SUN HEALTHCARE GROUP INC
8-K, 1999-10-27
SKILLED NURSING CARE FACILITIES
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 8-K

                                 CURRENT REPORT
     PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported)              October 14, 1999
- ------------------------------------------------------------------------------


                           SUN HEALTHCARE GROUP, INC.
- ------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


         DELAWARE                   1-12040                    85-0410612
- ------------------------------------------------------------------------------
(State or other jurisdiction      (Commission               (IRS Employer
     of incorporation)             File Number)            Identification No.)


101 SUN AVENUE, N.E., ALBUQUERQUE, NEW MEXICO                      87109
- ------------------------------------------------------------------------------
               (Address of principal executive offices)          (Zip Code)


Registrant's telephone number, including area code             (505) 821-3355
- ------------------------------------------------------------------------------


                                 NOT APPLICABLE
- ------------------------------------------------------------------------------
         (Former name or former address, if changed since last report.)




<PAGE>


Item 3.   Bankruptcy or Receivership

     On October 14, 1999,  Sun Healthcare  Group,  Inc. (the "Company" or "Sun")
announced  that  it and  its  U.S.  operating  subsidiaries  (collectively,  the
"Debtors")  filed  voluntary  petitions for  protection  under chapter 11 of the
United  States  Bankruptcy  Code (the  "Bankruptcy  Code) with the United States
Bankruptcy  Court for the District of Delaware (the "Court") (case nos.  99-3657
through 99-3841  inclusive).  The Debtors' cases have been  consolidated for the
purpose of joint administration and have been assigned to Judge Mary F. Walrath.
At  hearings  held on  October  14,  1999,  the Court  entered  first day orders
granting the Debtor's  authority to pay pre-petition and post-petition  employee
wages,  salaries,  benefits  and other  employee  obligations.  The  Court  also
approved  orders granting  authority,  among other things,  to pay  pre-petition
claims of utilities and patient obligations.

     On  October  22,  1999,  the Court also  granted  interim  approval  of the
Company's debtor in possession financing (the "DIP Financing") with a bank group
led by The  CIT  Group/Business  Credit,  Inc.  The  final  hearing  on the  DIP
Financing  is  scheduled  for  November  12,  1999.  The DIP  Financing  and the
Company's cash flows from operations will be used to fund the Company's  ongoing
operations during the restructuring.

     On October 26, 1999, the Company announced that it had reached an agreement
in  principal  with   representatives   of  its  bank  lenders  and  holders  of
approximately  two-thirds of its outstanding  senior  subordinated  bonds on the
terms of an  overall  restructuring  of the  Company's  capital  structure.  The
specific  terms of the agreement in principal  are reflected in a  restructuring
term sheet,  dated  October  26,  1999,  a copy of which is  attached  hereto as
Exhibit  99.3.  Implementation  of the  agreement  in  principal  is  subject to
appropriate  documentation,  including a chapter 11 plan of reorganization,  and
approval by the bankruptcy court, among other things. If approved, the agreement
in principal  would provide Sun's bank lenders with cash,  new senior  long-term
debt,  new  preferred  stock and new common  stock.  Sun's  senior  subordinated
bondholders  would  receive new common stock.  The agreement in principal  would
also provide new long-term  debt,  new  preferred  stock and new common stock to
general  unsecured  creditors,  and  reinstate  a  significant  portion of Sun's
secured debt. The agreement in principal  provides no recoveries for the holders
of Sun's outstanding  convertible  subordinated  debt,  convertible trust issued
preferred securities,  or common stock. The Company intends to file another Form
8-K shortly setting forth certain  projections used by the parties in connection
with negotiations on the agreement in principal.

     The Company's  press releases dated October 14 and 26, 1999 are attached as
Exhibits 99.1  and 99.2 and are incorporated by reference herein and made a part
hereof.


Item 7.   Financial Statements, Pro Forma Financial Information and Exhibits

(c)       Exhibits.

99.1      Press Release dated October 14, 1999.

99.2      Press Release dated October 26, 1999.



                                       2
<PAGE>



99.3      Term  Sheet for Plan of  Reorganization  Prepared  by Senior  Lenders'
          Working Group dated October 26, 1999.




                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                 SUN HEALTHCARE GROUP, INC.


                                 /s/ William C. Warrick
                                 -------------------------------
                                 Name:   William C. Warrick
                                 Title:  Vice President-Corporate Controller

Dated:  October 26, 1999


                                       3
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>

EXHIBIT NO.    IDENTITY OF EXHIBIT
<S>            <C>
99.1           Press Release issued by the Registrant on October 14, 1999.

99.2           Press Release issued by the Registrant on October 26, 1999.

99.3           Term Sheet for Plan of Reorganization Prepared by Senior Lenders'
               Working Group dated October 26, 1999.
</TABLE>

                                       4
<PAGE>



                                                                    Exhibit 99.1

                           SUN HEALTHCARE GROUP, INC.

                                                  Contact:  505-858-4507 (media)
                                                        505-856-2341 (investors)

     SUN HEALTHCARE GROUP FILES VOLUNTARY PETITION FOR BANKRUPTCY PROTECTION

                     COMPANY TO CONTINUE NORMAL OPERATIONS;
          RECEIVES COMMITMENT FOR UP TO $200 Million in DIP Financing

     Albuquerque,   N.M.,   Oct.  14,  1999  --  Sun  Healthcare   Group,   Inc.
(SHGE:OTC-BB)  announced today that Sun and its U.S. operating subsidiaries have
filed  voluntary  petitions with the U.S.  Bankruptcy  Court for the District of
Delaware to reorganize under chapter 11 of the U.S.  Bankruptcy Code in order to
restructure  the company's debt  obligations.  The company elected to seek court
protection in order to  facilitate  its efforts to  restructure  its capital and
lease obligations.

     To ensure that the company has the short-term  working capital necessary to
operate its  business,  it has obtained a  commitment  for up to $200 million in
debtor-in-possession   ("DIP")   financing   with  a   group   led  by  The  CIT
Group/Business  Credit,  Inc.  and  Heller  Healthcare  Finance,  Inc.  Sun  has
requested  the Court's  permission  to access the DIP  financing  to fund normal
business operations and other cash needs during the bankruptcy proceeding.

     "Deep cuts in Medicare  reimbursement  exceeded all industry  expectations,
and  severely  impacted  the  company's  ability to service its current  capital
structure.  This  situation,  coupled with a  significant  decline in the market
demand  for  ancillary  services,  resulted  in the  need  for us to  lower  our
operating  costs and  significantly  reduce our  indebtedness,"  said  Andrew L.
Turner, Sun's chairman and chief executive officer.

     Mark Wimer,  president,  added,  "Most  important,  court  protection under
chapter 11 ensures that we can continue to serve our patients and our customers'
patients while we reorganize."

     Because of significant debt repayment obligations,  the company has been in
negotiations  with its banks and senior  bondholders in anticipation of the need
to  restructure  its  obligations.  The  company  believes  that it is  close to
reaching  an  agreement  with the banks and bond  holders on the key terms for a
financial restructuring. The Court protection afforded by chapter 11 will enable
the company to develop a plan of  reorganization  with the goal of emerging from
bankruptcy in a stronger financial position.  The company is also in discussions
with  some of the  owners  of the  nursing  homes it  operates  in an  effort to
renegotiate certain leases.


<PAGE>


     Headquartered  in  Albuquerque,  N.M.,  Sun  Healthcare  Group,  Inc.  is a
diversified   international  long-term  care  provider.  Sun  companies  operate
long-term  and  post-acute  care  facilities  in the United  States,  the United
Kingdom,  Spain,  Germany and Australia.  Sun  subsidiaries  provide therapy and
pharmacy services,  fulfill the medical supply needs of nursing homes, and offer
a comprehensive array of ancillary services for the healthcare industry.

     Certain  statements  set  forth  above,  including,  but  not  limited  to,
statements containing the words "anticipates," "believes," "expects," "intends,"
"will," "may" and similar words constitute forward-looking statements within the
meaning  of  the  Private  Securities   Litigation  Reform  Act  of  1995.  Such
forward-looking  statements are based on the company's current  expectations and
include known and unknown risks,  uncertainties and other factors, many of which
the Company is unable to predict or control, that may cause the Company's actual
results  or  performance  to  differ  materially  from  any  future  results  or
performance  expressed  or implied  by such  forward-looking  statements.  These
statements involve risks,  uncertainties and other factors detailed from time to
time in the Company's filings with the Securities and Exchange Commission.  Such
factors may include, without limitation, the delays or the inability to complete
the Company's plan of  reorganization;  the availability and terms of capital in
light of recent  losses,  cash flow  shortfalls  and the  Company's  chapter  11
bankruptcy  filing;  adverse  actions  which may be taken by  creditors  and the
outcome of various  bankruptcy  proceedings;  the  Company's  ability to attract
patients  given its current  financial  position;  and the effects of healthcare
reform and legislation on the Company's  business  strategy and operations.  The
Company  cautions  investors  that any  forward-looking  statements  made by the
Company are not  guarantees  of future  performance.  The Company  disclaims any
obligation to update any such factors or to announce publicly the results of any
revisions to any of the  forward-looking  statements  included herein to reflect
future events or developments.

                                       2
<PAGE>




                                                                    Exhibit 99.2

                                        CONTACT:  Marjorie Goldstein (investors)
                                                         Phyllis Goodman (media)
                                                                    505-821-3355

              SUN HEALTHCARE GROUP REACHES AGREEMENT IN PRINCIPAL
                     WITH BANKS AND SENIOR BONDHOLDERS FOR
                         RESTRUCTURING OF COMPANY DEBT

     Albuquerque,   N.M.,   Oct.  26,  1999  --  Sun  Healthcare   Group,   Inc.
(SHGE:OTC-BB) announced today that it has reached an agreement in principal with
representatives  of its bank lenders and holders of approximately  two-thirds of
its  outstanding   senior   subordinated  bonds  on  the  terms  of  an  overall
restructuring  of  Sun's  capital  structure.  The  bank and  senior  bond  debt
represents more than $1.3 billion of Sun's capital structure.

     Implementation  of the  agreement in  principal  is subject to  appropriate
documentation,  including a chapter 11 plan of  reorganization,  and approval by
the  bankruptcy  court,  among other  things.  If  approved,  the  agreement  in
principal would provide Sun's bank lenders with cash, new senior long-term debt,
new preferred stock and new common stock. Sun's senior subordinated  bondholders
would receive new common stock.  It would also provide new long-term  debt,  new
preferred  stock  and new  common  stock to  general  unsecured  creditors,  and
reinstate  a  significant  portion  of Sun's  secured  debt.  The  agreement  in
principal   provides  no  recoveries  for  the  holders  of  Sun's   outstanding
convertible subordinated debt, convertible trust issued preferred securities, or
common stock.

     The terms of the  agreement in principal  will be disclosed  shortly by the
company in a filing with the Securities and Exchange Commission.

     Headquartered  in  Albuquerque,  N.M.,  Sun  Healthcare  Group,  Inc.  is a
diversified   international  long-term  care  provider.  Sun  companies  operate
long-term  and  postacute  care  facilities  in the  United  States,  the United
Kingdom,  Spain,  Germany and Australia.  Sun  subsidiaries  provide therapy and
pharmacy services,  fulfill the medical supply needs of nursing homes, and offer
a comprehensive array of ancillary services for the healthcare industry.

     Certain  statements  set  forth  above,  including,  but  not  limited  to,
statements containing the words "anticipates," "believes," "expects," "intends,"
"will," "may" and similar words constitute forward-looking statements within the
meaning  of  the  Private  Securities   Litigation  Reform  Act  of  1995.  Such
forward-looking  statements are based on management's  current  expectations and
include known and unknown risks,  uncertainties and other factors, many of which
the Company is unable to predict or control, that may cause the Company's actual
results  or  performance  to  differ  materially  from  any  future  results  or
performance  expressed  or implied  by such  forward-looking  statements.  These
statements involve risks,  uncertainties and other factors detailed from time to
time in the Company's filings with the Securities and Exchange Commission.  Such



<PAGE>


factors may include, without limitation, the delays or the inability to complete
the Company's plan of  reorganization;  the availability and terms of capital in
light of recent  losses,  cash flow  shortfalls  and the  Company's  Chapter  11
bankruptcy  filing;  adverse  actions  which may be taken by  creditors  and the
outcome of various  bankruptcy  proceedings;  the  Company's  ability to attract
patients  given its current  financial  position;  and the effects of healthcare
reform and legislation on the Company's  business  strategy and operations.  The
Company  cautions  investors  that any  forward-looking  statements  made by the
Company are not  guarantees  of future  performance.  The Company  disclaims any
obligation to update any such factors or to announce publicly the results of any
revisions to any of the  forward-looking  statements  included herein to reflect
future events or developments.



                                       2
<PAGE>



                                                                   Exhibit  99.3

                                 SUN HEALTHCARE
                     TERM SHEET FOR PLAN OF REORGANIZATION
                                October 26, 1999


     This term sheet is prepared for the purpose of facilitating discussion of a
possible   restructuring  of  Sun  Healthcare   Group,  Inc.  and  its  domestic
subsidiaries.  The term  sheet  sets  forth  certain  major  terms of a possible
restructuring, but additional terms and conditions, material to the transaction,
are not set forth  herein.  Nothing  contained  herein shall in part or in whole
constitute an offer  susceptible of acceptance of a legally binding  obligation.
This term sheet is being provided in furtherance of settlement discussions,  and
is entitled to the protection from use or disclosure afforded by Federal Rule of
Evidence  408  and  any  similar  applicable  rule  of  evidence.  The  plan  of
reorganization  will contain the  following  classes of claims and treatment for
creditors  in  those  classes.   Except  as  expressly  set  forth  herein,  all
distributions  will be made on the effective date of the plan of  reorganization
(the "Plan").

     1. DIP LOAN/PRIORITY EXIT REVOLVER.

          a.   AMOUNT: approximately $56.1 million.

          b.   TREATMENT:  DIP  loan  rolled  into or taken  out by a  revolving
               credit facility with $200 million commitment.  Amount outstanding
               on  emergence  based on the  amount of the DIP loan drawn at that
               time.  Interest to be  LIBOR-based  to be  determined  at time of
               emergence  (assumed  LIBOR  +  3.00%).  Term  to be an  evergreen
               revolver.  Security  interest  in  inventories  and  receivables.
               Outstanding  letters  of  credit  under the  Pre-Petition  Credit
               Agreement (the "Credit Agreement") to be reinstated or refinanced
               under DIP Loan/Priority Exit Revolver.
<PAGE>

     2. REINSTATED SECURED DEBT.

          a.   AMOUNT: $115.8 million.(1)

          b.   TREATMENT: Reinstated.

     3. TRADE  CREDITORS THAT COMMIT TO PROVIDE  POST-CONFIRMATION  TRADE CREDIT
     AND LANDLORDS  THAT AGREE TO RENT  CONCESSION ON REMAINING  FACILITIES  AND
     ELECT FOR CLASS 3 TREATMENT.

          a.   AMOUNT: Estimated at $40 million.

          b.   TREATMENT:  Paid in cash the lesser of: (i) 25% of allowed  claim
               and (ii) pro-rata  share of $10 million.  In order to be eligible
               for  such  treatment,  a  creditor  must  be  either  (i) a trade
               creditor  that  commits  contractually  to provide  normal  trade
               credit  for at  least  one  year to  reorganized  Sun,  or (ii) a
               landlord  that leases  facilities  retained  by Sun and  provides
               satisfactory  rent  concessions  with respect to those  remaining
               facilities  (the  25%  cash  would be paid  with  respect  to the
               landlord's  rejection  claims  for  other  facilities  that  were
               closed).  Class 3 treatment  is optional  for the creditor -- the
               creditor can elect Class 4 treatment instead.

     4. GENERAL UNSECURED CREDITORS (EXCLUDING THE SENIOR LENDERS,  SUBORDINATED
     NOTEHOLDERS AND CLASS 3 CREDITORS).

          a.   AMOUNT: Estimated at $85 million.(2)

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

     (1) Assumed to be $129.4 million LESS claims that in fact are unsecured and
LESS  Bombardier  airplane loan of $2.4 million  (airplane to be  surrendered to
Bombardier). Amount of reinstated secured debt subject to further reduction with
respect to additional secured claims that should be written down to the value of
the collateral or the collateral returned to the creditor.

     (2)  Assumed  to  be  $100  million   PLUS  $12  million  of  secured  debt
reclassified  as unsecured debt (see note 1 above),  LESS $40 million assumed to
qualify  for  Class  3  treatment,  rounded  up to  $85  million  to  deal  with
contingencies/additional unsecured claims.



<PAGE>



          b.   TREATMENT: Each Class 4 creditor receives a pro-rata share of the
               following aggregate distributions to Class 4: (i) $7.1 million of
               Term A Senior  Debt,  (ii)$10.5  million  of Term B Senior  Debt,
               (iii) 4.2  million  shares of Class A Preferred  Stock,  and (iv)
               470,000 shares of common stock.(3)

     5. SENIOR LENDERS  (EXISTING  PRE-PRETITION  CREDIT  AGREEMENT (THE "CREDIT
     AGREEMENT").

          a.   AMOUNT:  Approximately  $880 million.(4)  Outstanding  letters of
               credit to be reinstated or refinanced under the DIP Loan/Priority
               Exit Revolver to the maximum extent  possible.  The Company shall
               use its  reasonable  best  efforts to cause  beneficiaries  under
               letters of credit not to draw letters of credit  issued under the
               Credit  Agreement  and to accept  replacement  letters  of credit
               issued,  in the first  instance,  under the DIP Loan and,  on the
               effective  date of the  Plan,  issued  under  the  Priority  Exit
               Revolver.  If the Plan  described  in this  Term  Sheet  does not
               become  effective,  any  reduction in credit  exposure  (the "L/C
               Exposure  Reduction")  of the  Senior  Lenders  under the  Credit
               Agreement  by  reason of  outstanding  letters  of  credit  being
               replaced by letters of credit  issued under the DIP Loan shall be
               subject to the reservation of rights  described in paragraph 5(b)
               below. It is assumed that approximately $20 million of letters of
               credit  (principally  related to rejected  leases)  will be drawn
               during the bankruptcy case and,  accordingly,  will not be rolled
               into the DIP  Loan/Priority  Exit Revolver.  To the extent actual
               draws of letters of credit are greater or less than $20  million,
               the initial accreted amount of Series A Preferred Stock issued to
               the Senior Lenders will be increased or decreased.

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

     (3) Any creditor in Class 4 will be entitled to its pro-rata share of these
distributions,  which are based on estimates of the relative  amounts in classes
4-8 without  adjustment  for the fact that the Senior  Lenders also  purportedly
have the benefit of a pledge of approximately  $1.4 billion of intercompany debt
and are offering a compromise to Class 6. To the extent actual claims in Class 4
are greater or less than $85 million,  creditors in Class 4 will either  receive
an enhanced or diminished recovery.



                                       2
<PAGE>


     b.   TREATMENT:  Each  Senior  Lender  receives  its pro rata  share of the
          following aggregate  distributions to Class 5: (i) $71 million in cash
          (consisting of $31 million paid on the Plan effective date and the $40
          million Adequate  Protection  Payment paid within 1 week of filing the
          bankruptcy  case pursuant to the Cash Collateral  Stipulation  between
          the Senior  Lenders and the Company  (subject  to the  reservation  of
          rights set forth in that  certain  Stipulation  Regarding  Use of Cash
          Collateral and Adequate Protection dated as of October 20, 1999), (ii)
          $142.9  million of Term A Senior Debt,  (iii) $209.5 million of Term B
          Senior Debt, (iv) 85.8 million shares of Class A Preferred  Stock, and
          (v) 2.23 million shares of common stock.

     c.   ADJUSTMENT FOR ADDITIONAL CASH  COLLATERAL.  The foregoing is based on
          the  simplifying  assumption  that  cash  collateral  is  exactly  $40
          million.  If actual cash  collateral is greater than $40 million,  the
          Senior Lenders will receive  additional  cash on the effective date of
          the Plan equal to the difference  between  actual cash  collateral and
          the $40 million paid on the  petition  date.  The Senior  Lenders' pro
          rata share of Term Debt, Class A Preferred Stock and Common Stock will
          be recalibrated accordingly.

     6. SENIOR SUBORDINATED NOTES.

          a.   AMOUNT: $432.1 million.

          b.   TREATMENT: Each Note holder receives its pro rata share of 7.3
               million shares of common stock.

     7. CONVERTIBLE SUBORDINATED DEBT.

          a.   AMOUNT: $87.9 million.

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

     (4)  Approximately  $820  million  principal  PLUS $39  million of interest
accrued through October 1, 1999 PLUS $20 million of letters of credit related to
rejected leases.


                                       3
<PAGE>


          b.   TREATMENT:  No distribution  (all deemed turned over to senior
               creditors pursuant to subordination provisions).

     8. TIPES.

          a.   AMOUNT: $360 million.

          b.   TREATMENT:  No  distribution  (all  distributions  deemed turned
               over to senior creditors pursuant to subordination provision).

     9. EXISTING  EQUITY PLUS  SECURITIES  LAW CLAIMS  SUBORDINATED  PURSUANT TO
     BANKRUPTCY CODE SECTION 510(b).

          a.   AMOUNT: N.A.

          b.   TREATMENT: No distribution.

     MANAGEMENT: The Plan shall reserve an appropriate amount of the Reorganized
Company's Series A Preferred Stock for option grants to management.  Issuance of
such options shall be  determined  by the Board of Directors of the  Reorganized
Company.  All stock  distributions  listed  above are  subject to  dilution  for
management stock/options.

     MEDICARE/MEDICAID  OVERCHARGE  CLAIMS.  Implementation of the Plan shall be
subject to, among other things,  a mutually  acceptable  agreement  with federal
government and relevant  state  governments  concerning any possible  overcharge
claims related to all pre-petition periods.

     REGISTRATION   RIGHTS.   Demand  and  piggyback   registration  rights  for
significant  holders  of Term A Senior  Debt,  Term B Senior  Debt,  common  and
preferred stock.

     LISTING.  Reorganized  Company  shall  use its  best  efforts  to list  and
maintain  the  listing of the Common  Stock and Class A  Preferred  Stock on the
NASDAQ National Market or another acceptable national securities exchange.

     FEES.  The  reasonable  fees and  expenses of legal  counsel and  financial
advisors to the Senior  Lenders and  Unofficial  Committee  shall be paid by the
Debtors' estates on the effective date of the Plan.


                                       4
<PAGE>


                SUMMARY OF CAPITAL STRUCTURE FOR REORGANIZED SUN


I.   POST-CONFIRMATION PRIORITY REVOLVING CREDIT FACILITY.

Issuer:                       Sun Healthcare Group.

Type of facility:             Revolving Credit Facility.

Commitment:                   $200 million.

Outstanding:                  Assumed $56.1 million on the confirmation date.

Interest:                     LIBOR-based to be determined at time of
                              confirmation, assumed to be LIBOR + 3.00%.

Term:                         Evergreen revolver.

Security:                     Inventory and receivables.

II.  TERM A SENIOR LOAN.

Issuer:                       Sun Healthcare Group.

Type of facilities:           Term Loan/Senior Notes.

Principal Amount              $150 Million.

Interest:                     LIBOR plus 3%.

Term:                         7 years.

Amortization:                 Year 1:        $3.75 million (2.5%);
                              Year 2:        $7.5 million (5.0%);
                              Year 3:        $11.25 million (7.5%)
                              Years 4-6:     $22.5 million each year (15.0%);
                              Year 7:        $60.0 million (40.0%)

Excess Cash Flow Payments:    75% of excess cash flow (with the definition of
                              excess  cash  flow  to be  set  forth  in
                              definitive  documentation  reasonably acceptable
                              to the parties) to be applied first to year 1
                              scheduled  amortization and then  pro-rata to
                              remaining  scheduled  amortization  on Term A
                              Senior Loan, until satisfied, and then to Term B
                              Loan.

                                       5
<PAGE>


Asset Sales:                  75% of proceeds to be applied first to year 1
                              scheduled amortization and the pro-rata to
                              remaining scheduled amortizations on Term A Senior
                              Loan until satisfied, and then to Term B Loan.

Optional Prepayments:         May be applied as directed by Company.

Security:                     Stock of subsidiaries.

III. TERM B SENIOR LOAN.

Issuer:                       Sun Healthcare Group.

Type of facility:             Term Loan/Senior Notes.

Principal Amount              $220 Million.

Interest:                     LIBOR plus 3.5%.

Term:                         7 years.

Amortization:                 Years 1-6:        $2.2 million each year (1.0%)
                              Year 7:           $206.8 million (94.0%)

Excess Cash Flow Payments:    After satisfaction of Term A, 75% of excess cash
                              flow (with the definition of excess cash flow to
                              be set forth in definitive documentation
                              reasonably acceptable to the parties) applied to
                              year 7 amortization.

Asset Sales:                  After satisfaction of Term A, 75% of proceeds
                              applied to year 7 amortization.

Optional Prepayments:         May be applied as directed by the Company.

Security:                     Stock of subsidiaries.

IV.  CLASS A PREFERRED STOCK.

Issuer:                       Sun Healthcare Group.

Number of Shares:             90 million

Liquidation Preference:       Equal to accreted value.

Accreted Amount at Issuance:  $435 million.

Accretion Rate:               14.5% per annum, accreting quarterly.


                                       6
<PAGE>



Conversion:                   Commencing on October 1, 2003, convertible into
                              common stock at 1:1 - i.e., 90% of common stock,
                              prior to dilution for management stock/options.
                              Not convertible prior to October 1, 2003.

Optional Redemption           The Company at its option may redeem the Class A
                              Preferred Stock in whole or in part in cash at any
                              time at its accreted value.

Mandatory Redemption:         Mandatory redemption: (i) 7 years from the
                              effective date of the Plan, or (ii)if EBITDA
                              equals or exceeds $250 million for any fiscal
                              year, in either case at a redemption price equal
                              to accreted value.

Voting:                       Each share of Class A Preferred Stock has voting
                              rights equal to a share of common stock on matters
                              to be determined by shareholders, except the
                              preferred stock as a class will have the right to
                              elect 5 of 9 directors.

Distribution:                 Senior Lenders:  85.8 million shares (95.3% of all
                              Class A Preferred).

                              Class 4 General unsecureds: 4.2 million shares
                              (4.7% of all Class A Preferred)

V.   COMMON STOCK.

Issuer:                       Sun Healthcare Group.

Issue:                        Common stock.

Number of shares:             10 million shares before conversion of Class A
                              Preferred Stock.

                              100 million shares after conversion of Class A
                              Preferred Stock.

Distribution:                 Senior Lenders:  2.23 million shares (22.3% prior
                              to dilution)

                              Class 4 General Unsecureds: 470,000 shares (4.7%
                              prior to dilution)

                              Class 6 Senior Subordinated notes: 7.3 million
                              shares (72.5% prior to dilution)

Board Seats:                  Common Stock as a class will have the right to
                              elect 3 of 9 directors until preferred stock is
                              redeemed or converted.



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VI.  CORPORATE GOVERNANCE.

Board Size:                   9 Directors.

Initial Board:                Initial members of the Board of Directors will be
                              selected as follows:  i) 5 selected by Senior
                              Lenders, ii) 3 selected by the Senior Subordinated
                              Notes, and iii) the CEO for the Reorganized
                              Company.

Class voting for Directors:   Until the Series A Preferred Stock is redeemed or
                              converted, the Series A Preferred Stock shall be
                              entitled to select 5 Directors and the Common
                              Stock shall be entitled to select 3 Directors.

Special Vote for Significant  During the first 12 months after the effective
Events:                       date of the Plan, the occurrence of a "Significant
                              Event" shall require the affirmative vote of (i)
                              at least 6 members of the Board including at least
                              two of the Directors elected by holders of Common
                              Stock, (ii) more than 50% of the outstanding
                              shares of Common Stock voting as a class, and
                              (iii) a fairness opinion from a mutually
                              acceptable, nationally recognized investment
                              banking firm retained by the Reorganized Company
                              that the transaction is fair from a financial
                              point of view to the Reorganized Company and its
                              shareholders, taking into consideration the
                              interests of all shareholders.  After the 12
                              month anniversary of the effective date of the
                              Plan through October 1, 2003, the occurrence of a
                              "Significant Event" shall require (i) the
                              affirmative vote of at least 6 members of the
                              Board including at least two of the Directors
                              elected by holders of Common Stock, (ii)a fairness
                              opinion from a mutually acceptable, nationally
                              recognized investment banking firm retained by the
                              Reorganized Company that the transaction is fair
                              from a financial point of view to the Reorganized
                              Company and its shareholders, taking into
                              consideration the interests of all shareholders,
                              and (iii) either (at the option of a majority of
                              the Board) (x) 60 days advance written notice to
                              the Common Stock holders, it being understood and
                              agreed that during such period of time, no further
                              steps to implement such Significant Event may be
                              taken, or (y) the affirmative vote of more than
                              50% of the outstanding shares of Common Stock
                              voting as a class.  "Significant Events" are
                              defined as:  (i) any merger, consolidation, or
                              combination of the Reorganized Company in which it
                              is not the surviving entity (subject to clause v
                              below), (ii) any sale or other disposition of all
                              or substantially all of the Reorganized Company's
                              assets; (iii) any voluntary liquidation,
                              dissolution or winding-up of the Reorganized
                              Company,(iv) any amendment or modification to the
                              Certificate of Incorporation that affects the
                              rights and privileges of common or preferred
                              stock, and (v) the issuance of shares of Common
                              Stock (or participating preferred stock or other
                              similar security to be mutually agreed) in a
                              single transaction or series of transactions
                              (including a merger in which the Reorganized
                              Company is the surviving entity) other than (x)
                              the shares of Common Stock issued pursuant to the

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                              Plan, (y) the shares of Common Stock reserved for
                              issuance upon conversion of the Series A Preferred
                              Stock issued pursuant to the Plan or reserved for
                              issuance upon conversion of the Series A Preferred
                              Stock subject to management options (which shares
                              of Common Stock may only be used only to satisfy
                              the conversion of such Series A Preferred Stock),
                              and (z) 20% of the issued and outstanding shares
                              of Common Stock.


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