as infusion therapy, pain
management, antibiotic therapy and parenteral nutrition) to affiliated and
nonaffiliated long-term and subacute care facilities. Sun believes that its
expertise in operating long-term and subacute care facilities enables it to
provide its therapy and pharmaceutical services more effectively and efficiently
than providers without such operating expertise.
The Company's principal executive offices are located at 101 Sun Avenue,
N.E., Albuquerque, New Mexico 87109, and its telephone number at such address is
(505) 821-3355. The Company maintains a Web site at http://www.sunh.com.
9
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THE EXCHANGE OFFER
<TABLE>
<CAPTION>
<S> <C>
Registration Rights
Agreement................... The Old Notes were issued on July 8, 1997 to the
Initial Purchasers. The Initial Purchasers placed
the Old Notes with institutional investors. In
connection therewith, the Company and the Initial
Purchasers entered into the Registration Rights
Agreement, providing, among other things, for the
Exchange Offer. See "The Exchange Offer."
The Exchange Offer............ New Notes are being offered in exchange for an
equal principal amount of Old Notes. As of the
date hereof, $250,000,000 aggregate principal
amount of Old Notes are outstanding. Old Notes may
be tendered only in integral multiples of $1,000.
Resale of New Notes........... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties, including the Exchange
Offer No-Action Letters, the Company believes that
the New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other
than a broker-dealer who acquires such New Notes
directly from the Company for resale pursuant to
Rule 144A under the Securities Act or any other
available exemption under the Securities Act or
any holder that is an "affiliate" of the Company
as defined in Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in
the ordinary course of such holders' business and
such holders are not engaged in, and do not intend
to engage in, a distribution of such New Notes and
have no arrangement or understanding with any
person to participate in a distribution of such
New Notes. By tendering the Old Notes in exchange
for New Notes, each holder, other than a
broker-dealer, will represent to the Company that:
(i) it is not an affiliate of the Company (as
defined under Rule 405 of the Securities Act) or a
broker-dealer tendering Old Notes acquired
directly from the Company for its own account;
(ii) any New Notes to be received by it were
acquired in the ordinary course of its business;
and (iii) it is not engaged in, and does not
intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to
participate in a distribution of the New Notes. If
a holder of Old Notes is engaged in or intends to
engage in a distribution of the New Notes or has
any arrangement or understanding with respect to
the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, such holder may
not rely on the applicable interpretations of the
staff of the Commission and must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
secondary resale transaction. Each Participating
Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such
</TABLE>
10
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<TABLE>
<S> <C>
New Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New
Notes received in exchange for Old Notes where
such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other trading activities. The
Company has agreed that, starting on the
Expiration Date and ending on the close of
business 180 days after the Expiration Date, it
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for
sale or register the New Notes prior to offering
or selling such New Notes. The Company has agreed,
pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein,
to register or qualify the New Notes for offer or
sale under the securities or "blue sky" laws of
such jurisdictions as may be necessary to permit
the holders of New Notes to trade the New Notes
without any restrictions or limitations under the
securities laws of the several states of the
United States.
Consequences of Failure to
Exchange Old Notes.......... Upon consummation of the Exchange Offer, subject
to certain exceptions, holders of Old Notes who do
not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to
registration rights and will not be able to offer
or sell their Old Notes, unless such Old Notes are
subsequently registered under the Securities Act
(which, subject to certain limited exceptions, the
Company will have no obligation to do), except
pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable
state securities laws. See "Risk
Factors--Consequences of Failure to Exchange" and
"The Exchange Offer--Terms of the Exchange Offer."
Expiration Date............... 5:00 p.m., New York City time, on July 31, 1998
(at least 20 business days following the
commencement of the Exchange Offer), unless the
Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time
to which the Exchange Offer is extended.
Interest on the New Notes..... The New Notes will accrue interest at the
applicable per annum rate set forth on the cover
page of this Prospectus, from the last date on
which interest was paid on the Old Notes
surrendered in exchange therefor or, if no
interest has been paid, from the Issue Date of
such Old Notes Interest on the New Notes is
payable on January 1 and July 1 of each year.
Conditions to the Exchange
Offer....................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange.
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However the Exchange Offer is subject to customary
conditions, which may be waived by the Company.
See "The Exchange Offer--Conditions." Except for
the requirements of applicable federal and state
securities laws, there are no federal or state
regulatory requirements to be complied with or
obtained by the Company in connection with the
Exchange Offer.
Procedures for Tendering Old
Notes....................... Each holder of Old Notes (other than certain
members of the Automated Tendering Offering
Program ("ATOP") at the Depository Trust Company
who choose to use ATOP) wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any other
required documentation to the Exchange Agent (as
defined herein) at the address set forth herein or
effect a tender of Old Notes pursuant to the
procedures for book-entry transfer as provided for
herein. See "The Exchange Offer--Procedures for
Tendering" and "--Book Entry Transfer."
Guaranteed Delivery
Procedures.................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
and a properly completed Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights............. Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Old
Notes, a written or facsimile transmission notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein under "The
Exchange Offer--Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes....... Subject to certain conditions, any and all Old
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date will be accepted for exchange.
The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Certain Tax Considerations.... The exchange of New Notes for Old Notes should not
be a sale or exchange or otherwise a taxable event
for Federal income tax purposes. See "Certain U.S.
Federal Income Tax Consequences."
Exchange Agent................ First Trust National Association is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
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Fees and Expenses............. All expenses incident to the Company's
consummation of the Exchange Offer and compliance
with the Registration Rights Agreement will be
borne by the Company. See "The Exchange
Offer--Fees and Expenses."
Use of Proceeds............... There will be no cash proceeds payable to Sun from
the issuance of the New Notes pursuant to the
Exchange Offer. The proceeds from the sale of the
Old Notes were used to repay amounts outstanding
under the Old Credit Facility (as defined), which
may be subsequently reborrowed. See "Use of
Proceeds."
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SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $250,000,000 aggregate
principal amount of Old Notes for up to an equal aggregate principal amount of
New Notes. The New Notes will be entitled to the benefits of the same Indenture
that governs the Old Notes and will govern the New Notes. The form and terms of
the New Notes are the same in all material respects as the form and terms of the
Old Notes, except that the New Notes do not contain terms with respect to
liquidated damages provisions and the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. See "Description of New Notes."
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Maturity Date..................... July 1, 2007.
Interest Payment Dates............ January 1 and July 1, commencing on January 1, 1998.
Mandatory Redemption.............. None.
Optional Redemption............... The New Notes may not be redeemed prior to July 1, 2002.
At any time on or after July 1, 2002, the New Notes may
be redeemed for cash at the option of Sun, in whole or
in part, at the redemption prices set forth herein, plus
accrued and unpaid interest and Liquidated Damages, if
any, to the date of redemption, in a manner set forth in
"Description of New Notes--Optional Redemption."
Change of Control................. Upon a Change of Control, each holder of New Notes will
have the right to require Sun to repurchase all or any
part of such holder's New Notes for cash at 101% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the date of
repurchase. The terms of certain of Sun's indebtedness
require that Sun repay or refinance such indebtedness in
the event of a "change of control," as defined therein.
Such change of control provisions may be triggered under
such indebtedness prior to the occurrence of a Change of
Control with respect to the New Notes, thereby requiring
that such indebtedness be repaid or refinanced prior to
Sun repurchasing any New Notes upon the occurrence of a
Change of Control. There can be no assurance that Sun
will have the financial resources to repurchase the New
Notes in the event of a Change of Control. See
"Description of New Notes-- Repurchases at the Option of
Holders--Change of Control."
Ranking........................... The New Notes will be senior subordinated, unsecured,
general obligations of Sun, and, as such, subordinated
in right of payment to all existing and future Senior
Debt of Sun. The New Notes will rank PARI PASSU with all
existing and future senior subordinated indebtedness of
Sun and will rank senior to all other existing and
future subordinated indebtedness of Sun. The Guarantees
will be senior subordinated, unsecured, general
obligations of the Guarantors. The New Notes will also
be effectively subordinated to (i) all existing and
future liabilities of Sun's subsidiaries which are not
Guarantors and (ii) all existing and future Senior Debt
of the Guarantors. As of March 31, 1998, after giving
effect to the offering of 9 3/8% Senior Subordinated
Notes due 2008 (the "2008 Notes Offering" and the
offering of Convertible Trust Issued Preferred
Securities in
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May 1998 (the "Convertible Preferred Securities
Offering" and together with the 2008 Notes Offering, the
"May Offerings") the aggregate amount of indebtedness
(excluding intercompany indebtedness) that effectively
ranked senior to the New Notes and the Guarantees was
approximately $855.5 million. As of March 31, 1998 after
giving effect to the May 2008 Offerings approximately
$155.7 million of indebtedness ranking PARI PASSU in
right of payment with the New Notes and/or the
Guarantees and $104.0 million of indebtedness ranking
subordinate in right of payment to the New Notes and/or
the Guarantees was outstanding. If the RCA and Contour
Mergers (as defined) had been consummated, Sun's
consolidated long-term debt would have increased by
$177.3 million as of March 31, 1998, $177.3 million of
which would have effectively ranked senior to the New
Notes and/or the Guarantees (based on Retirement Care's
March 31, 1998 balance sheet and assuming Sun acquires
the remaining 35% of Contour for Common Stock). All of
the Guarantors have guaranteed the Company's obligations
under the Company's Senior Credit Facility as have the
CareerStaff Companies (which entities are not
Guarantors).
Certain Covenants................. The indenture governing the New Notes (the "Indenture")
will contain certain covenants, including, but not
limited to, covenants limiting: (i) the incurrence by
Sun and its Subsidiaries of additional indebtedness and
the issuance of preferred stock; (ii) the payment of
dividends on and the redemption of capital stock by Sun;
(iii) the creation of liens securing indebtedness; (iv)
restrictions on the ability of Subsidiaries to pay
dividends or make other restricted payments; (v)
transactions with affiliates; (vi) certain sales of
assets; (vii) the ability of Sun to engage in certain
businesses; and (viii) Sun's ability to consolidate or
merge with or into, or to transfer all or substantially
all of its assets to, another person. See "Description
of New Notes-- Certain Covenants."
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RISK FACTORS
Prospective purchasers of the New Notes should carefully review the
information contained and incorporated by reference in this Prospectus and
should particularly consider the following matters:
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
Sun has substantial indebtedness. As of March 31, 1998, after giving pro
forma effect to the May Offerings, Sun would have had on a consolidated basis
approximately $1.4 billion of indebtedness and approximately $633.0 million of
stockholders' equity. Sun's ratio of earnings to fixed charges for each of the
years ended December 31, 1995, 1996, and 1997 was 1.2x, 1.6x, 1.7x and 1.5x and
for the three months ended March 31, 1998, respectively. After giving pro forma
effect to the May Offerings, Sun's ratio of earnings to fixed charges for each
of the year ended December 31, 1997 and for the three months ended March 31,
1998 would have been 1.4x and 1.6x, respectively. As of the June 11, 1998, Sun
would have the ability to borrow approximately $372.8 million under the Senior
Credit Facility. If the RCA Merger and Contour Merger (the "RCA and Contour
Mergers" and, together with the Regency Merger, the "Mergers") had been
consummated, Sun's consolidated long-term debt (including current maturities),
would have increased by approximately $177.3 million, based on Retirement Care's
March 31, 1998 balance sheet and assuming Sun acquires the remaining 35% of
Contour for Sun Common Stock.
In addition, as of December 31, 1997, Sun's existing lease agreements
required aggregate annual payments for the years ending December 31, 1998, 1999,
2000, 2001, and 2002 of $122.9 million, $122.5 million, $121.5 million, $115.7
million and $113.3 million, respectively. In addition, as part of its growth
strategy Sun intends to incur significant additional lease obligations and
therefore expects its annual lease obligations over the next five fiscal years
will be significantly greater than the amounts set forth in the preceding
sentence.
At March 31, 1998, Sun had outstanding commitments for construction and
development costs of approximately $22.7 million in the United States and
approximately L0.6 million (approximately $1.0 million as of March 31, 1998) in
the United Kingdom. Sun also expects to loan up to $47.0 million (of which
approximately $41.4 million had been funded as of March 31, 1998) for the
development, construction and operation of assisted living facilities. Any such
advances are expected to be funded by borrowings under the Credit Facility and
will be subject to certain conditions, including the approval of each project by
Sun. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" included in Sun's Annual
Report on Form 10-K for the year ended December 31, 1997 and Sun's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1998, incorporated by
reference herein.
The degree to which Sun is leveraged could have important consequences to
holders of the New Notes, including, but not limited to, the following: (i) a
substantial portion of Sun's cash flow from operations will be required to be
dedicated to debt service and will not be available for other purposes,
including acquisitions; (ii) Sun's ability to obtain additional financing in the
future could be limited; (iii) certain of Sun's borrowings are at variable rates
of interest, which could result in higher interest expense in the event of
increases in interest rates; and (iv) the indenture with respect to the New
Notes, the Senior Credit Facility and the United Kingdom revolving credit
facilities generally contain financial and restrictive covenants that limit the
ability of Sun to, among other things, borrow additional funds, dispose of
assets or pay cash dividends. Failure by Sun to comply with such covenants could
result in an event of default which, if not cured or waived, would have a
material adverse effect on Sun. In addition, the Company's future capital
requirements will depend on many factors, including the Company's working
capital needs, the costs associated with the RCA and Contour Mergers, if
consummated, and in particular, the timing and extent to which the Company
implements its acquisition strategy. Accordingly, the Company expects that it
may raise additional equity or debt financing in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital
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Resources" in Sun's Annual Report on Form 10-K for the year ended December 31,
1997 and Sun's Quarterly Report on Form 10-Q for three months ended March 31,
1998, incorporated by reference herein.
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
Sun is a holding company and, accordingly, the New Notes will be effectively
subordinated to all existing and future liabilities of the non-Guarantor
subsidiaries. Sun's cash flow and, consequently, its ability to service debt,
including the New Notes, is dependent upon the earnings of its subsidiaries and
the payment of funds by those subsidiaries to Sun in the form of loans,
dividends or otherwise. The New Notes are guaranteed on a subordinated,
unsecured basis by the Guarantors, and as a result, should Sun fail to satisfy
any payment obligation under the New Notes, the holders would have a direct
claim therefor against the Guarantors. However, the Guarantors are obligors with
respect to substantial indebtedness, including in their capacity as guarantors
under the Senior Credit Facility on a senior basis, and the capital stock of the
Guarantors is pledged to secure amounts borrowed thereunder. Accordingly, there
may be insufficient assets remaining after payment of senior and/or secured
claims to pay amounts due on the New Notes. Sun's non-Guarantor subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the New Notes or to make funds
available therefor, whether in the form of loans, dividends or otherwise. The
Indenture will permit Sun and its subsidiaries (including non-Guarantor
subsidiaries) to incur additional indebtedness (subject to certain
restrictions). See "Description of New Notes." Any right of Sun to participate
in any distribution of the assets of any of the non-Guarantor subsidiaries upon
the liquidation, reorganization or insolvency of such subsidiary (and the
consequent right of the holders of the New Notes to participate in the
distribution of those assets) will be subject to the claims of creditors
(including trade creditors) and preferred stockholders, if any, of such
non-Guarantor subsidiary, except to the extent that Sun has a claim against such
non-Guarantor subsidiary as a creditor of such non-Guarantor subsidiary.
Moreover, the payment of dividends and the making of loan advances to Sun by its
subsidiaries are subject to restrictive covenants in agreements entered into by
certain of such subsidiaries and may be restricted upon an event of default
thereunder.
SUBORDINATION
The New Notes will be unsecured senior subordinated obligations of Sun and,
as such, will be subordinated to all existing and future Senior Debt of Sun and
its subsidiaries, including borrowings under the Senior Credit Facility. The New
Notes will also be effectively subordinated to all secured indebtedness of
either Sun or any of its subsidiaries to the extent of the assets secured by
such indebtedness. As of March 31, 1998, on a pro forma basis after giving
effect to the May Offerings, the aggregate amount of indebtedness (excluding
intercompany indebtedness) that would have effectively ranked senior to the New
Notes and the Guarantees was approximately $855.5 million. As of March 31, 1998,
on a pro forma basis after giving effect to the May Offerings, approximately
$155.7 million of indebtedness ranking PARI PASSU in right of payment with the
New Notes and/or the Guarantees and $104.0 million of indebtedness ranking
subordinate in right of payment to the Notes and/or the Guarantees was
outstanding. In addition, on a pro forma basis as of March 31, 1998 after giving
effect to the application of the net proceeds of the May Offerings, the Company
would have had approximately $269.5 million available under the Senior Credit
Facility. See "Business--Acquisitions" in Sun's Annual Report on Form 10-K for
the year ended December 31, 1997, incorporated by reference herein.
The Company may not pay principal of, premium, if any, or interest on or
other amounts owing in respect of the New Notes, make any deposit pursuant to
any defeasance provisions or repurchase, redeem or otherwise retire the New
Notes if certain Senior Debt is not paid when due or any other default on such
Indebtedness occurs and the maturity of such Indebtedness is accelerated in
accordance with its terms unless, in either case, the default has been cured or
waived, any such acceleration has been rescinded or such Indebtedness has been
paid in full. Moreover, under certain circumstances, if any non-payment
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default exists with respect to such Indebtedness, the Company may not make any
payments on the New Notes for a specified time, unless such default is cured or
waived, any acceleration of such indebtedness has been rescinded or such
indebtedness has been paid in full. See "Description of New Notes--
Subordination."
LIMITATIONS ON REPURCHASE OF NEW NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, each holder of New Notes will have certain rights
to require Sun to repurchase all or a portion of such holder's New Notes. See
"Description of New Notes." If a Change of Control were to occur, there can be
no assurance that Sun would have sufficient funds to pay the repurchase price
for all New Notes tendered by the holders thereof. In addition, a change of
control would constitute a default under the Senior Credit Facility and is
otherwise restricted by the Senior Credit Facility and may be prohibited or
limited by, or create an event of default under, the terms of other agreements
relating to borrowings which the Company may enter into from time to time,
including other agreements relating to secured indebtedness. If Sun's
obligations under the Senior Credit Facility were accelerated due to a default
thereunder, the lenders thereunder would have a priority claim on the proceeds
from the sale of the collateral securing the Senior Credit Facility. See
"--Holding Company Structure; Effects of Asset Encumbrances" and
"--Subordination."
In addition, the Change of Control purchase feature of the New Notes may
make more difficult or discourage a takeover of Sun and, thus, the removal of
incumbent management. The Change of Control purchase feature resulted from
negotiations between Sun and the Initial Purchasers and is not the result of
management's knowledge of any specific effort to obtain control of Sun by means
of accumulating shares of common stock of Sun or by means of a merger, tender
offer, solicitation or otherwise or part of a plan by management to adopt a
series of anti-takeover provisions.
RISKS ASSOCIATED WITH THE DEVELOPMENT AND EXPANSION OF ANCILLARY SERVICES
A significant aspect of Sun's operating strategy is to expand its therapy,
temporary therapy staffing and pharmaceutical services and, in particular, to
offer these services to nonaffiliated facilities. Therapy, temporary therapy
staffing and pharmaceutical services provided to nonaffiliated facilities in the
United States, while representing 26%, 28%, 31% and 28% of Sun's revenues for
the three months ended March 31, 1998, and for the years ended December 31,
1995, 1996, and 1997, respectively, provided more than half of Sun's operating
profits for such periods. In addition, a substantial portion of Sun's
consolidated interest expense was attributable to Sun's long-term and subacute
care services and its foreign operations and not the ancillary services business
due to the capital intensive nature of these businesses and to related
acquisitions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Sun's Annual Report on Form 10-K for the
year ended December 31, 1997 and Sun's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998, incorporated by reference herein. As a
result of the Regency Acquisition and RCA Merger,the percentage of revenues from
services provided to nonaffiliated facilities is expected to decrease.
Regulatory changes, including a Prospective Payment System ("PPS"), are expected
to be made that affect reimbursement for these services, which could adversely
affect Sun's profitability. See "--Risks Related to Prospective Payment System,"
"--Potential Reduction of Reimbursement Rates From Third Party Payors and
Possible Adverse Impact on Future Operating Results" and "--Risk of Adverse
Effect of Future Healthcare Reform." From time to time the negative publicity
surrounding the government investigations of Sun has slowed Sun's success in
obtaining additional outside contracts in the rehabilitation therapy business,
which in the past has resulted in higher than required therapist staffing levels
and has affected the private pay enrollment in certain inpatient facilities. In
addition, if government investigations have a negative impact on the future
billing practices related to Sun's rehabilitation therapy subsidiary, the
profitability of the services provided by such subsidiary would be reduced from
current levels. See "--Investigations; Uncertain Impact on Future Operating
Results."
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RISK OF ADVERSE EFFECT OF FUTURE HEALTHCARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the state
level. Among the proposals under consideration are cost controls on hospitals,
changes in reimbursement by federal and state payors such as Medicare and
Medicaid, limitations on the ability of Sun to maintain or increase the level of
services it provides, insurance market reforms to increase the availability of
group health insurance to small businesses and the requirement that all
businesses offer health insurance coverage to their employees. Some of the
leading proposals would extend temporary reductions in Medicare reimbursement
imposed under current law, impose additional cuts in Medicare reimbursement and
substantially restructure Medicaid. In the Balanced Budget Act of 1997 (the
"BBA"), Congress amended the reimbursement provisions applicable to exempt
hospital services, skilled nursing, therapy and other ancillary services. See
"--Risks Related to Prospective Payment System." These changes include, but are
not limited to, reductions in capital reimbursement; reductions in certain
laboratory reimbursement; limitations on ancillary costs of skilled nursing
facilities; bundling of ancillary services into nursing home payments; and
imposition of a prospective payment system for skilled nursing facility services
and home health services. Additional changes may still be enacted, which may
include amendments similar to those imposed under the BBA as well as the
imposition of salary equivalency for occupational and speech therapy services.
It is not clear at this time when or whether any new proposals will be adopted,
or, if adopted, what effect, if any, such proposals would have on Sun's
business. There can be no assurance that future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have a material adverse effect on Sun's financial condition or
results of operations. See "--Potential Reduction of Reimbursement Rates From
Third Party Payors and Possible Adverse Impact on Future Operating Results,"
"--Risks Associated with Reimbursement Process and Collectibility of Certain
Accounts Receivable," "--Potential Liability for Reimbursements Paid to Former
Operators of Acquired Facilities," and "--Risks Associated with Related Party
Transactions."
RISKS RELATED TO PROSPECTIVE PAYMENT SYSTEM
In BBA, Congress passed numerous changes to the reimbursement policies
applicable to exempt hospital services, skilled nursing, therapy and other
ancillary services. The BBA provides for a phase-in of a PPS for skilled nursing
facilities over a four-year period, effective for Sun's facilities on January 1,
1999. Under PPS, Medicare will pay skilled nursing facilities a fixed fee per
patient 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 was formerly made
separately under Medicare. 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 rates, were
published on May 12, 1998. It is unclear what the impact of PPS will be on Sun.
There can be no assurance that the imposition of PPS will not have a material
adverse effect on the results of operations and financial condition of Sun.
Sun's revenues from its inpatient facilities will be significantly affected
by the size of the federally established per diem rate. There can be no
assurance that the per diem rate will not be less than the amount Sun's
inpatient facilities currently receive for treating the patients currently in
its care. Moreover, since Sun treats a greater percentage of higher acuity
patient than many nursing homes, Sun may also be adversely impacted if the
federal per diem rates for higher acuity patients does not adequately compensate
Sun for the additional expenses and risks for caring for such patients. As a
result, there can be no assurance that Sun's financial condition and results of
operations will not be materially and adversely affected.
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Sun is responding to the implementation of PPS by establishing 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
Sun's services following the imposition of PPS will not adversely affect Sun's
revenues. Even if SunSolution is successful, no assurance can be given that the
costs of providing the contracted for services will be less than the fixed fee
received by Sun for such services. Given the relative profitability of Sun's
ancillary services, there can be no assurance that Sun's margins and ultimately
Sun's results of operations and financial condition will not be materially and
adversely affected.
In addition, for all Medicare patients not receiving post-hospital extended
care services (i.e., Medicare Part B patients), effective July 1, 1998,
reimbursement for ancillary services, including rehabilitation therapy, medical
supplies, pharmacy, temporary staffing for rehabilitation therapy, and other
ancillary services, will be made pursuant to yet-to-be developed fee schedules.
In addition, effective January 1, 1999, there will be an annual per beneficiary
cap of $1,500 on reimbursement for outpatient physical therapy and speech
therapy and an annual per beneficiary cap of $1,500 on 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 Sun will receive any payments in excess of these caps. There can also be no
assurance that such yet-to-be developed fee schedules or caps will not have a
material adverse effect on Sun.
POTENTIAL REDUCTION OF REIMBURSEMENT RATES FROM THIRD PARTY PAYORS AND POSSIBLE
ADVERSE IMPACT ON FUTURE OPERATING RESULTS
Various cost containment measures adopted by governmental and private pay
sources have begun to restrict the scope and amount of reimbursable healthcare
expenses and limit increases in reimbursement rates for medical services. Any
reductions in reimbursement levels under Medicaid, Medicare or private payor
programs and any changes in applicable government regulations or interpretations
of existing regulations could significantly affect Sun's profitability.
Furthermore, 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
Sun's facilities and its therapy and pharmaceutical businesses. There can be no
assurance that payments under governmental or private payor programs will remain
at levels comparable to present levels or will be adequate to cover the costs of
providing services to patients eligible for assistance under such programs.
Significant decreases in utilization and limits on reimbursement could have a
material adverse effect on Sun's financial condition and results of operations,
including the possible impairment of certain assets. Most recently, in the BBA
Congress amended the reimbursement provisions applicable to exempt hospitals
services, skilled nursing, therapy and other ancillary services. See "--Risks
Associated with the Development and Expansion of Ancillary Services." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Sun's Annual Report on Form 10-K for the year ended
December 31, 1997 and Sun's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31,1998, incorporated by reference herein, for a summary of sources
of revenues for Sun for the three most recent fiscal years.
Reimbursement for therapy services is currently evaluated under Medicare's
reasonable cost principles. Under current law, the reasonable costs for physical
therapy and respiratory therapy 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 the Health Care
Financing Administration ("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 costs. Although salary equivalency guidelines will no
longer be effective following the implementation of PPS and fee schedule
reimbursement, HCFA has published new equivalency guidelines.
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On January 30, 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. HCFA
has applied the new salary equivalency guidelines 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 reduced
reimbursement rates for speech therapy and occupational therapy. The effect of
the changes could have a material adverse impact on Sun's results of operations.
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, which may be effective as early as July 1, 1998.
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 Sun's rehabilitation therapy subsidiary.
When salary equivalency guidelines, 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 Sun, based on the terms of substantially all of the Sun's existing
contracts with such facilities, for payments previously made by such facilities
to Sun 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 Sun'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 Sun's facilities on January 1, 1999)
and fee schedules with respect to Medicare Part B (which may be effective as
early as July 1, 1998) are implemented, Sun's facilities' reimbursement will no
longer be affected by salary equivalency guidelines and the cost reporting
settlement process for services rendered after their effectiveness. See "Risks
Related to Prospective Payment System," and"--Risks Associated with Development
and Expansion of Ancillary Services" and "--Risk of Adverse Effect of Future
Healthcare Reform" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Sun's Quarterly Report for the three
months ended March 31, 1998.
RISKS ASSOCIATED WITH REIMBURSEMENT PROCESS AND COLLECTIBILITY OF CERTAIN
ACCOUNTS RECEIVABLE
Sun derives a substantial percentage of its total revenues from Medicare,
Medicaid and private insurance. Sun's financial condition and results of
operations may be affected by the revenue reimbursement process, which 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. Sun recognizes revenues from third-party
payors and accrues estimated settlement amounts in the period in which the
related services are provided. Sun estimates these settlement balances by making
determinations
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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 within two to three years following the provision of services. Sun
has experienced differences between the net amounts accrued and subsequent
settlements, which differences are recorded in operations at the time of
settlement. For example, in the fourth quarter of 1997, Sun recorded negative
revenue adjustments totalling 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 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. In addition, accounts receivable have increased
in part because of the growth in the Company's inpatient, therapy and
pharmaceutical services businesses since December 31, 1996. During 1996 and the
first two quarters of 1997, as a result of these factors, accounts receivable
for therapy services grew disproportionately to the growth in revenue of that
line of business. As a result, the Company increased its provision for losses on
accounts receivable in mid-1996. No assurance can be given that further
increases in the provision for losses on accounts receivable will not be
required.
Sun'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 differ materially from the amounts accrued in prior
periods. Sun's financial condition and results of operations may also be
affected by the timing of reimbursement payments and rate adjustments from
third-party payors. Sun has from time to time experienced delays in receiving
final settlement and reimbursement from government agencies. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included in Sun's Annual Report on
Form 10-K for the year ended December 31, 1997 and Sun's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998, incorporated by reference
herein.
POTENTIAL LIABILITY FOR REIMBURSEMENTS PAID TO FORMER OPERATORS OF ACQUIRED
FACILITIES
Sun's growth strategy relies heavily on the acquisition of long-term and
subacute care facilities. Regardless of the legal form of the acquisition, the
Medicare and Medicaid programs often require that Sun assume certain obligations
relating to the reimbursement paid to the former operators of facilities
acquired by Sun. From time to time, fiscal intermediaries and Medicaid agencies
examine cost reports filed by such predecessor operators. If, as a result of any
such examination, it is concluded that overpayments to a predecessor operator
were made, Sun, as the current operator of such facilities, may be held
financially responsible for such overpayments. At this time Sun is unable to
predict the outcome of any existing or future examinations. See "--Difficulty of
Integrating Acquired Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Sun's Quarterly Report for the
three months ended March 31, 1998.
RISKS ASSOCIATED WITH RELATED PARTY TRANSACTIONS
Current Medicare regulations that apply to transactions between related
parties, such as Sun's subsidiaries, are relevant to the amount of Medicare
reimbursement that Sun is entitled to receive for the rehabilitation and
respiratory therapy and pharmaceutical services that it provides to Sun-operated
facilities. These related party regulations require that, among other things, a
substantial part of the rehabilitation and respiratory therapy services or
pharmaceutical services, as the case may be, of the relevant subsidiary be
transacted with nonaffiliated entities in order for Sun to receive reimbursement
for services provided to Sun-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
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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. See "--Risks Associated with the Development and Expansion of
Ancillary Services" and "Business--United States Revenue Sources-- Medicare" in
Sun's Annual Report on Form 10-K for the year ended December 31, 1997
incorporated, reference herein.
Sun believes that it satisfies the requirements of these regulations
regarding nonaffiliated businesses. Sun's net revenues from rehabilitation
therapy services, including net revenues for temporary therapy staffing
services, provided to nonaffiliated facilities represented 73%, 74%, 70% and 63%
of total rehabilitation and temporary therapy staffing services net revenues for
for the years ended December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1998, respectively. Respiratory therapy services provided to
nonaffiliated facilities represented 64%, 55%, 63% and 56% of total respiratory
therapy services net revenues for the for the period from the date of
acquisition of SunCare on May 5, 1995 to December 31, 1995, for the years ended
December 31, 1996 and 1997, and for the three months ended March 31, 1998,
respectively. Sun's respiratory therapy operations did not provide services to
affiliated facilities prior to the acquisition of SunCare on May 5, 1995. Net
revenues from pharmaceutical services billed to nonaffiliated facilities
represented 78%, 78%, 79%, and 78% of total pharmaceutical services revenues for
for the years ended December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1998, respectively. If upon audit by Federal or state
reimbursement agencies, such agencies find that these regulations have not been
satisfied for these periods, and if, after appeal, such findings are sustained,
Sun could be required to refund 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. See "--Risks Associated
with the Development and Expansion of Ancillary Services."
If Sun fails to satisfy these regulations in the future, the reimbursement
that Sun receives for rehabilitation and respiratory therapy and pharmaceutical
services provided to its own facilities would be significantly reduced, as a
result of which Sun's financial condition and results of operations would be
materially and adversely affected for so long as Medicare and Medicaid continue
to reimburse on the basis of reasonable cost. While Sun believes that it has
satisfied and will continue to satisfy the requirements of these regulations
regarding non-affiliated businesses, there can be no assurance that its position
would prevail if contested by relevant reimbursement agencies. The foregoing
statements with respect to Sun's ability to satisfy these regulations are
forward looking and could be affected by a number of factors,
including the interpretation of Medicare regulations by Federal or state
reimbursement agencies and Sun's ability to provide services to nonaffiliated
facilities. When the salary equivalency guidelines, PPS and fee schedules are
implemented, the Medicare impact of the related party rule will be significantly
reduced. See "--Risks Related to Prospective Payment System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Sun's Annual Report on Form 10-K for the year ended December 31,
1997 and Sun's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1998, incorporated by reference herein.
POTENTIAL ADVERSE EFFECT OF CHANGE IN REVENUE SOURCES
Changes in the mix of patients among the Medicaid, Medicare and private pay
categories, and among different types of private pay sources, can significantly
affect the revenues and the profitability of Sun's operations. There can be no
assurance that Sun will continue to attract and retain private pay patients or
maintain its current payor or revenue mix.
In addition, there can be no assurance that the facilities operated by Sun,
or the provision of services and products by Sun, now or in the future, will
initially meet or continue to meet the requirements for participation in the
Medicare and Medicaid programs, or that Sun will continue to qualify for the
levels of
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reimbursement it has in the past with respect to reimbursement for
rehabilitation therapy, respiratory therapy and pharmaceutical services provided
by Sun-operated facilities. A loss of Medicare or Medicaid certification or a
change in Sun's reimbursement under Medicare or Medicaid could have an adverse
effect on its financial condition and results of operations. See "--Potential
Reduction of Reimbursement Rates From Third Party Payors and Possible Adverse
Impact on Future Operating Results," "--Risks Associated with Reimbursement
Process and Collectibility of Certain Accounts Receivables," "--Risks Associated
with Related Party Transactions," "--Risk of Adverse Effect of Future Healthcare
Reform" and "--Investigations; Uncertain Impact on Future Operating Results."
INVESTIGATIONS; UNCERTAIN IMPACT ON FUTURE OPERATING RESULTS
Sun's subsidiaries, including those that provide subacute and long-term
care, rehabilitation and respiratory therapy and pharmaceutical services, are
engaged in industries that are extensively regulated. See "--Potential Adverse
Impact from Extensive Regulation." 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. 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.
In January 1995, Sun learned that it was the subject of a pending Federal
investigation. The investigating agencies are the United States Department of
Health and Human Services' Office of Inspector General ("OIG") and the United
States Department of Justice. At this time, Sun does not know the full scope of
the investigation. However, Sun currently believes that the investigation is
focused principally on whether Sun provided and billed for unnecessary or
unordered therapy services to residents of skilled nursing facilities and
whether Sun adequately documented the therapy services that it provided.
In July 1997, the Criminal Division of the U.S. Department of Justice
informed Sun that it had completed its investigation of Sun, and that it would
not initiate any actions against Sun or any individuals. The investigation by
the Civil Division of the Department of Justice and the OIG is still proceeding.
The government continues to collect information, and Sun continues to cooperate
with the investigators. Sun and the government have had preliminary discussions,
and Sun expects to have continuing discussions, regarding a possible settlement
of the investigation.
Sun is unable to determine at this time when the investigation will be
concluded, how large a monetary settlement the government may seek, the nature
of any other remedies that may be sought by the government, whether or when a
settlement will in fact occur or whether any such settlement or any other
outcome of the investigation will have a material adverse effect on Sun's
financial condition or results of operations. The foregoing statements with
respect to the outcome of the investigation are forward-looking and could be
affected by a number of factors, including the actual scope of the
investigation, the government's factual findings and the interpretation of
Federal statutes and regulations by the government and Federal courts and
whether any such factual findings could serve as a basis for proceedings by
other governmental authorities. From time to time the negative publicity
surrounding the investigation has in the past adversely affected the private pay
enrollment in certain inpatient facilities and slowed Sun's success in obtaining
additional outside contracts in the rehabilitation therapy business, which
resulted in higher than required therapist staffing levels. Negative publicity
in the future could have a similar effect. See "--Risks Associated with the
Development and Expansion of Ancillary Services."
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 Sun'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
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reporting periods prior to 1993. The information under review includes
submissions and representations by the long-term care subsidiary and Sun's chief
executive officer. The evidentiary phase of the hearing has concluded. Sun
submitted a settlement offer to the DSS in February 1998 and the DSS responded
with a counter-offer in late May 1998. Based on Sun's current understanding of
the investigation and the terms of the counter-offer, Sun does not believe the
terms of a settlement, if any, would have a material adverse effect on Sun's
business, financial condition or results of operations. However, Sun 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 may 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 Sun's business,
financial condition or results of operations. The foregoing statement with
regard to the outcome of this investigation is forward looking and could be
affected by a number of factors, including factual findings and the
interpretation of applicable laws and regulations by the Attorney General and
the DSS and whether any such factual findings could serve as a basis for
proceedings by other governmental authorities in Connecticut or elsewhere.
In 1997, Sun was notified by a law firm representing several national
insurance companies that these companies believed that Sun had engaged in
improper billing and other practices in connection with Sun's delivery of
therapy and related services. In response, Sun began discussions directly with
these insurers and hopes to resolve these matters without litigation; however,
Sun 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.
Pursuant to the Health Insurance Portability and Accountability Act of 1996
(the "Act"), 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 Sun. Sun is currently the subject of several
such investigations. It is Sun's practice to cooperate fully in such matters.
POTENTIAL ADVERSE IMPACT FROM EXTENSIVE REGULATION
Sun is subject to extensive Federal, state and local government regulation
relating to licensure, conduct of operations, ownership of facilities, expansion
of facilities and services and reimbursement for services. As such, in the
ordinary course of business, Sun's operations are continuously subject to state
and Federal regulatory scrutiny, supervision and control. Such regulatory
scrutiny often includes inquiries, investigations, examinations, audits, site
visits and surveys, some of which may be non-routine. All of the facilities
operated or managed by Sun are required to be licensed in accordance with the
requirements of state and local agencies having jurisdiction over their
operations. Most of Sun's facilities are also certified as providers under the
Medicaid and Medicare programs. The long-term care facilities, as well as Sun's
rehabilitation therapy and pharmaceutical operations, are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with regulatory procedures and licensing under state law and certification under
the Medicare and Medicaid programs. The failure to obtain or renew any required
regulatory approvals or licenses or to comply with applicable regulations in the
future could adversely affect Sun's financial condition and results of
operations. See "--Investigations; Uncertain Impact on Future Operating
Results." To the extent that Certificates of Need ("CONs") or other similar
approvals are required for expansion of Sun's operations, either through
acquisitions or additions to or provision of new services at such facilities,
such expansion could be adversely affected by the failure to obtain such CONs or
approvals. See "--Risks Related to Prospective Payment System."
Medicare and Medicaid antifraud and abuse laws prohibit certain business
practices and relationships that might affect the provision and cost of health
care services reimbursable under Medicare and
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Medicaid. Expressly prohibited are kickbacks, bribes and rebates related to
Medicare or Medicaid referrals. Federal laws also provide civil and criminal
penalties for any false or fraudulent statements, knowingly made, in any claim
for payment under a Federal or state health care program as well as any material
omissions in such claims. In addition, certain states have adopted fraud and
abuse and false claims laws that prohibit specified business practices.
Sanctions for violating these laws include criminal penalties and civil
sanctions, including fines and possible exclusion from the Medicare and Medicaid
programs.
In many states, the temporary therapy staffing industry is regulated and
CareerStaff must be registered or qualify for an exemption from registration.
While these regulations have had no material effect on the conduct of
CareerStaff's business to date, there can be no assurance that future
regulations will not have such an effect. In addition, the healthcare industry
to which CareerStaff provides therapists is subject to numerous Federal, state
and local regulations. The majority of states require therapists practicing in
such states to be licensed or certified. CareerStaff has occasionally
experienced difficulties in moving therapists from one state to another because
of state licensing requirements. Sun does not believe this has had a material
adverse effect on its financial condition or results of operations.
There can be no assurance that Sun's business in the future will not be
materially adversely affected by licensing requirements of state and Federal
authorities and by amendments to Federal law, which mandate that nursing homes
provide rehabilitation therapy services to their patients and authorize Medicare
reimbursement for such services, or by new reimbursement rates proposed by HCFA.
See "Business-- Government Regulation" included in Sun's Annual Report on Form
10-K for the year ended December 31, 1997 and Sun's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998, incorporated by reference
herein.
DIFFICULTY OF INTEGRATING ACQUIRED OPERATIONS
Sun's growth strategy relies heavily on the acquisition of long-term and
subacute care facilities. In October 1997, the Company acquired Regency, its
largest acquisition to date. Acquisitions present problems of integrating the
acquired operations with existing operations, including the loss of key
personnel and institutional memory of the acquired business, difficulty in
integrating corporate, accounting, financial reporting and management
information systems and strain on existing levels of personnel to operate such
acquired businesses. In addition, certain assumptions regarding the financial
condition of an acquired business may later prove to be incorrect. For example,
in connection with Sun's acquisition of The Mediplex Group, Inc. ("Mediplex") in
June 1994, a significant percentage of Mediplex's receivables proved to be
uncollectible, which resulted in significant write-offs in Sun's 1994, 1995 and
1996 fiscal years. In addition, Sun's net earnings for its 1995 and 1996 fiscal
years were adversely affected by an impairment loss to certain goodwill
associated with the acquisition of Mediplex and negative revenue adjustments
resulting primarily from changes in accounting estimates based on events
occurring in 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Sun's Annual Report on Form
10-K for the year ended December 31, 1997 and Sun's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998, incorporated by reference
herein. Sun's ability to manage its growth effectively will require it to
continue to improve its corporate accounting, financial reporting and management
information systems, and to attract, train, motivate and manage its employees
effectively. See "--Management of Growth."
The integration of the operations of Retirement Care and Contour, to the
extent consummated, will require the dedication of management resources which
will detract attention from Sun's day-to-day business. The difficulties of
integration may be increased by the necessity of coordinating geographically-
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. As part of the RCA and
Contour Mergers, Sun is expected to seek to reduce expenses by eliminating
duplicative or unnecessary personnel, corporate functions and other expenses.
There can be no assurance that Sun will be able to reduce expenses in this
fashion or that there will not be high costs associated with such activities or
that there will not be other material adverse effects of such
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activities. Such events could materially and adversely affect Sun's financial
condition and results of operations. There can be no assurance that Sun will be
able to successfully integrate acquired operations or to successfully manage any
growth; failure to do so effectively and on a timely basis could have a material
adverse effect upon Sun's financial condition and results of operations. See
"--Risks Related to RCA and Contour Mergers."
If Sun is unable to effectively integrate the operations of an acquired
entity with Sun's existing operations, Sun may elect to divest some or all of
the acquired operations. In the second quarter of 1996, Sun sold its ambulatory
surgery subsidiary. Sun's decision to sell its ambulatory surgery subsidiary was
influenced in part by the marketplace's resistance to the integration of
subacute care with ambulatory surgery. In addition, in February 1997 Sun
announced that it had recognized a $7 million loss in anticipation of the sale
and divestiture of its outpatient rehabilitation therapy clinics in Canada,
which were primarily acquired through the acquisition of Columbia Health Care
Inc. ("Columbia") in 1995. The Company currently anticipates also selling its
outpatient rehabilitation therapy clinics in the United States, which were
primarily acquired as part of Sun's acquisitions of Mediplex and Regency.
RISKS RELATED TO RCA AND CONTOUR MERGERS
In addition to the general acquisition risks described under "--Difficulty
of Integrating Acquired Operations" and "Business--Acquisitions" in Sun's Annual
Report on Form 10-K for the year ended December 31, 1997. Sun faces risks
specific to its pending mergers with Retirement Care and Contour, including
risks related to the following:
POSSIBLE ADVERSE EFFECTS ON SUN IF THE RCA AND CONTOUR MERGERS ARE NOT
CONSUMMATED. Since early 1997, Sun has been providing on an arms'-length basis
ancillary services and management, consulting and advisory services to certain
facilities owned, leased or managed by Retirement Care, its affiliates and
affiliates of certain principal shareholders of Retirement Care (the "RCA
Facilities"). Revenues from the provision of such services totaled $11.0 million
and $12.4 million, or 1.5% and 0.6% of Sun's net revenues, for the three months
ended March 31, 1998 and for the year ended December 31, 1997, respectively,
substantially all of which remained unpaid as of March 31, 1998. In the event
the RCA Merger is not consummated there can be no assurance that Retirement Care
would not seek other sources for the provision of such services, and Sun's
potential future revenues therefrom would terminate. In addition, RCA is
indebted to Sun in the principal amount of $14.8 million, plus accrued and
unpaid interest of $1.3 million as of March 31, 1998, pursuant to two loan
agreements entered into between Sun and Retirement Care (the "Loan Agreements").
Amounts outstanding under the Loan Agreements are secured by a second lien on
all of Retirement Care's accounts receivable and are subordinate to certain
other outstanding indebtedness of Retirement Care. In the event that the RCA
Merger is not consummated, Sun's ability to collect the amounts owed by
Retirement Care to Sun for the provision of services and under the Loan
Agreements, which together totaled approximately $39.0 million as of March 31,
1998, could be impaired, particularly in light of the recent deterioration of
Retirement Care's financial condition and results of operation subsequent to the
execution of the RCA Merger Agreement. In December 1997, the Company purchased
from a third party $5.0 million aggregate principal amount of 9% Contour
convertible debentures (the "Contour Debentures") which are convertible into one
million shares of Contour common stock, for an aggregate price of $8.4 million
in cash. In the event the Contour Merger is not consummated, the value of the
Contour Debentures could be impaired, particularly in light of the deterioration
of Contour's financial condition and results of operations. See "--Recent
Deterioration of Retirement Care's Financial Condition" and "--Recent
Deterioration of Contour's Financial Condition" below. Failure to collect such
amounts could require significant charges in the period in which the RCA and
Contour Mergers are terminated, and Sun's financial condition and results of
operations may be materially and adversely affected in the period in which such
charges are taken.
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The Merger Agreement with respect to the RCA Merger, as amended (the "RCA
Merger Agreement") provides that either party has the right to terminate the RCA
Merger if the RCA Merger is not consummated by June 30, 1998. There can be no
assurance that the RCA Merger will be consummated.
RESIGNATION OF RETIREMENT CARE'S AND CONTOUR'S INDEPENDENT ACCOUNTANTS;
RESTATEMENT OF FINANCIAL STATEMENTS. On August 14, 1997, Coopers & Lybrand
L.L.P. ("C&L") resigned as the independent accountants of Retirement Care and
Contour. C&L stated that it resigned as the independent accountants of
Retirement Care as a result of (i) concerns regarding Retirement Care
management's inability to provide adequate support for certain inventory
adjustments; (ii) concerns regarding other potential adjustments that may have
required Retirement Care to amend its quarterly financial statements as
previously filed for the first three quarters of fiscal 1997; (iii) concerns
with respect to the realizability of notes and advances due to Retirement Care
from affiliates; and (iv) C&L's view that Retirement Care should increase its
allowances for doubtful accounts and Medicaid/Medicare settlements and increase
its accruals for self-insured workers' compensation matters. Contour has
indicated that it is not aware of any reason for C&L's resignation as its
independent accountants other than Contour's affiliation with Retirement Care.
C&L stated that its audit report on Retirement Care's and Contour's financial
statements for the fiscal year ended June 30, 1996 should not be relied upon
because C&L concluded that it could no longer rely on Retirement Care and
Contour management's representations. Retirement Care and Contour announced
C&L's resignation on August 21, 1997. On September 5, 1997, upon the
recommendation of the independent members of the audit committees of Retirement
Care's and Contour's respective boards of directors, Retirement Care and Contour
each retained Cherry, Bekaert & Holland, L.L.P. to reaudit Retirement Care's and
Contour's financial statements for the fiscal year ended June 30, 1996 and to
audit Retirement Care's and Contour's financial statements for the fiscal year
ended June 30, 1997. On October 14, 1997, Retirement Care and Contour each filed
amended annual reports on Form 10-K/A restating their results for the fiscal
year ended June 30, 1996, and on October 23, 1997, Retirement Care and Contour
each filed amended quarterly reports on Form 10-Q/A restating their results for
the first three quarters of fiscal 1997. In light of C&L's resignation and the
subsequent restatement of RCA and Contour's financial statements, there is an
increased risk that assumptions made by Sun regarding the financial condition of
Retirement Care and Contour may later prove to be incorrect. See "--Difficulty
of Integrating Acquired Operations."
SHAREHOLDER LITIGATION. The RCA Merger Agreement does not provide for any
contractual indemnification of Sun by Retirement Care's shareholders, nor is Sun
retaining any of the merger consideration as protection against any liabilities,
known or unknown, of Retirement Care for which Sun would, as a consequence of
the RCA Merger, become responsible. As a result, Sun would bear the cost of any
such liabilities of Retirement Care, including any liabilities arising out of
the following litigation, if the RCA Merger is consummated.
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 Retirement
Care's common stock, naming Retirement Care and certain of its officers and
directors as defendants. The complaints allege violations of Federal securities
laws by the defendants for disseminating allegedly false and misleading
financial statements for Retirement Care's fiscal year ended June 30, 1996 and
its first three quarters of fiscal year 1997, which the plaintiffs allege
materially overstated Retirement Care'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, Retirement Care, Sun and representatives of the
plaintiffs entered into a Memorandum of Understanding ("MOU"). Pursuant to the
MOU Sun agreed to pay $9 million into an interest bearing escrow account
maintained by Sun to settle the Actions (the "Settlement"). The Settlement is
contingent upon the closing of the RCA Merger and is subject to, among other
things, confirmatory discovery, the execution of definitive documentation and
court approval. Upon satisfaction of the
28
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conditions precedent to the Settlement, all claims by the class that were or
could have been asserted by the plaintiffs against Retirement Care or any of the
other defendants in the Actions will be settled and 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. Court approval of the
Settlement will not be sought unless and until the RCA Merger closes, and
therefore, no assurance can be given that the Settlement will become final even
if the RCA Merger is consummated.
There can be no assurance that additional class actions will not be filed
against Retirement Care and its officers and directors or that the court will
approve the Settlement or that the Actions will be settled and dismissed on the
terms described herein or at all. In the event that the RCA Merger does close,
but the Settlement is terminated for any reason, the Actions may result in
protracted litigation which may result in a diversion of management and other
resources of Sun as the new owners of Retirement Care. The payment of
substantial legal costs or damages, or the diversion of management and other
resources could have a material and adverse effect on Sun's business, financial
condition and results of operations.
Retirement Care is a party to indemnification agreements with certain of the
other defendants in the actions described above, including Retirement Care's
officers and directors. Retirement Care has also purchased a directors' and
officers' liability insurance policy that provides Retirement Care's directors
and officers with liability coverage of up to $5 million per policy year. The
scope of coverage under the policy is limited, and Retirement Care is currently
engaged in litigation with the carrier regarding whether the policy provides
indemnification for losses arising from the Actions. Following the RCA Merger,
Sun has agreed to provide indemnification to Retirement Care's officers and
directors under certain circumstances.
RECENT DETERIORATION OF RETIREMENT CARE'S FINANCIAL CONDITION. Retirement
Care has experienced significant operating and net losses for the fiscal year
ended June 30, 1997. Sun has been informed by Retirement Care that Retirement
Care believes the operating losses of approximately $9.9 million* for the fiscal
year ended June 30, 1997 and $8.1 million* for the nine months ended March 31,
1998 were incurred in part due to a deterioration of Retirement Care's
operations as a result of the pendency of and delays associated with the RCA
Merger (including higher than normal turnover), costs associated with the
integration and operation of Retirement Care's recently-acquired Virginia and
North Carolina facilities (including significant survey deficiencies and costs
associated with temporary staffing and state-appointed management at certain of
the Virginia and North Carolina facilities), and declines in Medicaid rates and
occupancy rates during fiscal year 1997 without a corresponding reduction in
operating costs.
There can be no assurance that Retirement Care will not experience continued
operating and net losses in the future, and unforeseen expenses, difficulties
and complications could result in greater than anticipated operating losses or
otherwise materially adversely affect Retirement Care's business, financial
condition and results of operations before and after the RCA Merger. As a
result, Sun as the owner of Retirement Care after the RCA Merger, may be
materially and adversely affected by expenses it will incur after the RCA Merger
to resolve problems associated with Retirement Care's deteriorating financial
condition.
Based upon a review of Retirement Care's, Contour's and Sun's publicly
available historical financial statements, the RCA and Contour Mergers would
have had a dilutive impact on Sun's reported earnings per share for the year
ended December 31, 1997 and three months ended March 31, 1998. If the RCA Merger
and Contour Merger are consummated, there can be no assurance that the future
combined results will not continue to be dilutive to Sun.
RECENT DETERIORATION OF CONTOUR'S FINANCIAL CONDITION. Contour has
experienced significant operating and net losses for the fiscal year ended June
30, 1997. Contour has informed the Company that it believes
- ------------------------
* Each of the amounts described above is based solely on Retirement Care's
Annual Report on Form 10-K for the year ended June 30, 1997 and Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998. Sun makes
no representation as to the accuracy or adequacy of such amounts.
29
<PAGE>
that the operating loss of approximately $0.4 million** for the fiscal year
ended June 30, 1997 and approximately $0.8 million for the nine months ended
March 31, 1998 were primarily due to decreases in gross profit margin
historically earned by Contour's bulk medical supplies operations, increases in
operating expenses associated with the acquisition of AmeriDyne Corporation in
March 1996 and Atlantic Medical Supply Company, Inc. in July 1996 and increases
in direct labor expense, occupancy expense, interest expense and miscellaneous
expense.
There can be no assurance that Contour will not experience continued
increases in expenses and decreases in gross margins and gross profit in the
future, and other unforeseen expenses, difficulties and complications could
result in greater than anticipated operating losses or otherwise materially and
adversely affect Contour's business, financial condition and results of
operations. As a result, Sun as the owner of Contour after the Contour Merger,
may be materially and adversely affected by expenses it will incur after the
Contour Merger to resolve problem's associated with Contour's deteriorating
financial condition.
Based upon a review of Contour's and Sun's publicly available historical
financial statements, the Contour Merger would have had a dilutive impact on
Sun's reported earnings per share for the year ended December 31, 1997. If the
Contour Merger is consummated, there can be no assurance that the future
combined results will not continue to be dilutive to Sun.
OTHER COSTS TO BE INCURRED IN CONNECTION WITH RCA AND CONTOUR
MERGERS. Costs being incurred in connection with the mergers of Retirement Care
and Contour are expected to be significant and will be charged against earnings
of the combined company. The charge is currently estimated to be approximately
$30 million, and is expected to consist of transaction costs and integration
expenses, including elimination of redundant corporate functions, severance
costs related to headcount reductions and write-off of certain intangibles and
property and equipment and the settlement of certain class action lawsuits. See
"--Shareholder Litigation." Approximately $25 million of these estimated charges
are expected to be charged to operations in the fiscal quarter in which the RCA
Merger is consummated. Approximately $5 million of the estimated charges
relating to the integration expenses are expected to be expensed as incurred as
these costs are expected to benefit future combined operations. Pursuant to the
MOU, Sun has agreed to pay $9 million into an interest bearing account to settle
the Actions. The Settlement will be expensed in the period in which the
conditions to the MOU, including closing of the RCA Merger, are satisfied. These
amounts are preliminary estimates only and are, therefore, subject to change.
MANAGEMENT OF GROWTH
Sun's success will depend in part on its ability to manage the growth of its
operations. Any such growth is expected to place a significant strain on Sun's
managerial, operational and financial resources. Sun's ability to manage growth
effectively will require it to continue to improve its corporate accounting,
financial reporting, internal accounting systems and management information
systems, and to attract, train, motivate and manage its employees effectively.
These demands are expected to require further expenditures for the addition of
new management personnel and the development of additional expertise by existing
management personnel. There can be no assurance that Sun will be able to manage
effectively the expansion of its operations, that its systems, procedures or
controls will be adequate to support Sun's operations or that Sun's management
will be able to exploit opportunities for its services and products. An
inability to manage growth, if any, could have a material adverse effect on
Sun's business, results of operations, financial condition and cash flow.
- ------------------------
** Each of the amounts described above is based solely on Contour's Annual
Report Form 10-K for the year ended June 30, 1997 and Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998. Sun makes no
representation as to the accuracy or adequacy of such amounts.
30
<PAGE>
NO ASSURANCE OF CONTINUED RAPID GROWTH
Since its formation in 1989, Sun has implemented an aggressive program of
expansion of its business through the acquisition of additional long-term and
subacute care facilities and other operations. From January 1994 through
December 31, 1997, Sun acquired or assumed the net operations or management of
417 long-term and subacute care facilities with a total of 39,492 licensed beds
in the United States, the United Kingdom, Australia, Spain and Germany. During
this same period, Sun opened 23 facilities with a capacity of 1,876 licensed
beds. During such period, Sun has also acquired pharmacies, temporary therapy
staffing providers, outpatient rehabilitation clinics, home care agencies,
ambulatory surgery centers and a respiratory therapy company, and has
experienced significant internal growth, particularly in its therapy operations.
Sun's total net revenues increased from $135.7 million for the year ended
December 31, 1992 to $2.0 billion for the year ended December 31, 1997.
Similarly, net earnings before the extraordinary loss increased from $4.4
million for the year ended December 31, 1992 to $54.7 million for the year ended
December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Sun's Annual Report on Form
10-K for the year ended December 31, 1997 and Sun's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998, incorporated by reference
herein. Sun intends to continue to pursue its acquisition strategy in the
future. In making such acquisitions, Sun competes with other providers, many of
which have greater financial resources than Sun. There can be no assurance that
suitable acquisitions will be identified or completed in the future.
Sun has used both Sun Common Stock and indebtedness to fund many of its
significant acquisitions. Although Sun did not utilize Sun Common Stock as
acquisition consideration from February 1996 through February 1997, Sun issued
or reserved for issuance approximately 23.3 million shares of Sun Common Stock
in acquisitions from January 1994 to January 1996. Sun has also undertaken
significant borrowing to finance the acquisitions of Regency, Mediplex and other
transactions and to support expanded operations (including the assumption or
guarantee by Sun of $338.6 million of Mediplex indebtedness as of the date of
the acquisition of Mediplex and the assumption or refinancing of $229.2 million
of indebtedness in connection with the Regency Acquisition), and would assume
$192.0 million of indebtedness (excluding $19.8 million which will be eliminated
in consolidation) if the Mergers are consummated (based on RCA's March 31, 1997
balance sheet and assuming Sun acquires the remaining 35% of Contour for Sun
Common Stock). Sun's Credit Facility and certain of Sun's indentures limit Sun's
ability to raise additional indebtedness which may inhibit Sun's ability to use
debt financing to consummate acquisitions. See "--Substantial Leverage; Ability
to Service Debt" and "Unaudited Pro Forma Combined Financial Statements." See
"Business--Acquisitions" included in Sun's Annual Report on Form 10-K for the
year ended December 31, 1997, incorporated by reference herein. The ability to
utilize Sun Common Stock for acquisition or financing purposes will depend on
the market price of the Sun Common Stock, which has from time to time been
subject to heightened volatility resulting primarily from uncertainties
regarding certain Medicare reimbursement policies and a government investigation
of Sun's rehabilitation therapy subsidiary. See "--Potential Reduction of
Reimbursement Rates from Third Party Payors and Possible Adverse Impact on
Future Operating Results," "--Risks Associated with Reimbursement Process and
Collectibility of Certain Accounts Receivable," "--Risks Associated with Related
Party Transactions" and "--Investigations; Uncertain Impact on Future Operating
Results."
Because of operating and financing constraints resulting from acquisitions
and internal growth, there can be no assurance that Sun will have adequate cash
or borrowing capacity and other resources to compete effectively for future
acquisitions or will be able in the future to continue to engage as actively in
acquisitions as it has in the past, and uncertainties regarding reimbursement
rates for therapy, the outcome of the government investigation of Sun's
rehabilitation therapy subsidiary or a material reduction in such rates could
limit internal growth of Sun's therapy business. Pursuant to the Senior Credit
Facility, Sun will be required to obtain the consent of its principal bank
lenders in connection with significant future acquisitions. In addition, to the
extent Sun's operational, administrative and financial resources are strained by
its acquisition program, Sun's ability to integrate acquired operations may
become more protracted. Although Sun is continuously engaged in discussions
regarding future acquisitions, there can be
31
<PAGE>
no assurance that any acquisitions will be completed, or that Sun's historic
rate of growth in assets, revenues or net revenues will be sustained. See
"--Management of Growth", "--Risks Related to the RCA and Contour Mergers",
"--Difficulty of Integrating Acquired Operations", "--Potential Liability for
Reimbursements Paid to Former Operators of Acquired Facilities" and
"--Substantial Leverage; Ability to Service Debt." See "Business--Acquisitions"
included in Sun's Annual Report on Form 10-K for the year ended December 31,
1997, incorporated by reference herein.
FINANCIAL RESULTS SUBJECT TO FLUCTUATION
Sun's financial results may fluctuate on a quarterly basis as a result of a
number of factors, including the timing of acquisitions, any associated charges
to earnings and the financial performance of acquired companies. A material
shortfall in revenue or increase in expenses in a given quarter, or a delayed or
unrealized ability to achieve synergies from acquisitions, could have a material
adverse effect on Sun's earnings. Sun believes that quarterly comparisons of
Sun's revenues and operating results should not be relied on as necessarily
being indicative of future performance. See "--Difficulty of Integrating
Acquired Operations."
RISK OF EXPANSION OF INTERNATIONAL OPERATIONS; FOREIGN EXCHANGE RISK
Sun currently conducts business outside the United States in the United
Kingdom, Spain, Germany, Australia and Canada. Foreign operations accounted for
approximately 9%, 10%, 4% and 2% of Sun's total net revenues during the three
months ended March 31, 1998, the years ended December 31, 1997, 1996 and 1995,
respectively, and 24% of Sun's consolidated total assets as of December 31,
1997. See "Business--Acquisitions" included in Sun's Annual Report on Form 10-K
for the year ended December 31, 1997, incorporated by reference herein. Sun
expects that its revenues and operations attributable to international
operations may increase and substantially contribute to Sun's growth and
earnings in the future. Accordingly, as Sun's international operations continue
to grow, adverse results from Sun's international operations could adversely
affect Sun's financial condition and results of operations. Sun intends to
expand its international operations through the acquisition of operational
facilities and the construction and development of new facilities. In the past,
Sun has constructed and developed new facilities to a more significant degree in
its international expansion than it has in the United States, where Sun's growth
has been primarily due to the acquisition of operational facilities. In addition
to the capital expenditures involved in the construction and development of new
facilities, Sun expects to incur substantial losses in the first year of
operation of a new facility. As a result, the financial condition and results of
operations of Sun's international operations could be adversely affected in any
period in which a significant number of facilities are being constructed or
developed or are in their first year of operation. The success of Sun's
operations in and expansion into international markets depends on numerous
factors, many of which are beyond its control. Such factors include, but are not
limited to, economic conditions and healthcare regulatory systems in the foreign
countries in which Sun operates. In addition, international operations and
expansion may increase Sun's exposure to certain risks inherent in doing
business outside the United States, including slower payment cycles, unexpected
changes in regulatory requirements, potentially adverse tax consequences,
currency fluctuations, restrictions on the repatriation of profits and assets,
compliance with foreign laws and standards and political risks.
Sun's financial condition and results of operations are subject to foreign
exchange risk. Because of Sun's foreign growth strategies, Sun does not expect
to repatriate funds invested overseas and, therefore, foreign currency
transaction exposure is not normally hedged. Exceptional planned foreign
currency cash flow requirements, such as acquisitions overseas, are hedged
selectively to prevent fluctuations in the anticipated foreign currency value.
Changes in the net worth of Sun's foreign subsidiaries arising from currency
fluctuations are accumulated in the translation adjustments component of
stockholders' equity.
32
<PAGE>
YEAR 2000 RISK
In common with users of computers around the world, Sun is investigating if
and to what extent the date change from 1999 to 2000 may affect its networks and
systems. Sun expects to incur internal staff costs, external consulting costs,
and other expenses related to infrastructure and facility enhancement necessary
to prepare the systems for the year 2000. Although the total cost to Sun of
achieving year 2000 compliant systems is not expected to be material to Sun's
operations or financial condition, there can be no assurance that the costs will
be as expected or that this program will be successful or that the date change
from 1999 to 2000 will not materially adversely affect Sun's business, financial
condition and results of operations. The ability of third parties with which Sun
transacts business to adequately address their year 2000 issues is outside Sun's
control. Although Sun will seek alternative vendors, where its current vendors
are unwilling or unable to become year 2000 compliant in a timely manner, there
can be no assurance that Sun's business, financial condition and results of
operations will not be materially adversely affected by the ability of third
parties dealing with Sun, including Medicare and Medicaid, to also manage the
effect of the year 2000 date change.
INCREASED LABOR COSTS AND AVAILABILITY OF PERSONNEL
In recent years Sun has experienced increases in its labor costs primarily
due to higher wages and greater benefits required to attract and retain
qualified personnel, increased staffing levels in its long-term and subacute
care facilities due to greater patient acuity and the hiring and retention of
staff therapists. Although Sun expects labor costs to continue to increase in
the future, it is anticipated that any increase in costs will generally result
in higher patient rates in subsequent periods, subject to the time lag in most
states between increases in reimbursable costs and the receipt of related
reimbursement rate increases. Since under the upcoming PPS and fee schedules
reimbursement, payment will no longer be on a "pass through" basis, increases in
costs may no longer result in corresponding increases in reimbursement. See
"--Potential Reduction of Reimbursement Rates from Third Party Payors and
Possible Adverse Impact on Future Operating Results," "--Risks Associated with
Reimbursement Process and Collectibility of Certain Accounts Receivable,"
"--Potential Liability for Reimbursements Paid to Former Operators of Acquired
Facilities," and "--Risks Associated with Related Party Transactions."
In the past, the healthcare industry, including Sun's long-term and subacute
care facilities, has experienced a shortage of nurses to staff healthcare
operations and, more recently, the healthcare industry has experienced a
shortage of therapists. Sun is not currently experiencing a nursing or therapist
shortage, but it competes with other healthcare providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Sun in other capacities, such as certified nursing assistants. A
nursing, therapist or certified nursing assistant shortage could force Sun to
pay higher salaries and make greater use of higher cost temporary personnel. A
lack of qualified personnel might also require Sun to reduce its census or admit
patients requiring a lower level of care, both of which could adversely affect
operating results.
SUBSTANTIAL COMPETITION
Sun operates in a highly competitive industry. The nature of competition
varies by location. Sun's facilities generally operate in communities that are
also served by similar facilities operated by others. Some competing facilities
are located in buildings that are newer than those operated by Sun and provide
services not offered by Sun, and some are operated by entities having greater
financial and other resources and longer operating histories than Sun. In
addition, some facilities are operated by nonprofit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other resources not available to Sun. Some hospitals that either currently
provide long-term and subacute care services or are converting their
under-utilized facilities into long-term and subacute care facilities are also a
potential source of competition to Sun. Sun also competes with other companies
in providing rehabilitation therapy services and pharmaceutical products and
services to the long-term care industry and in
33
<PAGE>
employing and retaining qualified therapists and other medical personnel. Many
of these competing companies have greater financial and other resources than
Sun. There can be no assurance that Sun will not encounter increased competition
in the future that would adversely affect its financial condition and results of
operations.
POTENTIAL CONFLICTS OF INTEREST FROM RELATED PARTY TRANSACTIONS
At March 31, 1998, 58 of Sun's 318 long-term and subacute care facilities in
the United States were leased or subleased from John E. Bingaman or Zev Karkomi,
two of Sun's directors, or from partnerships or corporations in which such
directors are general or limited partners, directors or stockholders or
otherwise have a significant equity holding. Sun believes the terms of all of
the foregoing leases and subleases to which it is a party are as favorable to
Sun as those that could have been obtained in arm's length transactions with
nonaffiliated parties at the time of such transactions. However, contractual
relationships with entities affiliated with members of Sun's board of directors
create the potential for conflicts of interest. Sun will likely continue to
enter into leases and subleases with members of its board of directors and their
affiliates. There can be no assurance that these contractual relationships with
members of Sun's board of directors and their affiliates will not create actual
conflicts of interest.
ADEQUACY OF CERTAIN INSURANCE
Healthcare companies are subject to medical professional liability, personal
injury and other liability claims that are customary risks inherent in the
operation of health facilities and are generally covered by insurance. Sun
maintains property, liability and professional liability insurance policies in
amounts and with such coverages and deductibles that are deemed appropriate by
Sun, based upon historical claims, industry standards and the nature and risks
of its business. Sun also requires that physicians practicing at its facilities
carry medical professional liability insurance to cover their respective
individual professional liabilities. There can be no assurance that such
insurance will continue to be available at acceptable costs or that claims in
excess of the current insurance coverage or claims not covered by insurance will
not be asserted against Sun.
HEALTH INSURANCE AND WORKERS' COMPENSATION INSURANCE
Sun self-insures the healthcare risks of its employees who select coverage
under certain Sun-sponsored plans. Sun has in the past effected workers'
compensation coverage through self-insurance or high deductible insurance
programs. Substantially all of the risk of workers' compensation claims under
the high deductible programs are assumed by Sun and such risks are comparable to
those of a self-insured plan. The costs of paying for self-insured healthcare
and self-insured and high deductible workers' compensation claims can fluctuate
depending on the type and number of claims in any given period. There can be no
assurance that the amounts Sun will be required to pay for these types of claims
will not increase.
CONCENTRATION OF OWNERSHIP
As of June 9, 1998, Mr. Andrew Turner, the Chairman of the Board of
Directors and Chief Executive Officer of Sun, beneficially owned approximately
13.8% of the outstanding Sun Common Stock. While Mr. Turner's percentage of
ownership is not sufficient to enable him to control the outcome on matters
submitted to stockholders, his stock ownership, along with his position as
Chairman of the Board of Directors and Chief Executive Officer of Sun, enables
him to exert significant influence on Sun's operations. Mr. Turner's level of
ownership may have the effect of hindering a change of control of Sun.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
The Notes will be new securities for which there is no established trading
market. The Company does not intend to apply for listing of the Notes on any
national securities exchange or in any automated
34
<PAGE>
quotation system. The Initial Purchasers have advised the Company that they
currently intend to make a market in the Notes, but that they are not obligated
to do so and, if commenced, may discontinue such market making at any time at
their sole discretion. Although the Notes are expected to be eligible for
trading in the PORTAL Market, there can be no assurance as to the development of
any market or the liquidity of any market that may develop for the Notes.
Because the Notes are being sold pursuant to an exemption from registration
under the Securities Act and applicable state securities laws, they may not be
publicly offered, sold or otherwise transferred in any jurisdiction where such
registration may be required unless the applicable Notes are registered or are
sold in a transaction exempt from registration in such jurisdiction. There can
be no assurance that an active trading market for any of the Notes will develop
or if one does develop, that it will be sustained. Accordingly, no assurance can
be made as to the development or liquidity of any market for the Notes. If an
active public market does not develop, the market, price and liquidity of any
market of the Notes may be adversely affected. If any of the Notes are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending on prevailing interest rates, the market for similar
securities and other factors, including general economic conditions and the
financial condition and performance of Sun. Prospective investors in the Notes
should be aware that they may be required to bear the financial risks of such
investment for an indefinite period of time. See "Description of Notes" and
"Notice to Investors."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES
Prior to the Exchange Offer, there has been no public market for the New
Notes. If such a market were to develop, the New Notes could trade at prices
that may be higher or lower than their principal amount. Sun does not intend to
apply for listing of the New Notes on any securities exchange or for quotation
of the New Notes on The Nasdaq Stock Market's National Market or otherwise. Sun
has been advised by the Initial Purchasers that they currently intend to make a
market in the New Notes, as permitted by applicable laws and regulations, after
consummation of the New Notes Offering. The Initial Purchasers are not
obligated, however, to make a market in the Old Notes or the New Notes, and any
such market making activity may be discontinued at any time without notice at
the sole discretion of the Initial Purchasers. There can be no assurance as to
the liquidity of the public market for the New Notes or that any active public
market for the New Notes will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of the New Notes
may be adversely affected.
USE OF PROCEEDS
There will be no cash proceeds payable to Sun from the issuance of the New
Notes pursuant to the Exchange Offer. The proceeds from the sale of the Old
Notes were used to repay borrowings under the Old Credit Facility.
35
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company and its consolidated subsidiaries for the periods indicated. The
Company to date has not issued Preferred Stock; therefore, the ratios of
earnings to combined fixed charges and preferred stock dividends are unchanged
from the ratios presented here.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges............................ 3.34 1.76 1.15 1.64 1.65
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998
-----------------
<S> <C>
Ratio of earnings to fixed charges............................ 1.52
</TABLE>
The computation of the ratio of earnings to fixed charges is based on
applicable amounts of Earnings of the Company and its consolidated subsidiaries
plus dividends received from less than fifty percent owned affiliates.
"Earnings" consist of income from continuing operations before income taxes and
fixed charges excluding capitalized interest. "Fixed charges" consist of
interest on indebtedness, including amounts capitalized, amortization of debt
discount and expense, an estimated amount of rental expense that it deemed to be
representative of the interest factor and other interest charges.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents: (i) selected consolidated historical financial
data for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 derived
from Sun's audited Consolidated Financial Statements and (ii) selected
consolidated historical financial data for the three months ended March 31, 1997
and 1998 derived from Sun's unaudited Consolidated Financial Statements. Results
for the three month periods may not be indicative of results for the full year.
The data for the periods presented are not necessarily comparable because of
acquisitions throughout those periods. The financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Sun's Consolidated Financial Statements
and the notes thereto included in its Annual Report on Form 10-K for the year
ended December 31, 1997 (the "Form 10-K") and its Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 (the "Form 10-Q"), each of which is
incorporated herein by reference.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues...................... $230,815 $673,354 $1,135,508 $1,316,308(1) $2,010,820(10) $ 398,636 $741,490
Costs and expenses:
Operating............................. 178,712 509,036 855,766 1,016,155 1,518,918 300,256 553,435
Rent.................................. 15,578 43,626 73,727 91,666 143,900 27,647 55,150
Corporate general and
administrative...................... 10,675 31,633 51,468 62,085 98,169 18,447 39,301
Provision for losses on accounts
receivable.......................... 1,265 27,632(2) 14,623(2) 14,970(2) 15,839 3,194 6,013
Interest, net......................... 341 10,548 21,829 25,899 74,482 11,324 35,140
Special charges....................... -- 2,275(3) 18,567(4) 19,250(5) 7,000(11) -- --
Impairment loss....................... -- -- 59,000(6) -- -- -- --
Depreciation and amortization......... 1,534 11,797 27,734 33,817 56,630 11,641 20,474
-------- -------- ---------- ---------- ---------- ---------- --------
Total costs and expenses............ 208,105 636,547 1,122,714 1,263,842 1,914,938 372,509 709,513
-------- -------- ---------- ---------- ---------- ---------- --------
Earnings before income taxes and
extraordinary loss.................... 22,710 36,807 12,794 52,466 95,882 26,127 31,977
Income taxes(7)(9)...................... 9,247 17,246 33,362 30,930 41,153 10,190 13,590
-------- -------- ---------- ---------- ---------- ---------- --------
Earnings (loss) before extraordinary
loss(7)(9)............................ 13,463 19,561 (20,568) 21,536 54,729 15,937 18,587
Extraordinary loss...................... -- -- (3,413)(8) -- (19,928 (12) -- --
-------- -------- ---------- ---------- ---------- ---------- --------
Net earnings (loss)(7)(9)............... $ 13,463 $ 19,561 $ (23,981) $ 21,536 $ 34,801 $ 15,937 $ 18,387
-------- -------- ---------- ---------- ---------- ---------- --------
-------- -------- ---------- ---------- ---------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 45,451 $ 197,150 $ 237,147 $ 211,582 $ 307,025 $ 373,885
Total assets.................. 110,488 1,054,223 1,042,503 1,229,426 2,579,237 2,687,986
Long-term debt, net of current
portion..................... 11,967 398,534 348,460 483,453 1,567,971 1,638,365
Stockholders' equity.......... 70,361 550,449 569,042 572,137 617,053 639,550
</TABLE>
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(1) In the fourth quarter of 1996, the Company recorded negative revenue
adjustments totaling approximately $23.0 million resulting from changes in
accounting estimates of amounts realizable from third party payors. These
changes in accounting estimates primarily arose out of the cost reporting
settlement process in that quarter, including the settlement of outstanding
Medicare cost reports and the results of Medicare and Medicaid cost report
audits. Approximately $19.4 million of the adjustments related to changes
in estimates of the settlement of prior years' cost reports (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Sun's Quarterly Report on Form 10-Q for the three months
ending June 30, 1997, and Note 1(d) to Sun's Consolidated Financial
Statements included elsewhere herein).
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(2) In 1994, the provision for losses on accounts receivable reflects the
write-off of $23.4 million of receivables of Mediplex that existed at the
time of its June 1994 acquisition by Sun. These receivables were impaired
as of the fourth quarter of 1994 or earlier. In 1995, an additional $7.6
million of Mediplex accounts receivable were written off, of which $3.5
million represented accounts receivable existing at the date of
acquisition. In 1996, Sun recorded an additional provision for losses on
accounts receivable of $6.6 million related primarily to its Mediplex
facilities (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Sun's Quarterly Report on Form 10-Q
for the three months ending June 30, 1997).
(3) Reflects a charge in connection with the payment of an inducement fee to
effect the conversion in August 1994 of $24.4 million of Sun's 6 1/2%
Convertible Subordinated Debentures.
(4) Includes (i) $5.8 million of transaction-related merger costs incurred in
connection with the mergers of Sun with CareerStaff and SunCare (see Note
(2) to Sun's Consolidated Financial Statements included elsewhere herein),
(ii) $4.0 million of costs related to averting a strike and negotiating new
contracts for certain unionized nursing homes in Connecticut, (iii) a
charge of $5.5 million related to monitoring and responding to the OIG
investigation and legal fees resulting from shareholder litigation related
to the announcement of the OIG investigation and (iv) a charge of $3.3
million in connection with the payment of an inducement fee to effect the
conversion in January 1995 of $39.4 million of Sun's 6 1/2% Convertible
Subordinated Debentures.
(5) Includes (i) a $24.0 million charge recognized by Sun to settle certain of
the lawsuits brought by shareholders, (ii) $9.0 million received from Sun's
director and officer insurance carrier in connection with such settlement
(see Note 14 to Sun's Consolidated Financial Statements included elsewhere
herein) and (iii) $4.3 million of additional expenses related to monitoring
and responding to the continuing OIG investigation and responding to the
remaining shareholder litigation related to the announcement of the OIG
investigation.
(6) The $59.0 million impairment loss recorded by Sun primarily relates to
goodwill associated with six of the forty facilities acquired in the
acquisition of Mediplex (see Note 1(g) to Sun's Consolidated Financial
Statements included elsewhere herein).
(7) There was no provision for Federal or state income taxes in Sun's
Consolidated Financial Statements for certain entities that subsequently
became subsidiaries of Sun that had elected S corporation status prior to
incorporation as C corporations. Net earnings (loss) for the years ended
December 31, 1993, 1994 and 1995 reflect pro forma Federal and state income
taxes that these entities would have been subject to and liable for as C
corporations prior to each of the entities' termination of their S
corporation status.
(8) Reflects an extraordinary charge of $3.4 million (net of related tax
benefit) in connection with the tender offer for Sun's 11 3/4% of Senior
Subordinated Notes (see Note 6 to Sun's Consolidated Financial Statements
included elsewhere herein).
(9) See Note 1(o) to Sun's Consolidated Financial Statements included elsewhere
herein for net earnings (loss) per share information. Also, PRO FORMA net
earnings per share data for the years ended December 31, 1992 and 1993 is
calculated based upon the number of shares of Sun Common Stock issued upon
the formation of Sun Healthcare Group, Inc. on April 13, 1993, which placed
under the control of a single corporation all of Sun's operations and the
appropriate weighted average number of shares of Sun Common Stock for
common stock transactions of Sun subsequent to Sun's preincorporation
agreement dated as of April 13, 1993, and also include the appropriate
weighted average number of shares of Sun Common Stock for common stock
transactions of CareerStaff and SunCare for the years ended December 31,
1992, 1993, 1994 and 1995.
(10) In the fourth quarter of 1997, the Company recorded negative revenue
adjustments totaling approximately $15.0 million resulting from changes in
accounting estimates primarily based on new information arising from the
settlement in late 1997 of substantially all of the Company's facility
cost reports for 1994 and 1995. This charge also includes an estimate for
projected settlements in 1996 based on prior years' settlements. In
addition, the extinguishment of certain Regency debt discussed in footnote
(10) below resulted in an increase in certain reimbursable costs from
Medicare. As a result, the Company recognized $4.0 million of additional
revenues from Medicare (see "Risk Factors--Risks Associated with
Reimbursement Process and Collectibility of Certain Accounts Receivable"
and "--Potential Liability for Reimbursements Paid to Former Operators of
Acquired Facilities," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 1(d) to Sun's Consolidated
Financial Statements included elsewhere herein).
(11) In 1997, the Company recorded a charge totaling $7.0 million in order to
reduce the carrying value of its Canadian operations to fair value based
on revised estimates of selling value and of costs to sell.
(12) In 1997, the Company recognized an extraordinary loss of $17.9 million,
net of related income tax benefit of $8.8 million, in connection with the
Company's purchase of Regency's 12.25% Junior Subordinated Notes due 2003
and of Regency's 9.875% Senior Subordinated Notes due 2002 and an
extraordinary loss of $2.1 million, net of related tax benefit of $1.0
million, related to the refinancing of the Company's credit facility.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
exhibit to the Registration Statement and a copy of which is available as set
forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the Old Notes pursuant to a Purchase
Agreement dated as of July 1, 1997, between the Company and the Initial
Purchasers, the Initial Purchasers and its respective assignees became entitled
to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company and the Guarantors
will, at Sun's cost (i) within 90 days after the date of the original issuance
of the Notes (the "Issue Date") file a registration statement of which this
Prospectus is a part under the Securities Act (the "Exchange Offer Registration
Statement") with the Commission with respect to a registered offer (the
"Exchange Offer") to exchange the Old Notes for New Notes, which will have terms
substantially identical in all material respects to the Notes (except that such
New Notes will not contain terms with respect to transfer restrictions and the
identity of the Guarantors may change in accordance with the terms of the
Indenture) and (ii) use reasonable best efforts to cause such Exchange Offer
Registration Statement to be declared effective under the Securities Act within
180 days after the Issue Date. Promptly after the Exchange Offer Registration
Statement is declared effective, Sun and the Guarantors will offer New Notes in
exchange for properly tendered Old Notes. Sun and the Guarantors will keep the
Exchange Offer open for not less than 20 business days (or longer if required by
applicable law) after the date notice of such Exchange Offer is mailed to the
Holders. The Exchange Offer being made hereby, if commenced and consummated
within the time periods described in this paragraph, will satisfy those
requirements under the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal (which together constitute the Exchange Offer),
all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date will be accepted for exchange. New Notes of
the same class will be issued in exchange for an equal principal amount of
outstanding Old Notes accepted in the Exchange Offer. Old Notes may be tendered
only in integral multiples of $1,000. This Prospectus, together with the Letter
of Transmittal, is being sent to all registered holders as of June 30, 1998. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the obligation to accept Old Notes for
exchange pursuant to the Exchange Offer is subject to certain conditions as set
forth herein under "--Conditions."
Old Notes shall be deemed to have been accepted as validly tendered when, as
and if the Trustee has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes and delivering New Notes to
such holders.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by the holders thereof without further compliance with the
registration and prospectus delivery provisions of the Securities Act. However,
any purchaser of Notes who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the New Notes,
or any broker-dealer who purchased the Notes from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act, (i) will
not be entitled to rely on the
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<PAGE>
interpretations of the staff of the Commission set forth in the above-referenced
no-action letters, (ii) will not be entitled to tender its Notes in the Exchange
Offer and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
the Notes, unless such sale or transfer is made pursuant to any exemption from
such requirements.
Each Holder who wishes to exchange Old Notes for New Notes in the Exchange
Offer will be required to make certain representations, including that (i) any
New Notes to be received by it will be acquired in the ordinary course of its
business, (ii) it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the New Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of Sun, or if it is an affiliate of Sun, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. In addition, if the Holder is not a broker-dealer, it will be
required to represent that it is not engaged in, and does not intend to engage
in, the distribution of the New Notes. If the Holder is a broker-dealer (a
"Participating Broker-Dealer") that will receive New Notes for its own account
in exchange for Old Notes that were acquired as a result of market-making
activities or other trading activities, it will be required to acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to such New Notes
(other than a resale of an unsold allotment from the original sale of the Notes)
with the prospectus contained in the Exchange Offer Registration Statement.
Under the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such New Notes.
In the event that any change in law or in the applicable interpretations of
the staff of the Commission do not permit Sun and the Guarantors to effect the
Exchange Offer, or if for any other reason the Exchange Offer is not consummated
within 225 days of the Issue Date, Sun and the Guarantors will, at Sun's
expense, (a) within 60 days after such filing obligation arises, file a shelf
registration statement covering resales of the Notes (the "Shelf Registration
Statement"), (b) use reasonable best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act on or prior to 60
days after such filing occurs and (c) use reasonable best efforts to keep
effective the Shelf Registration Statement until the earlier of 24 months
following the Issue Date and such time as all of the Notes covered by the Shelf
Registration Statement have been sold thereunder, or otherwise cease to be
Transfer Restricted Securities (as defined in the Registration Rights
Agreement). Sun will, in the event a Shelf Registration Statement is required to
be filed, provide to each Holder copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such Holder when the Shelf
Registration Statement for the Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A Holder
who sells Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such Holder (including certain indemnification and contribution
rights and obligations). In addition, each holder of the Notes will be required
to deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within the
time periods set forth in the Registration Rights Agreement in order to have
their Notes included in the Shelf Registration Statement and to benefit from the
provisions regarding Liquidated Damages set forth in the following paragraph.
If (a) the Shelf Registration Statement that is required to be filed as
described above is not filed on or before the date specified for such filing,
(b) any registration statement filed in accordance with the above is not
declared effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) an Exchange Offer
Registration Statement becomes effective, and Sun and the Guarantors fail to
consummate the Exchange Offer within 45 days of the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement, or (d) the Shelf
Registration Statement is
40
<PAGE>
declared effective but thereafter ceases to be effective or usable in connection
with resales of Notes during the period specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then Sun will pay liquidated damages ("Liquidated
Damages") to each Holder, with respect to the first 90-day period immediately
following the occurrence of such Registration Default, in an amount equal to
$.05 per week per $1,000 principal amount of the Notes held by such Holder. Upon
a Registration Default, Liquidated Damages will accrue at the rate specified
above until such Registration Default is cured and the amount of Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.25
per week per $1,000 principal amount of Notes (regardless of whether one or more
than one Registration Default is outstanding). All accrued Liquidated Damages
will be paid by Sun on each Interest Payment Date to the Holders by wire
transfer of immediately available funds or by mailing checks to their registered
addresses if such accounts have not been specified.
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Old Notes who do not exchange their Old Notes for New Notes in the
Exchange Offer will no longer be entitled to registration rights and will not be
able to offer or sell their Old Notes, unless such Old Notes are subsequently
registered under the Securities Act (which, subject to certain limited
exceptions, the Company will have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors--Consequences of Failure to
Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "Expiration Date" shall mean July 31, 1998 (at least 20 business
days following the commencement of the Exchange Offer), unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. Notwithstanding any extension of the Exchange Offer, if the Exchange
Offer is not consummated by February 18, 1998, the Company may be obligated to
pay Liquidated Damages.
See "--General."
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will notify the holders of
the Old Notes by means of a press release or other public announcement prior to
9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Old Notes not previously accepted if any of the conditions set
forth herein under "--Conditions" shall have occurred and shall not have been
waived by the Company, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
Exchange Agent. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
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<PAGE>
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the applicable per annum rate from the
last date on which interest was paid on the Old Notes surrendered in exchange
therefor or, if no interest has been paid, from the Issue Date of such Old
Notes. Interest on the New Notes is payable on January 1 and July 1 of each year
commencing January 1, 1998.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal (or ATOP ticket if applicable), or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Delivery of all
documents must be made to the Exchange Agent at its address set forth below.
Holders may also request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect such tender for such holders.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact such registered holder promptly and instruct such registered
holder to tender on his behalf. If such beneficial owner wishes to tender on his
own behalf, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old
Notes tendered pursuant thereto are tendered (i) by a registered holder who has
not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution.
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<PAGE>
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by bond powers and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case as the name of
the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted, would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the absolute
right to waive any irregularities or conditions of tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the Exchange
Offer (including the instructions in the Letter of Transmittal) will be final
and binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the tendering
holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to (i) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "--Conditions," to terminate the Exchange Offer in accordance with the
terms of the Registration Rights Agreement and (ii) to the extent permitted by
applicable law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Notes properly tendered will be accepted, promptly after the Expiration
Date, and the New Notes will be issued promptly after acceptance of the Old
Notes. See "--Conditions" below. For purposes of the Exchange Offer, Old Notes
shall be deemed to have been accepted as validly tendered for exchange when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or ATOP ticket, if applicable) and all other required documents. If
any tendered Old Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes will be returned without expense to the tendering holder
thereof (or, in the case of Old Notes tendered by book-entry transfer procedures
described below, such nonexchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal (if ATOP is not used) or
facsimile thereof with any required signature guarantees and any other required
documents must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with. ATOP is only available to members thereof who are
not tendering pursuant to guaranteed delivery procedures set forth in
"--Guaranteed Delivery Procedures."
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes,
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedures for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
holder of Old Notes and the amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within three NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "--Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn
(including the principal amount of such Old Notes) and (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange Agent,
then, prior to the release of such certificates, the withdrawing holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such holder is an Eligible Institution. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer described above,
any notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and
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<PAGE>
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering" and "--Book-Entry
Transfer" above at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Old Notes will not be
required to be accepted for exchange, nor will New Notes be issued in exchange
for any Old Notes, and the Company may terminate or amend the Exchange Offer as
provided herein before the acceptance of such Old Notes, if because of any
change in law, or applicable interpretations thereof by the Commission, the
Company determines that it is not permitted to effect the Exchange Offer. The
Company has no obligation to, and will not knowingly, permit acceptance of
tenders of Old Notes from affiliates of the Company (within the meaning of Rule
405 under the Securities Act) or from any other holder or holders who are not
eligible to participate in the Exchange Offer under applicable law or
interpretations thereof by the Commission, or if the New Notes to be received by
such holder or holders of Old Notes in the Exchange Offer, upon receipt, will
not be tradable by such holder without restriction under the Securities Act and
the Exchange Act and without material restrictions under the "blue sky" or
securities laws of substantially all of the states of the United States.
EXCHANGE AGENT
U.S. Bank Trust National Association has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Hand:
U.S. Bank Trust National Association U.S. Bank Trust National Association
First Trust Center First Trust Center
180 East Fifth Street 180 East Fifth Street
St. Paul, Minnesota 55101 Bond-Drop Window
St. Paul, Minnesota 55101
Attention: Melina Black
Telephone: (612) 244-8161
Facsimile: (612) 244-1537
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in
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connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents to
the beneficial owners of the Old Notes, and in handling or forwarding tenders
for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
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DESCRIPTION OF NEW NOTES
The Old New Notes were issued, and the New Notes offered hereby will be
issued under an indenture dated as of July 8, 1997 (the "Indenture") between the
Company, as issuer, the Guarantors and First Trust National Association, as
trustee (the "Trustee"), a copy of the form of which is available from the
Trustee. The following summary of the material provisions of the Indenture does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Indenture, including the definitions of
certain terms contained therein. For definitions of certain capitalized terms
used in the following summary, see "Certain Definitions." Capitalized terms used
herein and not otherwise defined shall have the meanings assigned to them in the
Indenture or the Registration Rights Agreement, as appropriate.
GENERAL
The Notes will be senior subordinated, unsecured, general obligations of
Sun, limited in aggregate principal amount to $250 million, and will mature on
July 1, 2007. The Notes will rank PARI PASSU with all existing and future senior
subordinated Indebtedness of Sun and will rank senior to all other existing and
future Subordinated Indebtedness of Sun, and subordinate in right of payment
with all other existing and future Senior Debt of Sun. The Notes will be
guaranteed on a senior subordinated, unsecured, general basis by all existing
and future material Subsidiaries of Sun other than Sun Systems, Inc., the
CareerStaff Companies and the Foreign Companies. For information about the
financial condition and results of operations of the Guarantors and of the
Subsidiaries of Sun that are not Guarantors, see Note 18 to Sun's Consolidated
Financial Statements included in Sun's Annual Report on Form 10-K for the year
ended December 31, 1997 and Sun's Current Report on Form 8-K dated June 25,
1998. The obligations of each Guarantor under its Guarantee, however, will be
limited in a manner intended to avoid it being deemed a fraudulent conveyance
under applicable law. See "--Certain Bankruptcy Limitations" below. As of March
31, 1998, after giving pro forma effect to the May Offerings, the aggregate
amount of Indebtedness (excluding intercompany Indebtedness) that would have
effectively ranked senior to the New Notes and the Guarantees was approximately
$855.5 million. As of March 31, 1998, after giving such pro forma effect,
approximately $155.7 million of Indebtedness ranking PARI PASSU in right of
payment with the New Notes and/or the Guarantees and $104.0 million of
Subordinated Indebtedness was outstanding.
Interest on the Notes will accrue at the rate per annum set forth on the
cover page of this Prospectus and will be payable in cash semi-annually in
arrears on January 1 and July 1 of each year, commencing on January 1, 1998, to
Holders of record on the immediately preceding December 15 and June 15,
respectively. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest on the Notes will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Notes will be payable at the office or agency of Sun maintained
for such purpose within the Borough of Manhattan, The City of New York or, at
the option of Sun, payment of interest may be made by check mailed to the
Holders at their respective addresses set forth in the register of Holders;
PROVIDED that all payments with respect to Notes, the Holders of which have
given wire transfer instructions to the paying agent at least five business days
prior to the relevant record date, will be required to be made by wire transfer
of immediately available funds to the accounts specified by such Holders. No
service charge will be made for any registration of transfer or exchange of
Notes, but Sun may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise designated
by Sun, Sun's office or agency in the Borough of Manhattan, The City of New York
will be the office of the Trustee maintained for such purpose. The Notes will be
issued in denominations of $1,000 and integral multiples thereof.
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SUBORDINATION
The Notes and the Guarantees will be general, unsecured obligations of Sun
and the Guarantors, respectively, subordinated in right of payment to all Senior
Debt of Sun and the Guarantors, as applicable.
The Indenture will provide that no payment (by set-off or otherwise) may be
made by or on behalf of Sun or a Guarantor, as applicable, on account of the
principal of, premium, if any, or interest on the Notes (including any
repurchases of Notes), or on account of the redemption provisions of the Notes,
for cash or property (other than Junior Securities), (i) upon the maturity of
any Senior Debt of Sun or such Guarantor by lapse of time, acceleration (unless
waived) or otherwise, unless and until all principal of, premium, if any, and
the interest on such Senior Debt are first paid in full in cash or Cash
Equivalents (or such payment is duly provided for) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents, or (ii) in the event of default in the payment of any
principal of, premium, if any, or interest on Senior Debt of Sun or such
Guarantor when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration or otherwise (a "Payment Default"),
unless and until such Payment Default has been cured or waived or otherwise has
ceased to exist.
Upon (i) the happening of an event of default (other than a Payment Default)
that permits the holders of Senior Debt to declare such Senior Debt to be due
and payable and (ii) written notice of such event of default given to Sun and
the Trustee by the Representative under the Credit Agreement or the holders of
an aggregate of at least $50 million principal amount outstanding of any other
Senior Debt or their representative (a "Payment Notice"), then, unless and until
such event of default has been cured or waived or otherwise has ceased to exist,
no payment (by set-off or otherwise) may be made by or on behalf of Sun or any
Guarantor which is an obligor under such Senior Debt on account of the principal
of, premium, if any, or interest on the Notes, (including any repurchases of any
of the Notes), or on account of the redemption provisions of the Notes, in any
such case, other than payments made with Junior Securities. Notwithstanding the
foregoing, unless the Senior Debt in respect of which such event of default
exists has been declared due and payable in its entirety within 179 days after
the Payment Notice is delivered as set forth above (the "Payment Blockage
Period") (and such declaration has not been rescinded or waived), at the end of
the Payment Blockage Period, Sun and the Guarantors shall be required to pay all
sums not paid to the Holders of the Notes during the Payment Blockage Period due
to the foregoing prohibitions and to resume all other payments as and when due
on the Notes. Any number of Payment Notices may be given; PROVIDED that (i) not
more than one Payment Notice shall be given within a period of any 360
consecutive days, and (ii) no default that existed upon the date of such Payment
Notice or the commencement of such Payment Blockage Period (whether or not such
event of default is on the same issue of Senior Debt) shall be made the basis
for the commencement of any other Payment Blockage Period unless such other
Payment Blockage Period is commenced by a Payment Notice from the Representative
under the Credit Agreement and such event of default shall have been cured or
waived for a period of at least 90 consecutive days.
Upon any distribution of assets of Sun or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of Sun
or a Guarantor, whether voluntary or involuntary, in bankruptcy, insolvency,
receivership or a similar proceeding or upon assignment for the benefit of
creditors or any marshalling of assets or liabilities, (i) the holders of all
Senior Debt of Sun or such Guarantor, as applicable, will first be entitled to
receive payment in full in cash or Cash Equivalents (or have such payment duly
provided for to the satisfaction of such holders) or otherwise to the extent
holders accept satisfaction of amounts due by settlement in other than cash or
Cash Equivalents before the Holders are entitled to receive any payment on
account of principal of, premium, if any, and interest on the Notes (other than
Junior Securities) and (ii) any payment or distribution of assets of Sun or such
Guarantor of any kind or character from any source, whether in cash, property or
securities (other than Junior Securities) to which the Holders or the Trustee on
behalf of the Holders would be entitled (by set-off or otherwise), except for
the subordination provisions contained in the Indenture, will be paid by the
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liquidating trustee or agent or other person making such a payment or
distribution directly to the holders of such Senior Debt or their representative
to the extent necessary to make payment in full (or have such payment duly
provided for) on all such Senior Debt remaining unpaid, after giving effect to
any concurrent payment or distribution to the holders of such Senior Debt.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of Sun or any Guarantor (other than Junior Securities)
shall be received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of such
Senior Debt, and shall be paid or delivered by the Trustee or such Holders, as
the case may be, to the holders of such Senior Debt remaining unpaid or
unprovided for or to their representative or representatives, or to the trustee
or trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Debt may have been issued, ratably according to the aggregate
principal amounts remaining unpaid on account of such Senior Debt held or
represented by each, for application to the payment of all such Senior Debt
remaining unpaid, to the extent necessary to pay or to provide for the payment
of all such Senior Debt in full in cash or Cash Equivalents or otherwise to the
extent holders accept satisfaction of amounts due by settlement in other than
cash or Cash Equivalents after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
The subordination provisions hereof shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Senior
Debt is rescinded or must otherwise be returned by any holder of such Senior
Debt upon the insolvency, bankruptcy or reorganization of Sun, any Guarantor or
otherwise, all as though such payment has not been made.
No provision contained in the Indenture or the Notes will affect the
obligation of Sun and the Guarantors, which is absolute and unconditional, to
pay, when due, principal of, premium, if any, and interest on the Notes. The
subordination provisions of the Indenture and the Notes will not prevent the
occurrence of any Default or Event of Default under the Indenture or limit the
rights of the Trustee or any Holder to pursue any other rights or remedies with
respect to the Notes.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of Sun or a
marshalling of assets or liabilities of Sun, the Holders may receive ratably
less than other creditors.
Sun conducts substantially all of its operations through its subsidiaries.
See "Risk Factors--Holding Company Structure; Effects of Asset Encumbrances."
Accordingly, Sun's ability to meet its cash obligations is dependent upon the
ability of its subsidiaries to make cash distributions to Sun. Furthermore, any
right of Sun to receive the assets of any such subsidiary which is not a
Guarantor upon such subsidiary's liquidation or reorganization (and the
consequent right of the Holders of the Notes to participate in the distribution
of the proceeds of those assets) effectively will be subordinated by operation
of law to the claims of such subsidiary's creditors (including trade creditors)
and holders of its preferred stock, except to the extent that Sun is itself
recognized as a creditor or preferred stockholder of such subsidiary, in which
case the claims of Sun would still be subordinate to any indebtedness or
preferred stock of such subsidiary senior in right of payment to that held by
Sun.
CERTAIN BANKRUPTCY LIMITATIONS
Sun is a holding company, conducting substantially all of its business
through subsidiaries, not all of which have guaranteed Sun's obligations with
respect to the Notes. See "Risk Factors--Holding Company Structure; Effects of
Asset Encumbrances." Holders of the Notes will be direct creditors of each
Guarantor by virtue of its Guarantee. Nonetheless, in the event of the
bankruptcy or financial difficulty of a Guarantor, such Guarantor's obligations
under its Guarantee may be subject to review and avoidance under state and
federal fraudulent transfer laws. Among other things, such obligations may be
avoided if a court concludes that such obligations were incurred for less than
reasonably equivalent value or fair
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consideration at a time when the Guarantor was insolvent, was rendered
insolvent, or was left with inadequate capital to conduct its business. A court
would likely conclude that a Guarantor did not receive reasonably equivalent
value or fair consideration to the extent that the aggregate amount of its
liability on its Guarantee exceeds the economic benefits it receives in the New
Notes Offering. The obligations of each Guarantor under its Guarantee will be
limited in a manner intended to cause it not to be a fraudulent conveyance under
applicable law, although no assurance can be given that a court would give the
holder the benefit of such provision. See "Risk Factors--Fraudulent Transfer
Risks."
If the obligations of a Guarantor under its Guarantee were avoided, Holders
would have to look to the assets of any remaining Guarantors for payment. There
can be no assurance in that event that such assets would suffice to pay the
outstanding principal and interest on the Notes.
OPTIONAL REDEMPTION
Sun will not have the right to redeem any Notes prior to July 1, 2002. The
Notes will be redeemable for cash, at the option of Sun, in whole or in part, at
any time on or after July 1, 2002 upon not less than 30 days' nor more than 60
days' notice to each Holder, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing July 1 of the years indicated below, in each case (subject to the
right of Holders of record on a Record Date to receive interest due on an
Interest Payment Date that is on or prior to such Redemption Date) together with
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. 104.7500%
2003.............................................................................. 103.1667
2004.............................................................................. 101.5833
2005 and thereafter............................................................... 100.0000
</TABLE>
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a PRO RATA basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the Redemption Date to the Holder of each
Note to be redeemed to such Holder's last address as then shown upon the
registry books of the Registrar. Any notice which relates to a Note to be
redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that upon surrender of such Note,
a new Note or Notes in a principal amount equal to the unredeemed portion
thereof will be issued. On and after the Redemption Date, interest will cease to
accrue on the Notes or portions thereof called for redemption unless Sun
defaults in its redemption obligation with respect thereto.
Sun will not be required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASES AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require Sun to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to an irrevocable and unconditional offer, as described below (the
"Change of Control Offer"), at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase (the "Change of
Control Payment") on a date (the "Change of Control Payment Date") that is not
more than
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90 days after the occurrence of such Change of Control. Within 45 days following
any Change of Control, Sun will mail, or at Sun's request the Trustee will mail,
a notice to each Holder offering to repurchase the Notes held by such Holder
pursuant to the procedures specified in such notice. Sun will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On or before the Change of Control Payment Date, Sun will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
and not withdrawn pursuant to the Change of Control Offer, (2) deposit with the
paying agent an amount in cash equal to the Change of Control Payment in respect
of all Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate listing the Notes or portions thereof being purchased by Sun. The
paying agent will promptly mail to each Holder so tendered the Change of Control
Payment for such Notes, and the Trustee will promptly authenticate and mail (or
cause to be transferred by book entry) to each Holder a new Note equal in
principal amount to any unpurchased portion of the Notes surrendered, if any,
PROVIDED that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. Any Notes improperly tendered or withdrawn will be
delivered promptly by Sun to the Holder thereof. Sun will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
A failure by Sun to comply with the provisions of the two preceding
paragraphs will constitute an Event of Default. Except as described above with
respect to a Change of Control, the Indenture will not contain provisions that
permit the Holders of the Notes to require that Sun repurchase or redeem the
Notes in the event of a takeover, recapitalization or similar transaction. See
"--Events of Defaults and Remedies."
The terms of certain of Sun's Indebtedness require that Sun repay or
refinance such Indebtedness in the event of a "change of control," as defined in
such Indebtedness. Such change of control provisions may be triggered under such
Indebtedness prior to the occurrence of a Change of Control, thereby requiring
that the indebtedness under such Indebtedness be repaid or refinanced prior to
Sun repurchasing any Notes upon the occurrence of a Change of Control. As such,
Sun may not be able to satisfy its obligations to repurchase the Notes unless
Sun is able to refinance or obtain waivers with respect to such Indebtedness.
There can be no assurance that Sun will have the financial resources to
repurchase the Notes in the event of a Change of Control.
ASSET SALES
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, in one or a series of related transactions, consummate an Asset
Sale unless (i) Sun (or the Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as reasonably determined and evidenced by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by Sun or such Subsidiary is in
the form of cash or Cash Equivalents, PROVIDED that for purposes of this
provision, (x) the amount of (A) any liabilities (as shown on the most recent
balance sheet of Sun or such Subsidiary or in the notes thereto) of Sun or such
Subsidiary that are assumed by the transferee of any such assets (other than
liabilities that are by their terms PARI PASSU with or subordinated to the Notes
or the guarantee of the Guarantors, as applicable) and (B) any securities or
other obligations received by Sun or any such Subsidiary from such transferee
that are immediately converted by Sun or such Subsidiary into cash or Cash
Equivalents (or as to which Sun or such Subsidiary has received at or prior to
the consummation of the Asset Sale a commitment (which may be subject to
customary conditions) from a nationally recognized investment, merchant or
commercial bank to convert into cash or Cash Equivalents within 90 days of the
consummation of such Asset Sale and which are thereafter actually converted into
cash or Cash Equivalents within such 90-day period) will be deemed
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to be cash or Cash Equivalents (and shall be deemed to be Net Proceeds for
purposes of the following provisions as and when reduced to cash or Cash
Equivalents) to the extent of the net cash or Cash Equivalents realized thereon
and (y) the fair market value of any Non-Cash Consideration received by Sun or a
Subsidiary in any Non-Qualified Asset Sale shall be deemed to be cash to the
extent that the aggregate fair market value (as reasonably determined and
evidenced by a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) of all Non-Cash Consideration (measured at
the time received and without giving effect to any subsequent changes in value)
received by Sun or any of its Subsidiaries since the date of the Indenture in
all Non-Qualified Asset Sales does not exceed 5% of Stockholders' Equity as of
the date of such consummation. Notwithstanding the foregoing, to the extent Sun
or any of its Subsidiaries receives Non-Cash Consideration as proceeds of an
Asset Sale, such Non-Cash Consideration shall be deemed to be Net Proceeds for
purposes of (and shall be applied in accordance with) the following provisions
when Sun or such Subsidiary receives cash or Cash Equivalents from a sale,
repayment, exchange, redemption or retirement of or extraordinary dividend or
return of capital on such Non-Cash Consideration.
Pursuant to the Indenture, within 365 days after the receipt of any Net
Proceeds from an Asset Sale, Sun or such Subsidiary may apply such Net Proceeds
(i) to purchase one or more Nursing Facilities or Related Businesses and/or a
controlling interest in the Capital Stock of a Person owning one or more Nursing
Facilities and/or one or more Related Businesses (and no other material assets),
(ii) to make a capital expenditure or to acquire other tangible assets, in each
case, that are used or useful in any business in which Sun is permitted to be
engaged pursuant to the covenant described below under the caption "--Certain
Covenants--Line of Business," or (iii) to permanently reduce Senior Debt
(including, in the case of Senior Revolving Debt, to correspondingly reduce
commitments with respect thereto). Pending the final application of any such Net
Proceeds, Sun or such Subsidiary may temporarily reduce Senior Revolving Debt.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $25 million, Sun
will be required to make an offer to all Holders and holders of any other
Indebtedness of Sun ranking senior to or on a parity with the Notes from time to
time outstanding with similar provisions requiring Sun to make an offer to
purchase or to redeem such Indebtedness with the proceeds from any Asset Sales,
pro rata in proportion to the respective principal amounts of Notes and such
other Indebtedness then outstanding (collectively, an "Asset Sale Offer") to
purchase the maximum principal amount of the Notes and such other Indebtedness
that may be purchased out of the Excess Proceeds, at an offer price in cash
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the date of purchase (the "Asset Sale
Payment"), in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of Notes and such other Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, Sun may use
any remaining Excess Proceeds for general corporate purposes not prohibited at
the time under the Indenture. If the aggregate principal amount of Notes and
such other Indebtedness surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Notes and such other Indebtedness will be purchased on a
pro rata basis. Upon completion of an Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any distribution on account of the Equity Interests of Sun or any of its
Subsidiaries (other than (x) dividends or distributions to the extent payable in
Qualified Equity Interests of Sun, (y) dividends or distributions to the extent
payable to Sun or any Subsidiary of Sun, and (z) dividends or distributions by
any Wholly Owned Subsidiary of Sun); (ii) purchase, redeem or otherwise acquire
or retire for value any Equity Interests of Sun, or any of its Subsidiaries;
(iii) make any
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principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Indebtedness, except at the original final
stated maturity date thereof; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment (the amount of any such
Restricted Payment, if other than cash or Cash Equivalents, shall be the fair
market value (as reasonably determined and evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee prior to the making of such Restricted Payment) of the asset(s) proposed
to be transferred by Sun or such Subsidiary, as the case may be, pursuant to
such Restricted Payment):
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) Sun would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the Reference Period immediately preceding the date of such
Restricted Payment, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described below under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Sun and its Subsidiaries after March 31, 1997
(excluding Restricted Payments permitted by clauses (w), (x), (y) and (z) of
the next succeeding paragraph), is less than the sum (without duplication)
of (i) 50% of the Consolidated Net Income of Sun for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after March 31, 1997 to the end of Sun's most recently ended
fiscal quarter for which internal financial statements are available at the
time of such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by Sun from the issue or sale (other
than to a Subsidiary of Sun) since March 31, 1997 of (A) Qualified Equity
Interests of Sun or (B) debt securities of Sun or any of its Subsidiaries
that were issued after March 31, 1997 and have been converted into or
exchanged for Qualified Equity Interests of Sun, plus (iii) to the extent
that any Restricted Investment that was made after the Issue Date is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return to Sun and its Subsidiaries of capital with respect to such
Restricted Investment (net of taxes and the cost of disposition, if any) or
(B) the initial amount of such Restricted Investment.
The immediately preceding paragraph will not prohibit the following
Restricted Payments: (u) dividends or distributions paid by any Subsidiary of
Sun to stockholders of such Subsidiary other than Sun or another Subsidiary of
Sun, PROVIDED that such dividends and distributions are paid (1) on a PRO RATA
basis to each stockholder of such Subsidiary or (2) in the case of payment by a
CareerStaff Company, in accordance with the partnership agreement thereof; (v)
the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have otherwise
complied with the provisions of the Indenture; (w) the payment of up to an
aggregate of $8.0 million to the extent required in connection with tenders for
the outstanding 6 1/2% Convertible Subordinated Debentures due 2003 pursuant to
their terms as in effect on the date of the Indenture; (x) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of Sun
issued after the date of the Indenture in exchange for, or out of the net cash
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
Sun) of Qualified Equity Interests of Sun, PROVIDED that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (y) the defeasance, redemption or repurchase of
Subordinated Indebtedness issued after the date of the Indenture with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness or in
exchange for or out of the net cash proceeds from the substantially concurrent
sale (other than to a Subsidiary of Sun) of Qualified Equity Interests of Sun,
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PROVIDED that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph; and (z) any purchase or
defeasance of Subordinated Indebtedness to the extent required upon a change of
control (as defined therein) by the indenture or other agreement or instrument
pursuant to which such Subordinated Indebtedness was issued, but only if Sun has
complied with its obligations under the provisions described under the covenant
described above under the caption "Repurchases at the Option of the
Holders--Change of Control," PROVIDED that in the case of each of clauses (u),
(v), (w), (x), (y) and (z) of this paragraph no Default or Event of Default
shall have occurred or be continuing at the time of such Restricted Payment or
would occur as a consequence thereof.
Not later than the date of making any Restricted Payment, Sun shall deliver
to the Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that except as set forth below in this covenant,
Sun will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable, contingently or otherwise, with respect to (individually
and collectively, "incur") after the date of the Indenture any Indebtedness
(including Acquired Debt), and Sun will not permit any of its Subsidiaries to
issue any shares of Preferred Stock; PROVIDED that Sun and its Subsidiaries may
incur Indebtedness (including Acquired Debt) if (a) no Default or Event of
Default shall have occurred and be continuing at the time of, or would occur
after giving effect on a pro forma basis to, such incurrence of Indebtedness and
(b) the Fixed Charge Coverage Ratio for the Reference Period immediately
preceding the date on which such additional Indebtedness is incurred would have
been at least 2.0 to 1 for incurrences on or prior to June 30, 1998, 2.25 to 1
for incurrences after June 30, 1998 and on or prior to June 30, 1999 and 2.5 to
1 thereafter, in each case determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred at the beginning of such Reference Period.
Indebtedness consisting of reimbursement obligations in respect of a letter of
credit will be deemed to be incurred when the letter of credit is first issued.
The foregoing paragraph will not prevent:
(i) the incurrence by Sun or any of its Subsidiaries (other than the
Foreign Companies) of Senior Revolving Debt pursuant to the Credit Agreement
in an aggregate principal amount at any time outstanding (with letters of
credit being deemed to have a principal amount equal to the maximum
potential reimbursement obligation of Sun or any such Subsidiary with
respect thereto) not to exceed an amount equal to $550 million, less the
aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the commitments with respect to such Indebtedness pursuant to the
covenant described above under the caption "--Repurchases at the Option of
Holders--Asset Sales" after the Issue Date;
(ii) the incurrence by the Foreign Companies of Senior Revolving Debt
pursuant to the U.K. Credit Agreements in an aggregate principal amount at
any time outstanding (with letters of credit being deemed to have a
principal amount equal to the maximum potential reimbursement obligation of
the Foreign Companies with respect thereto) not to exceed an amount equal to
L75 million (or the equivalent amount thereof, at the time of incurrence, in
other foreign currencies), less the aggregate amount of all Net Proceeds of
Assets Sales applied to permanently reduce the commitments with respect to
such Indebtedness pursuant to the covenant described above under the caption
"--Repurchases at the Option of Holders--Asset Sales" after the Issue Date;
(iii) the incurrence by Sun and the Guarantors of Indebtedness
represented by the Notes;
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(iv) the incurrence by Sun or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness
that was permitted by the Indenture to be incurred (including, without
limitation, Existing Indebtedness);
(v) the incurrence by Sun or any of its Subsidiaries of intercompany
Indebtedness between or among Sun and/or any Subsidiaries; PROVIDED that in
the case of such Indebtedness of Sun or the Guarantors, such obligations
shall be unsecured and subordinated in all respects to Sun's and the
Guarantors' obligations pursuant to the Notes and the Guarantees;
(vi) the incurrence by Sun or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the Indenture to be outstanding or any
receivable or liability the payment of which is determined by reference to a
foreign currency; PROVIDED that the notional principal amount of any such
Hedging Obligation does not exceed the principal amount of the Indebtedness
or the amount of such receivable or liability to which such Hedging
Obligation relates;
(vii) the incurrence by Sun or any of its Subsidiaries of Indebtedness
represented by performance bonds, warranty or contractual service
obligations, standby letters of credit or appeal bonds, in each case to the
extent incurred in the ordinary course of business of Sun or such Subsidiary
in accordance with customary industry practices, in amounts and for the
purposes customary in Sun's industry; and
(viii) the incurrence by Sun or any of the Guarantors or the Foreign
Companies of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount at any time
outstanding (including any Indebtedness issued to refinance, replace or
refund such Indebtedness) not to exceed $50 million (or the equivalent
amount thereof, at the time of incurrence, in other foreign currencies).
For purposes of determining any particular amount of Indebtedness under this
covenant and so as to avoid duplication, guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this covenant, (i) in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
permitted by the second paragraph of this covenant, Sun, such Guarantor or such
Subsidiary shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the categories of
permitted Indebtedness described above and (ii) the outstanding principal amount
on any date of any Indebtedness issued with original issue discount is the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness on such date.
LAYERING INDEBTEDNESS; REDEEMABLE STOCK; LIENS SECURING INDEBTEDNESS
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist (a) any (i) Redeemable Stock, or (ii) Indebtedness that is subordinate in
right of payment to any other Indebtedness of Sun or a Guarantor (other than
Existing Indebtedness and Indebtedness incurred in compliance with clause (v) of
the covenant described above under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock") unless, by its terms, such Redeemable Stock or
Indebtedness (A) has an original final stated maturity subsequent to the final
stated maturity of the Notes and a Weighted Average Life to Maturity longer than
that of the Notes and (B) is subordinate in right of payment to, or ranks PARI
PASSU with, the Notes or the Guarantee, as applicable, or (b) any Lien (except
Permitted Liens) on any asset now owned or hereafter acquired, or on any income
or profits therefrom or assign or convey any right to receive income therefrom
securing any Indebtedness of Sun or any of its Subsidiaries unless all payments
due under the Indenture, the Notes and the Guarantees (as applicable) are
secured on an equal and ratable basis with the Obligations so secured (or, if
the
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Obligations so secured constitute Subordinated Indebtedness, on a senior basis)
until such time as such Obligations are no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to Sun or any of its Subsidiaries (1) on its Capital Stock or (2)
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any Indebtedness owed to Sun or any of its Subsidiaries,
(ii) make loans or advances to or on behalf of Sun or any of its Subsidiaries or
(iii) transfer any of its properties or assets to or on behalf of Sun or any of
its Subsidiaries, except for such encumbrances or restrictions existing under or
by reason of (a) Existing Indebtedness as in effect on the date of the
Indenture, (b) the Indenture, (c) applicable law, (d) any instrument governing
Indebtedness or Capital Stock of a Person acquired by Sun or any of its
Subsidiaries as in effect at the time of such acquisition (except to the extent
incurred in connection with or in contemplation of such acquisition or in
violation of the covenant described above under the caption "Incurrence of
Indebtedness and Issuance of Preferred Stock"), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired, (e)
customary non-assignment provisions in leases entered into in the ordinary
course of business, (f) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above solely on the property so acquired, (g) Permitted Refinancing
Indebtedness, PROVIDED that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in and do not apply to any other assets or person than was
covered by the agreements governing the Indebtedness being refinanced, or (h)
the Credit Agreement, the U.K. Credit Agreements and future Foreign Company
credit agreements, including related documentation as the same is in effect on
the date of the Indenture and as amended or replaced from time to time, PROVIDED
that no such future Foreign Company credit agreement and no such amendment or
replacement is more restrictive as to the matters enumerated above than the
Credit Agreement, the U.K. Credit Agreements (in the case of amendments or
replacements thereof) and related documentation as in effect on the date of the
Indenture. Nothing contained in this "Dividend and Other Payment Restrictions
Affecting Subsidiaries" covenant shall prevent Sun or any Subsidiary of Sun from
creating, incurring, assuming or suffering to exist any Permitted Liens or
entering into agreements in connection therewith that impose restrictions on the
transfer or disposition of the property or assets subject to such Permitted
Liens.
LINE OF BUSINESS
The Indenture will provide that Sun will not, and will not permit any of its
Subsidiaries to, engage to any material extent in any business other than the
ownership, operation and management of Nursing Facilities and Related
Businesses.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that Sun may not consolidate or merge with or
into (whether or not Sun is the surviving corporation), or, directly or
indirectly, sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another Person or group of affiliated Persons or adopt a Plan
of Liquidation unless (i) Sun is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
Sun) or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made or (in the case of a Plan of Liquidation) the
Person which receives the greatest value from the Plan of Liquidation is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia; (ii) the entity or Person formed by or
surviving any such consolidation or merger
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(if other than Sun) or the entity or Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made or (in the case
of a Plan of Liquidation) the Person which receives the greatest value from the
Plan of Liquidation assumes all the obligations of Sun under the Notes and the
Indenture pursuant to a supplemental Indenture in form reasonably satisfactory
to the Trustee; (iii) immediately after giving effect to such transaction on a
pro forma basis, no Default or Event of Default exists; and (iv) Sun or the
entity or Person formed by or surviving any such consolidation or merger (if
other than Sun), or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made or (in the case of a Plan of
Liquidation) the Person which receives the greatest value from the Plan of
Liquidation (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of Sun
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the Reference Period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described above
under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock."
Upon any consolidation or merger or any such sale, assignment, transfer,
conveyance or other disposition (but not lease) or consummation of a Plan of
Liquidation in accordance with the foregoing, the successor corporation formed
by such consolidation or into which Sun is merged or to which such transfer is
made or, in the case or a Plan of Liquidation, the entity which receives the
greatest value from such Plan of Liquidation shall succeed to, and be
substituted for, and may exercise every right and power of, Sun under the
Indenture with the same effect as if such successor corporation had been named
therein as Sun, and Sun shall be released from the obligations under the Notes
and the Indenture except with respect to any obligations that arise from, or are
related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, Sun's interest in which constitutes all or substantially all
of the properties and assets of Sun shall be deemed to be the transfer of all or
substantially all of the properties and assets of Sun.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that neither Sun nor any of its Subsidiaries will
be permitted on or after the date of the Indenture to sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), or any series of
related Affiliate Transactions, unless (i) such Affiliate Transaction is on
terms that are no less favorable to Sun or the relevant Subsidiary than those
that could have been obtained in a comparable transaction by Sun or such
Subsidiary with an unrelated Person and (ii) Sun delivers to the Trustee (a)
with respect to an Affiliate Transaction, or any series of related Affiliate
Transactions, involving aggregate consideration in excess of $2.5 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to an
Affiliate Transaction, or any series of related Affiliate Transactions,
involving aggregate consideration in excess of $5 million, an opinion as to the
fairness to Sun or such Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing; PROVIDED that the following shall not be deemed to be Affiliate
Transactions: (w) transactions or payments pursuant to any employment
arrangements, director or officer indemnification agreements or employee or
director benefit plans entered into by Sun or any of its Subsidiaries in the
ordinary course of business of Sun or such Subsidiary, (x) transactions between
or among Sun and/or any of its Subsidiaries, (y) any transaction or series of
related transactions pursuant to terms entered into prior to the date of the
Indenture and (z) Restricted Payments by Sun which are permitted by the covenant
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described above under the caption "Restricted Payments" and are made on a PRO
RATA basis to each stockholder of Sun.
SUBSIDIARY GUARANTORS
The Indenture will provide that all existing and future Subsidiaries of Sun,
except as provided below, jointly and severally will guarantee irrevocably and
unconditionally all principal, premium, if any, and interest on the Notes on a
senior subordinated, unsecured, general basis. Sun will covenant pursuant to the
Indenture to cause (a) each of its Subsidiaries (other than Sun Systems, Inc.)
which is neither a CareerStaff Company nor a Foreign Company and which is not a
Guarantor on the date of the Indenture (other than Subsidiaries having total
assets with a book value of less than $500,000 and that do not guarantee any
Senior Debt) (b) any Subsidiary of the Company or any Guarantor, which is not
then a Guarantor, if, prior to it becoming a Guarantor hereunder and a guarantor
under the Credit Agreement, (i) such Subsidiary is not required by the terms of
the Credit Agreement to become a guarantor under the Credit Agreement and (ii)
the conditions for releasing a Guarantor from its obligations as a guarantor of
the Notes specified in clause (ii) of the second paragraph of "--Release of
Guarantors" are then satisfied and (c) Sun Systems, Inc. and each CareerStaff
Company or Foreign Company, if such person (i) guarantees or otherwise becomes
liable for Indebtedness of Sun or any Guarantor (other than, in the case of
CareerStaff Companies, Indebtedness under the Credit Agreement), or (ii) causes
more than two-thirds of its Equity Interests to be pledged to secure
Indebtedness of Sun or any Guarantor (other than, in the case of CareerStaff
Companies, Indebtedness under the Credit Agreement), to execute and deliver to
the Trustee, promptly upon the execution by such Subsidiary of a guarantee of
Sun's obligations under any Indebtedness, a Guarantee pursuant to which such
Subsidiary will guarantee payment of the Notes and the performance of Sun's
other obligations under the Indenture to the extent set forth in the provisions
of the Indenture relating to Guarantors.
RELEASE OF GUARANTORS
The Indenture will provide that no Guarantor shall consolidate or merge with
or into (whether or not such Guarantor is the surviving person) another person
unless (i) subject to the provisions of the following paragraph and certain
other provisions of the Indenture, the person formed by or surviving any such
consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such person shall
unconditionally guarantee, on a senior subordinated basis, all of such
Guarantor's obligations under such Guarantor's Guarantee and, the Indenture on
the terms set forth in the Indenture; and (ii) immediately before and
immediately after giving effect to such transaction on a pro forma basis, no
Default or Event of Default shall have occurred or be continuing.
The Indenture will provide that upon (i) the sale or disposition (whether by
merger, stock purchase, asset sale or otherwise) of a Guarantor (or all of its
assets) to an entity which is not a Subsidiary of Sun, or upon the dissolution
of any Guarantors which sale, disposition or dissolution is otherwise in
compliance with the Indenture, or (ii) the release of any Guarantor from its
obligations as a guarantor under the Credit Agreement, so long as (a) no Default
or Event of Default shall have occurred and be continuing at the time of, or
would occur after giving effect on a pro forma basis to, such release, (b) Sun
is permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock" on the date on which such release occurs, and (c)
the amount of Indebtedness outstanding under the Credit Agreement for at least
30 days prior to the time of such release is at least $250 million, such
Guarantor shall be deemed released from its obligations under its Guarantee of
the Notes; PROVIDED that any such termination shall occur only to the extent
that all obligations of such Guarantor under all of its guarantees of, and under
all of its pledges of assets or other security interests which secure any
Indebtedness of Sun shall also terminate upon such sale, disposition or
dissolution.
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REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, Sun will
furnish to the Trustee and all Holders, within 15 days after it is or would have
been required to file such with the Commission, all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if Sun were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by Sun's certified independent accountants. In addition, whether
or not required by the rules and regulations of the Commission but only to the
extent permitted thereby, Sun will file a copy of all such information and
reports with the Commission for public availability and make such information
available to securities analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment, when due, of any installment
of interest on the Notes; (ii) default in payment when due (at maturity,
redemption, by acceleration or otherwise, including without limitation payment
of the Change of Control Payment or the Asset Sale Payment) of the principal of
or premium, if any, on the Notes; (iii) failure by Sun or any Guarantor for 30
days after notice to comply with the provisions described above under the
caption "Restricted Payments" or "Incurrence of Indebtedness and Issuance of
Preferred Stock"; (iv) failure by Sun or any Guarantor for 60 days after notice
to comply with any of its other agreements in the Indenture, the Notes or a
Guarantee; (v) any default occurs under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by Sun or any of its Subsidiaries (or the
payment of which is guaranteed by Sun or any of its Subsidiaries), whether such
Indebtedness or guarantee exists on the date of the Indenture or is thereafter
created, which default (a) constitutes a Payment Default or (b) results in the
acceleration of such Indebtedness prior to its final stated maturity and, in
each case, the principal amount of any Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or that has been so accelerated, aggregates in excess of $20 million;
(vi) final unsatisfied judgments not covered by insurance aggregating in excess
of $20 million, at any one time rendered against Sun or any of its Subsidiaries
and not stayed, bonded or discharged within 60 days; (vii) any Guarantee by a
Guarantor which is a Significant Subsidiary shall cease for any reason not
permitted by the Indenture to be in full force and effect or any such Guarantor,
or any person acting on behalf of any such Guarantor, shall deny or disaffirm
its obligations under its Guarantee; and (viii) certain events of bankruptcy or
insolvency with respect to Sun or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately; PROVIDED that so long
as at least $15 million of Senior Debt is outstanding under the Credit
Agreement, no acceleration of the maturity of the Notes shall be effective until
the earlier of (i) five days after notice of acceleration is received by the
Representative under the Credit Agreement (unless such Event of Default is cured
or waived prior thereto) and (ii) the date on which any Senior Debt under the
Credit Agreement is accelerated. Notwithstanding the foregoing, in the case of
an Event of Default arising from certain events of bankruptcy or insolvency with
respect to Sun or any of its Significant Subsidiaries, all outstanding Notes
will become due and payable without further action or notice. Holders of the
Notes may not enforce the Indenture, the Notes or the Guarantees except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in aggregate principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
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Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of the applicable percentage (specified in the first paragraph of this
covenant) in aggregate principal amount of the Notes then outstanding, by notice
to the Trustee on behalf of the Holders of all of the Notes, may waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of the principal
of, premium, if any, or interest on the Notes.
Sun is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and Sun is required upon becoming aware of any
Default or Event of Default, to deliver to the Trustee a statement specifying
such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture will provide that no director, officer, employee, incorporator
or stockholder of Sun, as such, shall have any liability for any obligations of
Sun under the Notes, the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each Holder by accepting a
Note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the Federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Sun may, at its option and at any time within one year of the final stated
maturity of the Notes, elect to have all of its obligations and the obligations
of the Guarantors discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that Sun shall be deemed to have paid
and discharged the entire indebtedness represented, and the Indenture shall
cease to be of further effect as to all outstanding Notes and Guarantees, except
as to (i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due from the trust referred to below, (ii) Sun's obligations
with respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
Sun's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, Sun may, at its option and at any
time, elect to have its obligations and the obligations of the Guarantors
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) Sun
must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Notes, cash, U.S. Government Obligations, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on such outstanding Notes on their redemption or
final stated maturity; (ii) in the case of Legal Defeasance, Sun shall have
delivered to the Trustee an opinion of counsel in the United States confirming
that (A) Sun has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there has been
a change in the applicable Federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the Holders
of such outstanding Notes will not recognize income, gain or loss for Federal
income tax purposes as a result of such Legal Defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, Sun shall have delivered to the Trustee an
opinion of counsel in the United States confirming that the Holders of such
outstanding Notes will not recognize income, gain or
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loss for Federal income tax purposes as a result of such Covenant Defeasance and
will be subject to Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which Sun or any of its Subsidiaries is a party or by
which Sun or any of its Subsidiaries is bound (other than a breach, violation or
default resulting from the borrowing of funds to be applied to such deposit);
(vi) Sun must have delivered to the Trustee an opinion of counsel to the effect
that after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) Sun must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
Sun with the intent of preferring the Holders of such Notes over the other
creditors of Sun with the intent of defeating, hindering, delaying or defrauding
other creditors of Sun; and (viii) Sun must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the Officers' Certificate, (i) through
(vi) and, in the case of the opinion of counsel, clauses (i), (with respect to
the validity and perfection of the security interest) (ii), (iii) and (v) of
this paragraph, have been complied with.
If the funds deposited with the Trustee to effect Legal Defeasance or
Covenant Defeasance are insufficient to pay the principal of premium, if any,
and interest on the Notes when due, then the obligations of Sun and the
Guarantors under the Indenture, the Notes and the Guarantees will be revived and
no such defeasance will be deemed to have occurred.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for such
Notes), and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for such Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any
Note, (iii) reduce the rate of or extend the time for payment of interest on any
Note, (iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
thereof and a waiver of the Payment Default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders to receive payments of
principal of or premium, if any, or interest on the Notes, (vii) cause the Notes
or any Guarantee to become subordinate in right of payment to any Indebtedness
other than Senior Debt, or (viii) make any change in the foregoing amendment and
waiver provisions adverse to the Holders. Notwithstanding the foregoing, so long
as any Senior Debt is outstanding under the Credit Agreement, no modification,
supplement or waiver of any of the subordination and related provisions and
definitions of the Notes or the Indenture shall be effective unless expressly
agreed to in writing by the Representative under the Credit Agreement. So long
as any Senior Debt is outstanding under the Credit Agreement, the Trustee shall
deliver written notice of any modification or supplement to the Notes or the
Indenture to the Representative under the Credit
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Agreement no less than five business days before the effective date of any such
modification or supplement.
Without the consent of any Holder, Sun, the Guarantors and the Trustee may
amend or supplement the Indenture or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for additional Guarantors of the Notes or the
release, in accordance with the Indenture, of any Guarantor, to provide for the
assumption of Sun's or any Guarantor's obligations to Holders in the case of a
merger, consolidation or sale of assets, to make any change that would provide
any additional rights or benefits to the Holders or that does not adversely
affect the legal rights under the Indenture of any such Holder, to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act, to evidence and provide for the
acceptance of the appointment of a successor Trustee with respect to the
Securities, or in any other case, pursuant to the provisions of the Indenture,
where a supplemental indenture is required or permitted to be entered into
without the consent of any Holder.
CONCERNING THE TRUSTEE
The Indenture will contain certain limitations on the rights of the Trustee,
should the Trustee become a creditor of Sun, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will not be under
any obligation to exercise any of its rights or powers under the Indenture at
the request of any Holder, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"APPROVED JURISDICTION" means the United States of America, Canada, the
United Kingdom and any other member nation of the Organization for Economic
Development and Cooperation.
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"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets, including, without limitation, by way of a sale and leaseback or by
merger or consolidation (PROVIDED that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Sun and its
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "Repurchases at the Option of
Holders--Change of Control" and/or the provisions described above under the
caption "Certain Covenants--Merger, Consolidation or Sale of Assets" and not by
the provisions of the covenant described above under the caption "Repurchases at
the Option of Holders--Asset Sales"), and (ii) the issuance or sale by Sun or
any of its Subsidiaries of Equity Interests of any of Sun's Subsidiaries, in the
case of either clause (i) or (ii), whether in a single transaction or a series
of related transactions (a) that have a fair market value in excess of $5
million or (b) for Net Proceeds in excess of $5 million. Notwithstanding the
foregoing: (a) a transfer of assets by Sun to a Subsidiary or by a Subsidiary to
Sun or to another Subsidiary, (b) an issuance of Equity Interests by a
Subsidiary to Sun or to another Subsidiary, and (c) a Nursing Facility Swap will
not be deemed to be an Asset Sale.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CAREERSTAFF COMPANY" means (i) CareerStaff Unlimited, Inc., a Delaware
corporation and a Wholly Owned Subsidiary of Sun, and its direct and indirect
Wholly Owned Subsidiaries (collectively, "CareerStaff Unlimited") so long as
such persons conduct no material business except acquiring, holding or selling
equity or other interests in other CareerStaff Companies or (ii) any Subsidiary
of Sun (a) in which CareerStaff Unlimited is the general partner, (b) which is
no less than 5% and no more than 10% owned by persons that are not Affiliates of
Sun and (c) substantially of all of whose business consists of temporary therapy
staffing.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the government of an Approved
Jurisdiction or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (iii) certificates of deposit
with maturities of one year or less from the date of acquisition, bankers'
acceptances (or, with respect to foreign banks, similar instruments) with
maturities not exceeding one year and overnight bank deposits, in each case with
any domestic commercial bank organized under the laws of the United States of
America or any state thereof or the District of Columbia, or any United States
branch of a foreign bank having at the date of acquisition thereof combined
capital and surplus of not less than $500 million, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having the highest rating obtainable from Moody's or S&P and in
each case maturing within one year after the date of acquisition, and (vi)
investments in money market funds which invest substantially all their assets in
securities of the types described in the foregoing clauses (i) through (v).
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of Sun and its
Subsidiaries taken as a whole to any Person or group (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than to a Person or
group who, prior to such transaction, held a majority of the voting power of the
voting stock of Sun, (ii) the acquisition by any Person or group (as defined
above) of a direct or indirect interest in more than 50% of the voting power of
the voting stock
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of Sun, by way of merger or consolidation or otherwise, or (iii) the first day
on which a majority of the members of the Board of Directors of Sun are not
Continuing Directors.
The phrase "all or substantially all" of the assets of Sun will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of Sun has occurred, in which case a Holder's ability to obtain the
benefit of a Change of Control Offer may be impaired. In addition, no assurances
can be given that Sun will be able to acquire Notes tendered upon the occurrence
of a Change of Control.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, the sum of (i) provision for taxes based on income or profits of
such Person and its Subsidiaries for such period, to the extent such provision
for taxes was included in computing such Consolidated Net Income, (ii) the Fixed
Charges of such Person and its Subsidiaries for such period, to the extent that
such Fixed Charges were deducted in computing such Consolidated Net Income,
(iii) depreciation and amortization (including amortization of goodwill and
other intangibles) of such Person and its Subsidiaries for such period to the
extent that such depreciation and amortization were deducted in computing such
Consolidated Net Income, and (iv) other non-cash items of such Person and its
Subsidiaries for such period to the extent such non-cash items were deducted in
computing such Consolidated Net Income, less the amount of all cash payments
made by such person or any of its Subsidiaries during such period to the extent
such payments relate to non-cash charges that were added back in determining
Consolidated Cash Flow for such period or any prior period, in each case on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, the depreciation
and amortization of, and the other non-cash items of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to Sun by such Subsidiary without
prior approval (that has not been obtained), pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Subsidiary or its
stockholders.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis; PROVIDED that (i) the Net Income, if positive,
of any Person that is not a Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a Wholly Owned
Subsidiary thereof, but in any case not in excess of such Person's pro rata
share of such Person's Net Income for such period, (ii) the Net Income, if
positive, of any Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) 1996 non-recurring charges in
the pre-tax amount of up to $26 million shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of Preferred Stock (other than Redeemable Stock), less all write-ups
(other than write-ups resulting from foreign currency translations and write-ups
of tangible assets of a going concern business made in accordance with GAAP as a
result of the acquisition of such business) subsequent to the
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date of the Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, and excluding the cumulative effect of a
change in accounting principles, all as determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of Sun who (i) was a member of such Board of Directors on
the date of the Indenture or (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board at the time of such nomination or election.
"CREDIT AGREEMENT" means that certain Fourth Amended and Restated Credit
Agreement, dated as of October 29, 1996, by and among Sun, Mediplex and
NationsBank of Texas, N.A. and the other banks that are parties thereto,
providing for $490 million in aggregate principal amount of Senior Revolving
Debt, including any related notes, collateral documents, instruments and
agreements executed in connection therewith, and in each case as amended,
increased, modified, extended, renewed, refunded, replaced or refinanced, in
whole or in part, from time to time.
"DEFAULT" means any event or condition that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness of Sun and its Subsidiaries in
existence on the date of the Indenture, until such amounts are repaid.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that such
Person or any of its Subsidiaries incurs, assumes, guarantees, redeems or repays
any Indebtedness (other than revolving credit borrowings) or issues or redeems
Preferred Stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee, redemption or
repayment of Indebtedness, or such issuance or redemption of Preferred Stock, as
if the same had occurred at the beginning of the applicable Reference Period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by Sun or any of its Subsidiaries, including
through mergers or consolidations and including any related financing
transactions, during the Reference Period or subsequent to such Reference Period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the Reference Period, and (ii) the Consolidated Cash Flow and Fixed
Charges attributable to operations or businesses disposed of prior to the
Calculation Date shall be excluded (but in the case of Fixed Charges, only to
the extent that the obligations giving rise to such Fixed Charges would no
longer be obligations contributing to such Person's Fixed Charges subsequent to
the Calculation Date).
"FIXED CHARGES" means, with respect to any Person for any period, the sum
(without duplication and determined in each case in accordance with GAAP) of (i)
the consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization of
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letters of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations), (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, (iii) interest under any guarantee by such
Person or any of its Subsidiaries of Indebtedness of any other Person in the
amount of interest attributable to the Indebtedness guaranteed and (iv) the
product of (a) all cash dividend payments (and non-cash dividend payments in the
case of a Person that is a Subsidiary) on any series of Preferred Stock of such
Person, times (b) a fraction, the numerator of which is one and the denominator
of which is
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one minus the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, in each case, on a consolidated basis
and in accordance with GAAP; PROVIDED that in the event any cash dividend
payment is deductible for federal, state and/or local tax purposes, the amount
of the tax deduction relating to such cash dividend payment for such period
shall be subtracted from the Fixed Charges for such Person for such period.
"FOREIGN COMPANIES" means any Subsidiary of Sun which (i) is not organized
under the laws of the United States, any state thereof or the District of
Columbia and (ii) conducts substantially all of its business operations in a
country other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, applied on a consistent basis and as in effect from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange contracts
or currency swap agreements and (iii) other agreements or arrangements designed
to protect such Person against fluctuations in interest rates or currency
values.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (i)
any Redeemable Stock of such Person, (ii) any liabilities and obligations of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or bankers' acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, (iii) all liabilities and
obligations of any other Person secured by a Lien on any asset of such Person,
whether or not such indebtedness is assumed by such Person (the amount thereof
being deemed to equal such asset's fair market value), and (iv) to the extent
not otherwise included, the guarantee by such Person of any liabilities or
obligations of any other Person of the kind described in the preceding clauses
(i)-(iii).
"INVESTMENT" by any Person in any other Person means (without duplication)
(i) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (ii) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); and (iii) other than guarantees of Indebtedness of
Sun or any Subsidiary to the extent permitted by the covenant described above
under the caption "Incurrence of Indebtedness and Issuance of Preferred Stock,"
the entering into by such Person of any guarantee of, or other credit support or
contingent obligation with respect to, Indebtedness or other liability of such
other Person; PROVIDED that Investments shall not be deemed to include
extensions of trade credit by such Person or any of its Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of such
Person or such Subsidiary, as the case may be.
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"ISSUE DATE" means the date of the first issuance of the Notes under the
Indenture.
"JUNIOR SECURITY" means any Qualified Equity Interests and any Indebtedness
of Sun or a Guarantor, as applicable, that is subordinated in right of payment
to Senior Debt at least to the same extent as the Notes or the Guarantee, as
applicable, and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the final stated maturity of
the Notes.
"LIEN" means, with respect to any asset, mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset given to
secure Indebtedness, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction with respect to any such lien, pledge, charge or security
interest).
"NET INCOME" means, with respect to any Person, the consolidated net income
(loss) of such Person, determined in accordance with GAAP, excluding, however,
the effect of any extraordinary or other material non-recurring gain or loss
outside the ordinary course of business (including without limitation any gain
from the sale or other disposition of assets outside of the ordinary course of
business or from the issuance or sale of any Equity Interests), together with
any related provision for taxes on such extraordinary or other material
nonrecurring gain or loss.
"NET PROCEEDS" means the aggregate cash or Cash Equivalent proceeds received
by Sun or any of its Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any other
expenses incurred or to be incurred by Sun or a Subsidiary as a direct result of
the sale of such assets (including, without limitation, severance, relocation,
lease termination and other similar expenses), taxes actually paid or due and
payable as a result thereof in the year of sale or the immediately following
year (after taking into account the application of deductions, net operating
losses and other tax attributes), amounts required to be applied to the
repayment of Indebtedness (other than Subordinated Indebtedness) secured by a
Lien on the asset or assets that were the subject of such Asset Sale, any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP and all distributions and other payments
required to be made and actually made to minority interests holders in
Subsidiaries as a result of such Asset Sale; PROVIDED that if the instrument or
agreement governing such Asset Sale requires the transferor to maintain a
portion of the purchase price in escrow (whether as a reserve for adjustment of
the purchase price or otherwise) or to provide for indemnification of the
transferee for specified liabilities in maximum specified amount, the portion of
the cash or Cash Equivalents that is actually placed in escrow or segregated and
set aside by the transferor for such indemnification obligations shall not be
deemed to be Net Proceeds until the escrow terminates or the transferor ceases
to segregated and set aside such funds, in whole or in part, and then only to
the extent of the proceeds released from escrow to the transferor or that are no
longer segregated and set aside by the transferor.
"NON-CASH CONSIDERATION" means any non-cash or non-Cash Equivalent
consideration received by Sun or a Subsidiary of Sun in connection with an Asset
Sale and any non-cash or non-Cash Equivalent consideration received by Sun or
any of its Subsidiaries upon disposition thereof.
"NON-QUALIFIED ASSET SALE" means an Asset Sale in which the Non-Cash
Consideration received by Sun and its Subsidiaries exceeds 20% of the total
consideration received in connection with such Asset Sale calculated in
accordance with clause (x), but not clause (y), of the proviso to the first
sentence under the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales."
"NURSING FACILITY" means a nursing facility, hospital, outpatient clinic,
assisted living center, hospice, long-term care facility, subacute care facility
or other facility that is used or useful in the provision of healthcare
services.
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"NURSING FACILITY SWAP" means an exchange of assets by Sun or one or more
Subsidiaries of Sun or of the Equity Interests of a Subsidiary for one or more
Nursing Facilities and/or one or more Related Businesses or of the Equity
Interests of any Person owning one or more Nursing Facilities and/or one or more
Related Businesses.
"OBLIGATIONS" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PAYMENT DEFAULT" means any failure to pay any scheduled installment of
principal on any Indebtedness within the grace period provided for such payment
in the documentation governing such Indebtedness.
"PERMITTED LIENS" means (i) Liens in favor of Sun; (ii) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
Sun or any Subsidiary of Sun or becomes a Subsidiary of Sun, PROVIDED that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not extend to any assets other than those of the Person
merged into or consolidated with Sun or that becomes a Subsidiary of Sun; (iii)
Liens on property existing at the time of acquisition thereof by Sun or any
Subsidiary of Sun, PROVIDED that such Liens were in existence prior to the
contemplation of such acquisition and do not extend to any property other than
that acquired; (iv) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (v) Liens securing Senior Debt
outstanding under the Credit Agreement, Liens securing Existing Indebtedness,
and Liens on the Equity Interests in or assets of Foreign Companies securing
Indebtedness outstanding under Foreign Company credit agreements; (vi) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (vii) Liens to secure Permitted Refinancing Indebtedness
incurred to refinance Indebtedness that was secured by a Lien permitted under
the Indenture and that was incurred in accordance with the provisions of the
Indenture, PROVIDED that such Liens do not extend to or cover any property or
assets of Sun or any of its Subsidiaries other than assets or property securing
the Indebtedness so refinanced; (viii) Purchase Money Liens; (ix) any interest
or title of a lessor under any Capital Lease Obligation otherwise permitted by
the Indenture; (x) Liens upon specific items of inventory or equipment and
proceeds of Sun or any Subsidiary securing its obligations in respect of
bankers' acceptances issued or created for its account (whether or not under the
Credit Agreement) to facilitate the purchase, shipment, or storage of such
inventory and equipment; (xi) Liens securing reimbursement obligations with
respect to letters of credit (whether or not issued under the Credit Agreement)
otherwise permitted under the Indenture and issued in connection with the
purchase of inventory or equipment by Sun or any Subsidiary in the ordinary
course of business; (xii) Liens to secure (or encumbering deposits securing)
obligations arising from warranty or contractual service obligations of Sun or
any Subsidiary, including rights of offset and setoff; (xiii) Liens securing
Acquired Debt otherwise permitted by the Indenture, PROVIDED that (A) the
Indebtedness secured shall not exceed the fair market value of the assets so
acquired (such fair market value to be determined in good faith by the Board of
Directors of Sun at the time of such acquisition) and (B) such Indebtedness
shall be incurred, and the Lien securing such Indebtedness shall be created,
within 12 months after such acquisition; (xiv) Liens securing Hedging
Obligations agreements relating to Indebtedness otherwise permitted under the
Indenture; (xv) other Liens on assets of Sun or any of its Subsidiaries securing
Indebtedness that is permitted by the terms of the Indenture to be outstanding
having an aggregate principal amount at any one time outstanding not to exceed
$5 million; (xvi) Liens on Medicare, Medicaid or other patient accounts
receivable of Sun or its Subsidiaries; (xvii) Liens on real estate and related
personal property (including, but not limited to, sale and leasebacks of and
mortgages on real estate and related personal property) not to exceed an
aggregate amount equal to $60 million per year; (xviii) Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary
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course of business; (xix) easements, rights-of-way, zoning restrictions,
reservations, encroachments and other similar encumbrances in respect of real
property; and (xx) Liens securing stay and appeal bonds or judgment Liens in
connection with any judgment not giving rise to a Default under the Indenture.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Sun or any of
its Subsidiaries (a) issued in exchange for, or the net proceeds of which are
used solely to extend, refinance, renew, replace, defease or refund, in whole or
in part, or (b) constituting an amendment, modification or supplement to, or a
deferral or renewal of ((a) and (b) above are, collectively, a "Refinancing"),
other Indebtedness of Sun or any of its Subsidiaries; PROVIDED that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed the
lesser of (A) the principal amount of the Indebtedness so Refinanced and (B) if
such Indebtedness being Refinanced was issued with original issue discount, the
accreted value thereof (determined in accordance with GAAP) (plus, in each case,
the amount of any reasonable expenses incurred in connection therewith); (ii)
such Permitted Refinancing Indebtedness has a final stated maturity later than
the final stated maturity of, and has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the Indebtedness
being Refinanced; (iii) if the Indebtedness being Refinanced is Subordinated
Indebtedness, such Permitted Refinancing Indebtedness has a final stated
maturity later than the final stated maturity of, and is subordinated in right
of payment to, the Notes on terms at least as favorable to the Holders as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, deceased or refunded; and (iv) if the obligor on
the Indebtedness being Refinanced, is a Subsidiary that is not a Guarantor, such
Permitted Refinancing Indebtedness shall only be incurred by such Subsidiary.
"PLAN OF LIQUIDATION" means a plan that provides for, contemplates or the
effectuation of which is preceded or accompanied by (whether or not
substantially contemporaneously) (i) the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Sun otherwise than as
an entirety or substantially as an entirety and (ii) the distribution of all or
substantially all of the proceeds of such sale, lease, conveyance or other
disposition and all or substantially all of the remaining assets of Sun to
holders of Capital Stock of Sun.
"PREFERRED STOCK" means an Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness of a Person to any
seller or other Person incurred to finance the acquisition or construction
(including in the case of a Capital Lease Obligation, the lease) of any asset or
property which is incurred within 180 days of such acquisition or completion of
construction and is secured only by the assets so financed.
"PURCHASE MONEY LIEN" means a Lien granted on an asset or property to secure
Purchase Money Indebtedness permitted to be incurred under the Indenture and
incurred solely to finance the acquisition of construction of such asset or
property; provided that such Lien encumbers only such asset or property and is
granted within 180 days of such acquisition or completion of construction.
"QUALIFIED EQUITY INTERESTS" shall mean all Equity Interests of Sun other
than Redeemable Stock of Sun.
"REDEEMABLE STOCK" means any Equity Interest that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder), or upon the happening of any event,
matures or is mandatorily redeemable (other than redeemable only for Qualified
Equity Interests of the issuer), pursuant to a sinking fund obligation or
otherwise, or redeemable at the option of the holder thereof, in whole or in
part, on or prior to the date on which the Notes mature.
"REFERENCE PERIOD" with regard to any Person means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
for which internal financial statements are available ended immediately
preceding any date upon which any determination is to be made pursuant to the
terms of the Notes or the Indenture.
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"RELATED BUSINESS" means the business conducted by Sun and its Subsidiaries
as of the date of the Indenture and any and all healthcare service businesses
that in good faith judgment of the Board of Directors of Sun are materially
related businesses. Without limiting the generality of the foregoing, Related
Business shall include the operation of Nursing Facilities, long-term and
specialty healthcare services, skilled nursing care, subacute care,
rehabilitation programs, pharmaceutical services, health maintenance
organizations, insurance companies, preferred provider organizations or any
other form of managed care business, health care information services business,
distribution of medical supplies, geriatric care and home healthcare or other
businesses which provide ancillary services to long-term and specialty
healthcare facilities.
"RESTRICTED INVESTMENT" means, in one or a series of related transactions,
any Investment, other than (i) Investments in Cash Equivalents, (ii) Investments
in a Subsidiary of Sun, (iii) Investments in any Person that as a consequence of
such Investment becomes a Subsidiary of Sun, (iv) Investments existing on the
date of the Indenture, (v) accounts receivable, advances, loans, extensions of
credit created or acquired in the ordinary course of business, (vi) Investments
made as a result of the receipt of Non-Cash Consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "Repurchases at the Option of the Holders--Asset Sales," (vii)
Investments made as the result of the guarantee by Sun or any of its
Subsidiaries of Indebtedness of a Person or Persons other than Sun or any
Subsidiary of Sun that is secured by Liens on assets sold or otherwise disposed
of by Sun or such Subsidiary to such Person or Persons, PROVIDED that such
Indebtedness was in existence prior to the contemplation of such sale or other
disposition and that the terms of such guarantee permit Sun or such Subsidiary
to foreclose on the pledged or mortgaged assets if Sun or such Subsidiary is
required to perform under such guarantee, and (viii) Investments in any Related
Business.
"SENIOR DEBT" of Sun or any Guarantor means Indebtedness (including any
monetary obligation in respect of the Credit Agreement, and interest, whether or
not allowable, accruing on Indebtedness incurred pursuant to the Credit
Agreement after the filing of a petition initiating any proceeding under any
bankruptcy, insolvency or similar law) of Sun or such Guarantor unless, by the
terms of the instrument creating or evidencing such indebtedness, it is
expressly designated not to be senior in right of payment to the Notes or the
applicable Guarantee; PROVIDED that in no event shall Senior Debt include (i)
Indebtedness to any Subsidiary of Sun or any officer, director or employee of
Sun or any Subsidiary of Sun, (ii) Indebtedness incurred in violation of the
terms of the Indenture, (iii) Indebtedness to trade creditors, (iv) Redeemable
Stock and (v) any liability for taxes owed or owing by Sun or such Guarantor.
"SENIOR REVOLVING DEBT" means revolving credit loans and letters of credit
outstanding from time to time under the Credit Agreement.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 or Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
"STOCKHOLDERS' EQUITY" means, with respect to any Person as of any date, the
stockholders' equity of such Person determined in accordance with GAAP as of the
date of the most recent available internal financial statements of such Person,
and calculated on a pro forma basis to give effect to any acquisition or
disposition by such person consummated or to be consummated since the date of
such financial statements and on or prior to the date of such calculation.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of Sun or a Guarantor that is
subordinated in right of payment to the Notes or such Subsidiary's Guarantee of
the Notes, as applicable.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other
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Subsidiaries of such Person (or a combination thereof) and (ii) any partnership
(a) the sole general partner or the managing general partner of which is such
Person or a Subsidiary of such Person or (b) the only general partners of which
are such Person or of one or more Subsidiaries of such Person (or any
combination thereof).
"SUN SYSTEMS, INC." means Sun Systems, Inc., a Delaware corporation, in
which Sun expects to have the right to acquire a majority of the outstanding
Equity Interests.
"U.K. CREDIT AGREEMENTS" means (i) that certain Facility Agreement, dated as
of August 30, 1996, between Ashbourne plc, Ashbourne Homes (Developments)
Limited, Ashbourne Homes plc, Larstrike Limited, Sedbury Park Limited
(collectively, the "Ashbourne Group"), The Governor and Company of the Bank of
Scotland, and the other banks and financial institutions that are parties
thereto, providing for L25,000,000 in aggregate principal amount of revolving
credit; (ii) that certain Facility Agreement, dated as of August 30, 1996,
between the Ashbourne Group, Midland Bank plc, and the other banks and financial
institutions that are parties thereto, providing for L25,000,000 in aggregate
principal amount of revolving credit and (iii) that certain Credit Facility
Agreement with Lloyds Bank plc in the aggregate principal amount of up to L14.0
million, including in (i), (ii) and (iii) above, any related notes, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, increased, modified, extended, renewed, refunded, replaced
or refinanced, in whole or in part, from time to time.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity, or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
EXCHANGE OF OLD NOTES FOR NEW NOTES
The following summary describes the principal U.S. federal income tax
consequences to Noteholders of the exchange of the Old Notes for New Notes. This
summary is intended to address the beneficial owners of Notes that are citizens
or residents of the United States, corporations, partnerships or other entities
created or organized in or under the laws of the United States or any State, or
estates or trusts the income of which is subject to U.S. federal income taxation
regardless of its source that will hold the New Notes as capital assets.
The exchange of Old Notes for New Notes (the "Exchange") pursuant to the
Exchange Offer will not be a taxable event for U.S. federal income tax purposes.
As a result, a holder of an Old Note whose Old Note is accepted in an Exchange
Offer will not recognize gain on the Exchange. A tendering holder's tax basis in
the New Notes will be the same as such holder's tax basis in its Old Notes. A
tendering holder's holding period for the New Notes received pursuant to the
Exchange Offer will include its holding period for the Old Notes surrendered
therefor.
ALL HOLDERS OF OLD NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND OF THE OWNERSHIP AND DISPOSITION OF NEW
NOTES RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on the close of business 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until such date, all
broker-dealers effecting transactions in the New Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Starting on the Expiration Date, the Company will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus to
any broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed to pay all expenses incident to the Exchange Offer (including
the expenses of one counsel for the Holders of the Notes) other than commissions
or concessions of any brokers or dealers and will indemnify the Holders of the
New Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters as to the validity of the New Notes and certain United
States Federal income taxation matters will be passed upon by Shearman &
Sterling, San Francisco, California.
EXPERTS
The audited consolidated financial statements and schedules of Sun
Healthcare Group, Inc. and subsidiaries incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE UNDER THE RELIED UPON AS HAVING
BEEN AS AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS
NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR THE ACCOMPANYING
LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information.......................... 7
Incorporation of Certain Documents by
Reference..................................... 7
Prospectus Summary............................. 9
Risk Factors................................... 16
Use of Proceeds................................ 35
Ratio of Earnings to Fixed Charges............. 36
Selected Consolidated Financial Data........... 37
The Exchange Offer............................. 39
Description of New Notes....................... 47
Certain U.S. Federal Income Tax Consequences... 71
Plan of Distribution........................... 72
Legal Matters.................................. 72
Experts........................................ 72
</TABLE>
[SUN HEALTHCARE LOGO]
[SUN HEALTHCARE GROUP INC.]
OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED
NOTES DUE 2007
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED
FOR ANY AND ALL OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED
NOTES DUE 2007
---------------------
PROSPECTUS
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JUNE 30, 1998
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