UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-12040
SUN HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 85-0410612
(State of Incorporation) (I.R.S. Employer Identification No.)
101 SUN AVENUE, NE
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Address and telephone number of Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes __ No X
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |_| N/A |X| No plan of reorganization has been
filed with the bankruptcy court as of this date.
As of August 2, 2000, there were 65,230,853 shares of the Registrant's $.01
par value Common Stock outstanding, net of treasury shares.
<PAGE>
SUN HEALTHCARE GROUP, INC.
(DEBTOR-IN-POSSESSION)
INDEX
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Numbers
------------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.............................................. 2-3
Consolidated Statements of Losses
For the three months ended March 31, 2000 and 1999................................ 4
Consolidated Statements of Comprehensive Losses
For the three months ended March 31, 2000 and 1999................................ 5
Consolidated Statements of Cash Flows
For the three months ended March 31, 2000 and 1999................................ 6-7
Notes to the Consolidated Financial Statements.................................... 8-36
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 37-53
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 54
Item 3. Defaults Upon Senior Securities................................................... 54
Item 6. Exhibits and Reports on Form 8-K.................................................. 54
Signatures........................................................................................... 55
</TABLE>
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 27,737 $ 25,047
Accounts receivable, net of allowance for doubtful accounts of $156,271
at March 31, 2000 and $151,841 at December 31, 1999................. 217,027 254,464
Other receivables, net.................................................. 996 15,916
Inventory, net.......................................................... 32,403 42,983
Prepaids and other assets............................................... 22,534 15,087
----------------- ----------------
Total current assets................................................ 300,697 353,497
Property and equipment, net............................................. 267,909 446,176
Goodwill, net........................................................... 401,175 475,567
Notes receivable, net of allowance of $5,521 at March 31, 2000
and $6,556 at December 31, 1999..................................... 16,012 22,698
Assets held for sale.................................................... 195,156 70,609
Other assets, net....................................................... 52,136 69,941
----------------- ----------------
Total assets........................................................ $ 1,233,085 $ 1,438,488
================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
(Continued on next page.)
2
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.................................................... $ 63,408 $ 44,776
Current portion of obligations under capital leases.................................. 328 433
Accounts payable..................................................................... 47,619 53,787
Accrued compensation and benefits.................................................... 95,044 84,117
Accrued interest..................................................................... 4,466 2,972
Accrued self-insurance obligations................................................... 53,146 59,075
Other accrued liabilities............................................................ 126,339 116,489
Income tax payables.................................................................. 13,783 9,130
----------------- -----------------
Total current liabilities............................................................ 404,133 370,779
Long-term debt, net of current portion............................................... 56,239 100,765
Obligations under capital leases, net of current portion............................. 57,125 65,675
Other long-term liabilities.......................................................... 34,707 36,794
Liabilities subject to compromise (see Note 2)....................................... 1,541,108 1,558,518
----------------- -----------------
Total liabilities.................................................................. 2,093,312 2,132,531
Commitments and contingencies........................................................
Minority interest.................................................................... 6,044 5,979
----------------- -----------------
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely 7.0% convertible junior subordinated debentures of
the Company....................................................................... 322,978 344,119
----------------- -----------------
Stockholders' equity (deficit):
Preferred stock of $.01 par value, authorized 5,000,000 shares, none issued.......... - -
Common stock of $.01 par value, authorized 155,000,000 shares, 63,576,093
and 63,937,302 shares issued and outstanding as of March 31, 2000 and December 31, 636 639
1999, respectively................................................................
Additional paid-in capital........................................................... 798,399 777,164
Accumulated deficit.................................................................. (1,951,168) (1,785,507)
Accumulated other comprehensive loss ................................................ (9,561) (5,017)
----------------- -----------------
(1,161,694) (1,012,721)
Less:
Unearned compensation............................................................ - (3,966)
Common stock held in treasury, at cost, 2,212,983 shares as of March 31, 2000
and December 31, 1999........................................................ (27,376) (27,376)
Grantor stock trust, at market, 1,915,935 shares as of March 31, 2000 and
December 31, 1999............................................................ (179) (78)
----------------- -----------------
Total stockholders' deficit ......................................................... (1,189,249) (1,044,141)
----------------- -----------------
Total liabilities and stockholders' deficit.......................................... $ 1,233,085 $ 1,438,488
================= =================
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Total net revenues............................................................... $ 637,992 $ 673,032
------------------- ------------------
Costs and expenses:
Operating costs................................................................ 581,434 624,570
Corporate general and administrative........................................... 42,795 42,017
Depreciation and amortization.................................................. 14,416 21,448
Provision for losses on accounts receivable.................................... 9,033 13,818
Interest, net (contractual interest expense of $51,041 for the three months
ended March 31, 2000)........................................................ 8,224 37,170
Restructuring costs............................................................ - 11,428
Loss on sale of assets, net.................................................... - 12,106
Loss on termination of interest rate swaps..................................... - 2,488
Gain on sale of assets......................................................... (8,952) -
------------------- ------------------
Total costs, expenses and gains before reorganization items.................... 646,950 765,045
Dividends on convertible preferred securities of subsidiary...................... - 6,516
------------------- ------------------
Losses before reorganization costs, income taxes and cumulative effect of change
in accounting principle....................................................... (8,958) (98,529)
Reorganization costs, net........................................................ 156,645 -
------------------- ------------------
Losses before income taxes and cumulative effect of change in accounting
principle..................................................................... (165,603) (98,529)
Income taxes..................................................................... 58 892
------------------- ------------------
Losses before cumulative effect of change in accounting principle................ (165,661) (99,421)
Cumulative effect of change in accounting principle.............................. - (13,726)
------------------- ------------------
Net losses....................................................................... $ (165,661) $ (113,147)
=================== ==================
Net losses per common and common equivalent share:
Losses before cumulative effect of change in accounting principle
Basic.......................................................................... $ (2.78) $ (1.73)
=================== ==================
Diluted........................................................................ $ (2.78) $ (1.73)
=================== ==================
Net losses:
Basic.......................................................................... $ (2.78) $ (1.96)
=================== ==================
Diluted........................................................................ $ (2.78) $ (1.96)
=================== ==================
Weighted average number of common and common equivalent shares outstanding:
Basic.......................................................................... 59,523 57,621
=================== ==================
Diluted........................................................................ 59,523 57,621
=================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net losses..................................................... $ (165,661) $ (113,147)
Foreign currency translation adjustments, net of tax........... (4,544) (5,903)
---------------------- -------------------
Comprehensive losses........................................... $ (170,205) $ (119,050)
====================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses..................................................................... $ (165,661) $ (113,147)
---------------- ---------------
Adjustments to reconcile net losses to net cash used for operating activities:
Reorganization costs, net.................................................... 156,645 -
Depreciation and amortization................................................ 14,416 21,448
Provision for losses on accounts receivable.................................. 9,033 13,818
Loss on sale of assets, net.................................................. - 12,106
Gain on sale of assets....................................................... (8,952) -
Cumulative effect of change in accounting principle.......................... - 13,726
Other, net................................................................... (482) 786
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (6,071) 70,434
Other current assets......................................................... 151 7,813
Income taxes payable......................................................... 4,653 (481)
Other current liabilities.................................................... (8,933) (41,296)
---------------- ---------------
Net cash used for operating activities before reorganization costs............... (5,201) (14,793)
---------------- ---------------
Net cash paid for reorganization costs........................................... (998) -
Net cash used for operating activities........................................... (6,199) (14,793)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net...................................................... (9,360) (39,469)
Acquisitions, net of cash acquired............................................. - (1,225)
Proceeds from sale of assets held for sale..................................... 5,690 -
Decrease (increase) in long-term notes receivable.............................. 1,510 (2,043)
Decrease (increase) in other assets............................................ (4,569) (1,980)
---------------- ---------------
Net cash used for investing activities...................................... (6,729) (44,717)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit Agreement (postpetition) ................ 22,021 -
Long-term debt borrowings...................................................... 6,478 110,405
Long-term debt repayments (prepetition)........................................ (11,785) (27,653)
Principal payments on prepetition debt authorized by Bankruptcy Court.......... (992) -
Conversion of Mediplex 6.5% Convertible Subordinated Debentures due 2003....... - (5,840)
Net proceeds from issuance of common stock..................................... - 462
Purchases of treasury stock.................................................... - (264)
Other financing activities..................................................... (6) (283)
---------------- ---------------
Net cash provided by financing activities................................... 15,716 76,827
---------------- ---------------
Effect of exchange rate on cash and cash equivalents............................. (98) 2,347
---------------- ---------------
Net increase in cash and cash equivalents........................................ 2,690 19,664
Cash and cash equivalents at beginning of year................................... 25,047 27,504
---------------- ---------------
Cash and cash equivalents at end of period....................................... $ 27,737 $ 47,168
================ ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
(Continued on next page.)
6
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest net of $15 and $439 capitalized during the
three months ended March 31, 2000 and 1999,
respectively........................................ $ 7,732 $ 39,692
================== ================
Income taxes............................................. $ (2,836) $ 1,373
================== ================
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company's acquisitions during the three months ended
March 31, 2000 and 1999 involved the following:
Fair value of assets acquired............................ $ - $ 2,275
Liabilities assumed...................................... - (1,050)
------------------ ----------------
Cash payments made, net of cash received from others..... $ - $ 1,225
================== ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) NATURE OF BUSINESS
Sun Healthcare Group, Inc., a Delaware corporation, through its direct and
indirect subsidiaries (hereinafter collectively referred to as "Sun" or the
"Company"), is a provider of long-term, subacute and related specialty
healthcare services, including rehabilitation and respiratory therapy services
and pharmaceutical and medical supply services. Long-term and subacute care and
outpatient therapy services are provided through Company-operated facilities.
Therapy services and pharmaceutical and medical supply services are provided
both in Company-operated and in other nonaffiliated facilities located in the
United States. The Company also provides long-term care services in the United
Kingdom, Spain and Germany and acute care services in Australia.
(2) PETITIONS FOR REORGANIZATION UNDER CHAPTER 11
On October 14, 1999 (the "Filing Date"), Sun Healthcare Group, Inc. and
substantially all of its U.S. operating subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11").
The Company is presently operating its business as a debtor-in-possession under
Chapter 11 and is subject to the jurisdiction of the U.S. Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court"). The Bankruptcy Court has
extended the Company's exclusive periods in which to file a plan of
reorganization to November 9, 2000 and to solicit acceptances of the plan to
January 8, 2001.
The Consolidated Financial Statements of the Company have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7: "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
principles, except as otherwise disclosed, assume that assets will be realized
and liabilities will be discharged in the normal course of business. The chapter
11 filings, the uncertainty regarding the eventual outcome of the reorganization
cases, and the effect of other unknown, adverse factors raise substantial doubt
about the Company's ability to continue as a going concern.
On October 26, 1999, the Company announced that it had reached an agreement
in principle 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. If
approved as part of the Company's chapter 11 plan of reorganization, the
agreement in principle would provide the Company's bank lenders with cash, new
senior long-term debt, new preferred stock, and new common stock. The Company's
senior subordinated bondholders would receive new common stock. The agreement in
principle 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 principle provides that holders of Sun's
outstanding convertible subordinated debt, convertible trust issued preferred
securities ("CTIPS") and common stock would not receive any recovery in the plan
of reorganization. The Company and the other parties to the agreement in
principle have initiated discussions to amend the agreement in principle. No
assurance can be given that a plan of reorganization will be confirmed or that
any plan of reorganization that is confirmed will contain the terms of the
agreement in principle. The agreement in principle expires on September 30,
2000.
Under Chapter 11, certain claims against the Company in existence prior to
the Filing Date are stayed while the Company continues its operations as a
debtor-in-possession. These claims are reflected in the March 31, 2000 and
December 31, 1999 balance sheets as "Liabilities subject to compromise."
Additional chapter 11 claims have arisen and may continue to arise subsequent to
the Filing Date resulting from the rejection of executory contracts, including
leases, and from the determination by the Bankruptcy Court of allowed claims for
contingencies and other disputed amounts. Claims secured by the Company's assets
("secured claims") also are stayed, although the holders of such claims have the
right to petition the Bankruptcy Court for relief from the automatic stay to
permit such creditors to foreclose on the property securing their claim.
8
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company has determined that, generally, the fair market value of the
collateral is less than the principal amount of its secured prepetition debt
obligations; accordingly, the Company has discontinued accruing interest on
substantially all of these obligations as of the Filing Date. The Company
received approval from the Bankruptcy Court to pay or otherwise honor certain of
its prepetition obligations, including employee wages and benefits.
The principal categories and the balances of chapter 11 claims reclassified
in the Consolidated Balance Sheets and included in "Liabilities subject to
compromise" at March 31, 2000 and December 31, 1999 are identified below. These
amounts may be subject to future adjustments depending upon Bankruptcy Court
actions, further developments with respect to disputed claims, whether or not
such claims are secured, and the value of any security interests securing such
claims or other events.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
---------------------- ---------------------
(in thousands)
-----------------------------------------------
<S> <C> <C>
Revolving Credit Facility................................................ $ 414,687 $ 411,137
Credit Facility Term Loans............................................... 375,115 375,115
Senior Subordinated Notes due 2008....................................... 150,000 150,000
Senior Subordinated Notes due 2007....................................... 250,000 250,000
Interest payable......................................................... 103,132 102,467
Convertible Subordinated Debentures due 2004............................. 83,300 83,300
Prepetition trade and other miscellaneous claims......................... 64,610 79,948
Mortgage notes payable due at various dates through 2005................. 51,565 47,703
Other long-term debt..................................................... 17,061 21,200
Capital leases........................................................... 13,160 19,170
Industrial Revenue Bonds................................................. 10,935 10,935
Senior Subordinated Notes due 2002....................................... 6,161 6,161
Convertible Subordinated Debentures due 2003............................. 1,382 1,382
---------------------- ---------------------
Total liabilities subject to compromise............................. $1,541,108 $ 1,558,518
====================== =====================
</TABLE>
Since October 14, 1999, the payment of certain prepetition claims
(principally employee wages and benefits and payments to critical vendors and
utilities) that were approved by the Bankruptcy Court have reduced "Liabilities
subject to compromise."
It is not possible to fully or completely estimate the fair value of
"Liabilities subject to compromise" at March 31, 2000 and December 31, 1999 due
to the Company's chapter 11 filing and the uncertainty surrounding the ultimate
amount and settlement terms for such liabilities.
Under the Bankruptcy Code, the Company may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts, and other unexpired executory prepetition contracts, subject to
Bankruptcy Court approval. The Company cannot presently determine with certainty
the ultimate aggregate liability which will result from the filing of claims
relating to such contracts which have been or may be rejected. The Bankruptcy
Code generally accords priority to claims and expenses in the following order.
First, distributions are made to secured creditors to the extent of their
interest in collateral. Unencumbered assets, or the value thereof, are
distributed in the following order: to holders of super-priority claims, such as
the lenders under the debtor-in-possession financing (the "DIP Financing
Agreement"), holders of administrative expense claims, holders of claims for
wages and salaries, holders of claims with respect to contributions to employee
benefit plans, holders of certain tax claims, holders of unsecured claims and
holders of equity interests.
The Company is in default with respect to substantially all of its
prepetition borrowings. The Company's prepetition bank debt is collateralized by
(i) a pledge of stock in the Company's U.S. subsidiaries, (ii) a pledge of
approximately 66 percent of the stock in certain of the Company's direct foreign
subsidiaries, (iii) a security interest in intercompany debt owed by
subsidiaries to the Company and (iv) a pledge of certain notes held by the
Company.
9
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the Company and its filing subsidiaries as of the Filing Date as
shown by the Company's accounting records. Differences between amounts shown by
the Company and claims filed by creditors are being investigated and resolved.
The ultimate amount and the settlement terms for such liabilities are subject to
a plan of reorganization. The plan, when filed, is subject to a vote by the
Company's impaired creditors and stockholders and confirmation by the Bankruptcy
Court, and accordingly, is not presently determinable.
REORGANIZATION COSTS
Reorganization costs under chapter 11 are items of expense or income that
are incurred or realized by the Company because it is in reorganization. These
include, but are not limited to, professional fees and similar types of
expenditures incurred directly relating to the chapter 11 proceeding, loss
accruals or realized gains or losses resulting from activities of the
reorganization process, and interest earned on cash accumulated by the Company
because it is not paying its prepetition liabilities.
The components of reorganization costs, net are as follows for the periods
indicated:
<TABLE>
<CAPTION>
For the Three Months From Filing Date to
Ended March 31, 2000 December 31, 1999
-------------------------- --------------------------
(in thousands)
<S> <C> <C>
REORGANIZATION COSTS:
Write-off of debt discounts and deferred issuance costs........ $ - $ 37,614
Loss on sale of assets......................................... 152,669 7,085
Professional fees.............................................. 4,580 4,115
Less interest earned on accumulated cash....................... (604) (682)
-------------------------- --------------------------
Total..................................................... $ 156,645 $ 48,132
========================== ==========================
</TABLE>
(3) DEBTOR-IN-POSSESSION FINANCING
On October 14, 1999, the Company entered into a Revolving Credit Agreement
with CIT/Business Credit, Inc. and Heller Healthcare Finance, Inc.
(collectively, the "DIP Lenders") to provide the Company with up to $200.0
million in debtor-in-possession financing. The Bankruptcy Court granted final
approval of the DIP Financing Agreement on November 12, 1999. The DIP Financing
Agreement provides for maximum borrowing by the Company equal to the sum of (i)
up to 85.0% of the then outstanding domestic eligible accounts receivable and
(ii) the lesser of $10.0 million or 50.0% of the aggregate value of eligible
inventory. The DIP Financing Agreement matures on October 14, 2001. Fees and
expenses of $4.25 million were paid under this agreement in 1999 and are being
amortized to operations over one year.
Interest accrues on the principal amount outstanding under the DIP
Financing Agreement at a per annum rate of interest equal to the Alternate Base
Rate ("ABR") (Chase Manhattan) plus 0.25% or the London International Borrowing
Offer Rate ("LIBOR") plus 2.75% and is payable in arrears on each Interest
Payment Date. The ABR was approximately 9.5%, 9.0% and 8.6%, at July 31, 2000,
March 31, 2000 and December 31, 1999, respectively. The one-month LIBOR was
approximately 6.6%, 6.1% and 5.8% at July 31, 2000, March 31, 2000 and December
31, 1999, respectively. In the event of an Event of Default, interest accrues on
the principal amount of the loans outstanding at a rate per annum equal to the
ABR plus 2.0% and is payable daily.
10
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The obligations of the Company under the DIP Financing Agreement are
jointly and severally guaranteed by each of the Company's subsidiaries in the
United States that filed for protection under Chapter 11 (the "Company's
Debtors") pursuant to the agreement. Under the terms of the agreement, the
obligations of the DIP Lenders under the agreement (the "DIP Obligations")
constitute allowed super-priority administrative expense claims pursuant to
Section 364(c) of the Bankruptcy Code (subject to a carve-out for certain
professional fees and expenses incurred by the Company's Debtors). The DIP
Obligations are secured by perfected liens on all or substantially all of the
assets of the Company's Debtors (excluding bankruptcy causes of action), the
priority of which liens (relative to prepetition creditors having valid,
non-avoidable, perfected liens in those assets and to any "adequate protection"
liens granted by the Bankruptcy Court) is established in the Initial Company DIP
Order and the related cash collateral order entered by the Bankruptcy Court (the
"Initial Company Cash Collateral Order"). The Bankruptcy Court has also granted
certain prepetition creditors of the Company's Debtors replacement liens and
other rights as "adequate protection" against any diminution of the value of
their existing collateral in which such creditors had valid non-avoidable and
perfected liens as of the Petition Date. The discussion contained in this
paragraph is qualified in its entirety by reference to the Interim Company DIP
Order and the Initial Company Cash Collateral Order, and reference should be
made to such orders, which are available from the Bankruptcy Court, for a more
complete description of the terms.
The Company's DIP Financing Agreement contains customary representations,
warranties, and covenants of the Company Lenders, as well as certain financial
covenants relating to minimum earnings before income taxes, depreciation and
amortization (EBITDA), maximum capital expenditures, and minimum patient census.
The breach of any such representations, warranties, or covenants, to the extent
not waived or cured within any applicable grace or cure periods, could result in
the Company being unable to obtain further advances under the DIP Financing
Agreement or the exercise of remedies by the DIP lenders, either of which
occurrence could materially impair the ability of the Company to successfully
reorganize in chapter 11.
At July 31, 2000 and March 31, 2000, approximately $134.1 million and
$130.3 million, respectively, was available under the DIP Financing Agreement of
which amount the Company had borrowed approximately $46.6 million and $34.0
million as of July 31, 2000 and March 31, 2000, respectively. In addition,
letters of credit of approximately $26.1 million and $15.0 million were
outstanding under the facility as of July 31, 2000 and March 31, 2000,
respectively. Peak borrowings under the agreement during 1999 were approximately
$56.7 million with an effective interest rate during the year of approximately
8.8%. Peak borrowings under the agreement for the three months ended March 31,
2000 were approximately $51.6 million with an effective interest rate during the
period of approximately 8.8%.
The DIP Financing Agreement provides that the Company must comply with
certain financial covenants which include a limitation on capital expenditures
and a minimum amount on the last day of each month of EBITDA. The following is a
brief summary of the limitations on capital expenditures and the minimum
specified month end requirement for EBITDA.
Capital Expenditures Aggregate Limitations on Corporate Headquarters:
$3,000,000 For the period October 14, 1999 to December 31, 1999
$6,000,000 During fiscal 2000 and for each fiscal year until maturity
Capital Expenditures on Domestic Healthcare Facilities:
$12,900,000 For the period October 14, 1999 to December 31, 1999
$49,300,000 During fiscal 2000 and for each fiscal year until maturity
11
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Minimum cumulative EBITDA at Month End:
October 1999 $ 2,500,000
November 1999 $ 3,600,000
December 1999 $ 5,700,000
January 2000 $11,900,000
February 2000 $14,300,000
March 2000 $21,000,000
April 2000 $24,700,000
May 2000 $30,900,000
June 2000 $36,100,000
July 2000 $43,700,000
August 2000 $52,900,000
September 2000 $58,200,000
October 2000 $64,100,000
November 2000 $68,700,000
December 2000 $73,000,000
It would be an event of default if cumulative EBITDA for any continuous
twelve-month period beginning with or after January 2001 is less than
$73,000,000.
The Company was not in compliance with the EBITDA financial covenant at
December 31, 1999 and in each of the months for the period ended June 30, 2000.
The Company was also not in compliance with the DIP Financing Agreement because
the Company did not timely provide the DIP Lenders with financial statements for
the year ended December 31, 1999 and the quarters ended March 31 and June 30,
2000. The Company obtained a conditional waiver of these defaults on July 13,
2000 and which, as supplemented, currently extends through September 22, 2000.
The DIP Lenders have agreed to waive the defaults subject to, among other
things, the Company and the DIP Lenders entering into an amendment of the DIP
Financing Agreement to modify the cumulative EBITDA covenant and the payment to
the DIP Lenders of a $250,000 fee to enter into the amendment, both of which
will require the approval of the Bankruptcy Court.
(4) LONG-TERM DEBT
As a result of the chapter 11 filing, substantially all short and long-term
debt at the Filing Date of October 14, 1999 were classified as "Liabilities
subject to compromise" in the Company's Consolidated Balance Sheets in
accordance with SOP 90-7. No principal has been paid or interest accrued on
prepetition obligations since the Filing Date, except for amounts related to
certain Industrial Revenue Bonds, a fully-secured mortgage, certain capital
equipment leases and a nominal amount related to a promissory note.
Under the Bankruptcy Code, actions against the Company to collect
prepetition indebtedness are subject to an automatic stay provision.
Additionally, the Company may elect to assume or reject real estate leases,
employment contracts, personal property leases, service contracts and other
unexpired executory prepetition contracts subject to Bankruptcy Court approval.
12
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
2000 1999
---- ----
<S> <C> <C>
DIP Financing Agreement............................................................. $ 34,146 $ 12,126
Senior Credit Facility:
Revolving Credit Facility........................................................ 414,687 (1) 411,137 (1)
Credit Facility Term Loans ...................................................... 375,115 (1) 375,115 (1)
9.4% Senior Subordinated Notes due 2008............................................. 150,000 (1) 150,000 (1)
9.5% Senior Subordinated Notes due 2007............................................. 250,000 (1) 250,000 (1)
Convertible Subordinated Debentures due 2004, interest at 6.0% per annum............ 83,300 (1) 83,300 (1)
Convertible Subordinated Debentures due 2003, interest at 6.5% per annum............ 1,382 (1) 1,382 (1)
Senior Subordinated Notes due 2002, interest at 11.8% per annum..................... 6,161 (1) 6,161 (1)
Mortgage notes payable due at various dates through 2014, interest at rates from
8.0% to 11.4%, collateralized by various facilities............................... 74,319 (2) 63,578 (2)
Mortgage notes payable in Spanish pesetas due at various dates through 2017,
interest at rates from 5.0% to 14.0%, collateralized by various facilities in
Spain............................................................................. 12,471 13,977
Mortgage notes payable in pound sterling due at various dates in 2015 and 2016,
interest at 9.50% per annum, collateralized by various facilities in the United
Kingdom........................................................................... 4,657 4,795
Mortgage notes payable in German marks due at various dates through 2003, interest
at rates from 6.3% to 6.8%, collateralized by various facilities in Germany....... 7,978 6,899
Mortgage notes payable in Australian dollars due at various dates through 2001,
interest from 7.6 % to 8.0% collateralized by various facilities in Australia..... 13,031 13,841
Revolving lines of credit with a bank due at various dates through 2000, payable in
pounds sterling, interest rates of 6.4% and variable rates from 1.0% to 3.0% over
the Finance House Base Rate, collateralized by the assets of various facilities... - 4,901
Industrial Revenue Bonds............................................................ 16,510 (3) 63,660 (3)
Other long-term debt................................................................ 36,096 (4) 41,604 (4)
---------------- ----------------
Total long-term debt................................................................ 1,479,853 1,502,476
Less long-term debt subject to compromise........................................... (1,360,206) (1,356,935)
Less amounts due within one year.................................................... (63,408) (44,776)
---------------- ----------------
Long-term debt, net of current portion.............................................. $ 56,239 $ 100,765
================ ================
</TABLE>
Long-term debt at March 31, 2000 includes amounts owed under the DIP
Financing Agreement, one fully secured mortgage note payable, certain Industrial
Revenue Bonds and other debt of which approximately $15.1 million was assumed by
the purchaser in a Bankruptcy Court approved sales transaction subsequent to
March 31, 2000 and the Company's foreign debt obligations. The $15.1 million
assumed by the purchaser subsequent to March 31, 2000 is included in the $55.3
million assumed subsequent to December 31, 1999 as discussed below.
Long-term debt at December 31, 1999 includes amounts owed under the DIP
Financing Agreement, one fully secured mortgage note payable, certain Industrial
Revenue Bonds and other debt of which approximately $55.3 million was assumed by
the purchaser in a Bankruptcy Court approved sales transaction subsequent to
year end and the Company's foreign debt obligations.
(1) Classified as liabilities subject to compromise in the Company's
Consolidated Balance Sheets.
(2) Approximately $51,565 and $47,703 classified as liabilities
subject to compromise in the Company's Consolidated Balance
Sheets as of March 31, 2000 and December 31, 1999, respectively.
13
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) Approximately $10,935 and $10,935 classified as liabilities
subject to compromise in the Company's Consolidated Balance
Sheets as of March 31, 2000 and December 31, 1999, respectively.
(4) Approximately $17,061 and $21,200 classified as liabilities
subject to compromise in the Company's Consolidated Balance
Sheets as of March 31, 2000 and December 31, 1999, respectively.
The scheduled maturities of long-term debt (not including that which is
subject to compromise) as of March 31, 2000 and December 31, 1999 is as follows
(in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
2000................................................................... $ 63,408 $ 44,776
2001................................................................... 14,965 19,572
2002................................................................... 2,462 3,422
2003................................................................... 2,613 3,647
2004................................................................... 11,122 3,828
Thereafter............................................................. 25,077 70,296
------------------------ -------------------------
$ 119,647 $ 145,541
======================== =========================
</TABLE>
Included in the information above, is approximately $15.1 million and $55.3
million of Industrial Revenue Bonds and other debt as of March 31, 2000 and
December 31, 1999, respectively, which was assumed subsequent to year end by the
purchaser in a Bankruptcy Court approved sales transaction. The $15.1 million
assumed subsequent to March 31, 2000 is included in the $55.3 million assumed
subsequent to December 31, 1999.
In May 1998, the Company entered into certain interest rate swap
transactions with an aggregate notional value of $850.0 million to minimize the
risks and/or costs associated with certain long-term debt of the Company. The
Company does not otherwise utilize financial instruments for trading or other
speculative purposes. The interest rate swap transactions were designated as
hedges for accounting purposes. The amounts to be paid or received were accrued
and recognized as an adjustment to interest expense. On April 9, 1999, the
interest rate swap transactions were terminated due to an event of default
relating to the Company's non-compliance with certain covenants contained in the
Senior Credit Facility. The termination resulted in a pre-tax charge of
approximately $2.5 million in the first quarter of 1999.
The Company has letters of credit outstanding under its prepetition credit
facilities and under its DIP Financing Agreement. As of July 31, 2000, letters
of credit outstanding totaled approximately $45.3 million of which approximately
$19.2 million and $26.1 million were issued under the prepetition credit
facilities and the DIP Financing Agreement, respectively. As of March 31, 2000,
letters of credit outstanding totaled approximately $41.6 million of which
approximately $26.6 million and $15.0 million were issued under the prepetition
credit facilities and the DIP Financing Agreement, respectively. As of December
31, 1999, letters of credit outstanding totaled approximately $65.3 million of
which approximately $46.2 million and $19.1 million were issued under the
prepetition credit facilities and the DIP Financing Agreement, respectively.
(5) BASIS OF PRESENTATION
In the opinion of management of Sun, the accompanying interim consolidated
financial statements present fairly the Company's financial position at March
31, 2000 and December 31, 1999, the consolidated results of its operations for
the three month periods ended March 31, 2000 and 1999, and the consolidated
statements of cash flows for the three month periods ended March 31, 2000 and
1999. All adjustments are of a normal and recurring nature. These statements are
presented in accordance with the rules and regulations of the United States
Securities and Exchange Commission ("SEC"). Accordingly, they are unaudited, and
certain information and footnote disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted, as
permitted under the applicable rules and regulations. Readers of these
statements should refer to the Company's audited Consolidated Financial
Statements and notes thereto for the year ended December 31, 1999, which are
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999. The results of operations presented in the accompanying Consolidated
Financial Statements are not necessarily representative of operations for an
entire year.
14
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Certain amounts in the 1999 Consolidated Financial Statements and notes
thereto have been reclassified to conform to the 2000 presentation. The
reclassification has no effect on net losses or stockholders' equity balances as
previously reported.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5: "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). This statement requires costs of start-up activities and
organization costs to be expensed as incurred. The statement was effective for
financial statements for fiscal years beginning after December 15, 1998. During
the first quarter of 1999, the Company adopted the provisions of SOP 98-5, which
resulted in a cumulative effect of a change in accounting principle charge of
approximately $13.7 million.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133: "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). Under SFAS 133, all derivatives are
required to be recognized in the balance sheet at fair value. Gains or losses
from changes in fair value would be recognized in earnings in the period of
change unless the derivative is designated as a hedging instrument. In June
1999, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 137, which amended SFAS 133, delaying its effective
date to fiscal years beginning after June 15, 2000. The Company does not
currently hold any derivative instruments nor does it currently engage in
hedging activities. The Company does not believe that the new standard will
impact its Consolidated Financial Statements.
(6) RESTRUCTURING COSTS
In the fourth quarter of 1998, the Company initiated a corporate
restructuring plan focused primarily on reducing the operating expenses of its
United States operations. Related to the 1998 corporate restructuring plan, the
Company recorded a 1998 fourth quarter charge of approximately $4.6 million. The
1998 corporate restructuring plan included the elimination of approximately
7,500 positions, primarily in the Company's rehabilitation and respiratory
therapy operations, and also included the closure of approximately 70 divisional
and regional offices. The 1998 corporate restructuring charge consists of
approximately $3.7 million related to employee terminations and approximately
$0.9 million related to lease termination costs. As of March 31, 2000 and
December 31, 1999, the Company had paid approximately $2.5 million in
termination benefits to 1,440 employees that had been terminated and $0.1
million in lease termination costs under the 1998 corporate restructuring plan.
As of March 31, 2000 and December 31, 1999, the Company's 1998 corporate
restructuring costs reserve balances relating to employee terminations and lease
termination costs were approximately $1.2 million and $0.8 million,
respectively. Approximately $0.6 million of the 1998 corporate restructuring
costs reserve balance of approximately $2.0 million as of March 31, 2000 and
December 31, 1999 is comprised of prepetition severance accruals that are
classified as liabilities subject to compromise in the Company's Consolidated
Balance Sheets. As of March 31, 2000 and December 31, 1999, the Company's 1998
corporate restructuring plan was substantially complete.
In the first quarter of 1999, the Company initiated a second corporate
restructuring plan focused on further reducing the operating expenses of its
United States operations. Related to the 1999 corporate restructuring plan, the
Company recorded a first quarter charge of approximately $11.4 million. The 1999
corporate restructuring plan included the termination of approximately 3,000
employees, primarily in its rehabilitation and respiratory therapy services
operations. The 1999 corporate restructuring plan also includes the closure of
approximately 23 divisional and regional offices. In addition, the plan included
the relocation of the management of the Company's medical supply subsidiary and
temporary therapy services subsidiary to the Company's corporate headquarters in
Albuquerque, New Mexico. As part of the relocation, the Company terminated 96
employees of these subsidiaries. The 1999 corporate restructuring charge
consisted of approximately $9.1 million related to employee terminations,
approximately $1.4 million related to lease termination costs and $0.9 million
related to asset disposals or write-offs. During the first quarter of 1999, the
Company paid approximately $4.4 million in employee termination benefits under
the 1999 corporate restructuring plan. As of December 31, 1999, the Company's
1999 corporate restructuring plan was complete.
15
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) ASSETS HELD FOR SALE
Subsequent to December 31, 1998, the Company decided to dispose of several
non-core businesses, including assisted living facilities, rehabilitation
hospitals, certain inpatient facilities and other non-core businesses. The fair
value of these assets held for sale was based on the estimates of selling value
less selling costs. The Company recorded a loss of approximately $206.2 million
in 1998 to reduce the carrying amount of the non-core businesses identified for
disposal. During the first quarter of 1999, the Company recognized an additional
loss of approximately $17.1 million on certain of these non-core businesses
based on revised estimates of selling value less selling costs. During the first
quarter of 1999, the Company decided not to dispose of certain non-core
businesses previously recorded in assets held for sale at December 31, 1998. The
reversal of losses on assets held for sale of approximately $7.0 million was
recognized in the first quarter of 1999. The Company completed the sale of its
Canadian operations in the first quarter of 1999 resulting in additional loss on
the sale of approximately $2.0 million which was recorded in the first quarter
of 1999. The additional losses and loss reversal are recorded in loss on sale of
assets, net in the Company's Consolidated Statements of Losses.
In the first quarter of 2000, the Company entered into an agreement to sell
16 assisted living facilities, of which one campus includes a skilled nursing
facility. A part of the transaction involving 12 facilities was completed during
the first quarter of 2000. The cash consideration received from this first
quarter transaction was approximately $1.0 million which was received subsequent
to March 31, 2000. In addition, the Company received a note receivable of
approximately $0.5 million. The aggregate debt, capital leases and other
liabilities assumed by the purchaser in this first quarter transaction totaled
approximately $49.8 million. The Company previously recorded the anticipated
loss on the aggregate sale of the 16 facilities by recording a loss on assets
held for sale of approximately $17.4 million and $53.8 million during 1999 and
1998, respectively. During the first quarter of 2000, the Company reversed
approximately $1.5 million of the loss recorded in 1999. The reversal is
recorded in gain on sale of assets in the Company's Consolidated Statements of
Losses.
During the first quarter of 2000, the Company divested five pharmacies in
the United Kingdom. The cash consideration received during the first quarter was
approximately $5.7 million. During the second quarter of 2000, the Company
divested 13 pharmacies in the United Kingdom. See Note 16 - Subsequent Events.
During the first quarter of 2000, the Company began soliciting offers to
purchase its international operations. The Company recognized a loss of
approximately $141.1 million in the first quarter of 2000 to reduce the carrying
value of its international operations to the Company's estimate of selling value
less selling costs. The charge is recorded in reorganization costs in the
Company's Consolidated Statements of Losses. No purchase agreements have been
entered into for the international operations and the Company cannot predict
when, or if, these operations will be sold.
During the first quarter of 2000, the Company began pursuing the
disposition of certain non-core businesses, including its SunCare respiratory
therapy business. The Company recognized a loss of approximately $7.8 million in
the first quarter of 2000 to reduce the carrying value of its respiratory
therapy business to the Company's estimate of selling value less selling costs.
The charge is recorded in reorganization costs in the Company's Consolidated
Statements of Losses. No purchase agreements have been entered into for this
business and the Company cannot predict when, or if, this business will be sold.
During the first quarter of 2000, the Company identified two domestic
pharmacies for divestiture. The Company recognized a loss of approximately $0.5
million in the first quarter of 2000 to reduce the carrying value of these two
pharmacies to the Company's estimate of selling value less selling costs. The
charge is recorded in reorganization costs in the Company's Consolidated
Statements of Losses. No purchase agreements have been entered into for these
pharmacies and the Company cannot predict when, or if, these will be sold. The
results of operations of these two pharmacies are immaterial.
16
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company is actively reviewing its portfolio of properties and intends
to divest those properties that it believes do not meet acceptable financial
performance standards or do not fit strategically into the Company's operations.
This process is expected to be ongoing throughout its bankruptcy cases. All
intended divestitures require Bankruptcy Court approval.
During the second quarter of 2000, the Company completed the sale of the
other four assisted living facilities that were part of the agreement entered
into during the first quarter of 2000. In addition, the Company transferred its
two remaining assisted living facilities from the other operations segment to
the inpatient services segment. See Note 16 - Subsequent Events.
During the second quarter of 2000, the Company divested 21 skilled nursing
facilities. See Note 16 - Subsequent Events.
As of August 31, 2000, the Company had identified 69 additional skilled
nursing facilities, a rehabilitation facility and other non-core businesses for
disposal. The Company recorded a loss of approximately $3.3 million in the first
quarter to reduce the carrying value of certain of these skilled nursing
facilities to the Company's estimate of selling value less cost to sell. The
loss is recorded in reorganization costs in the Consolidated Statements of
Losses. See Note 16 - Subsequent Events.
The following is a summary (in thousands) of the carrying amounts of assets
held for sale as of March 31, 2000 and the losses or gains on the sale of assets
and the losses on assets held for sale for the three months ended March 31,
2000. The losses are recorded in reorganization costs and the gains are recorded
in gain on sale of assets in the Company's Consolidated Statements of Losses.
See Note 2 - Petitions for Reorganization under Chapter 11.
<TABLE>
<CAPTION>
Carrying
Amount Losses Gains
------ ------ -----
<S> <C> <C> <C>
International operations................................... $ 177,119 $ 141,079 $ -
Assisted living facilities................................. 16,220 - (1,532)
Inpatient facilities....................................... - 3,322 (7,420)
Other non-core businesses.................................. 1,817 8,268 -
------------------- ------------------ ------------------
$ 195,156 $ 152,669 $ (8,952)
=================== ================== ==================
</TABLE>
(8) COMMITMENTS
(A) CONSTRUCTION COMMITMENTS
The Company had construction commitments of approximately $6.8 million as
of March 31, 2000, under various contracts in the United States. These include
contractual commitments to improve existing facilities and to complete
construction on a corporate office building.
(B) LITIGATION
The Company is a party to various legal actions and administrative
proceedings and subject to various claims arising in the ordinary course of
business. See Note 11 - Other Events.
(C) CONTINGENT FEE TO INVESTMENT BANKER
During the first quarter of 2000, the Company began pursuing the
disposition of its international operations. The Company's international
subsidiaries have executed an agreement with an international firm to act as
their investment banker and financial advisor and the Company entered into a
guaranty agreement with the firm. Under this guaranty, the Company is
contingently liable to the firm should the Company sell its international
operations. The cash fee is based on a specified percentage of the aggregate
consideration, as defined, arising out of the sale but in no event shall the
cash fee be less than $2.0 million should the sale be completed in a single
transaction. Should the sale not be completed in a single transaction, the
minimum cash fee is $1.25 million for the sale of the Company's European
operations and $0.75 million for the sale of the Company's Australian
operations.
17
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) CONVERTIBLE TRUST ISSUED PREFERRED SECURITIES
In May 1998, a statutory business trust, all of whose common securities are
owned by the Company, issued $345.0 million of 7.0% CTIPS with a liquidation
amount of $25.00 per CTIP. Each CTIP is convertible into 1.2419 shares of the
Company's common stock (equivalent to a conversion price of $20.13 per share).
The CTIPS holders were entitled to receive cumulative cash distributions at an
annual rate of 7.0%, payable quarterly. Payment of the cash distributions and
principle are irrevocably guaranteed by the Company. Sun may defer cash
distribution for up to 20 consecutive quarters. Beginning with the interest
payment due on May 1, 1999, Sun exercised its right to defer cash distributions.
As cash distributions are deferred, dividends on the CTIPS will continue to
accrue. As of March 31, 2000, accrued and deferred interest and penalties were
approximately $18.3 million. Due to the Company's filing for protection under
Chapter 11 and in accordance with SOP 90-7, the Company did not pay or accrue
interest on the CTIPS during the first quarter of 2000. The agreement in
principle discussed in Note 2 - Petitions for Reorganization under Chapter 11,
provides that holders of the CTIPS would not receive any recovery under the plan
of reorganization.
(10) NET LOSSES PER SHARE
Basic net losses per share is based upon the weighted average number of
common shares outstanding during the period.
Diluted net earnings per share in periods of earnings is based upon the
weighted average number of common shares outstanding during the period plus the
number of incremental shares of common stock contingently issuable upon exercise
of stock options and, if dilutive, including the assumption that the Company's
convertible securities were converted as of the beginning of the period. Net
earnings, if conversion of the securities is assumed, is adjusted for the
interest on the debentures, net of interest related to additional assumed
borrowings to fund the cash consideration on conversion of certain convertible
securities and the related income tax benefits. In periods of losses, diluted
net losses per share is based upon the weighted average number of common shares
outstanding during the period. As the Company had a net loss for the three month
periods ended March 31, 2000 and 1999, the Company's stock options and
convertible debentures were anti-dilutive.
Losses per share is calculated as follows for the three months ended March
31, (in thousands except per share data):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
BASIC:
Net losses before cumulative
effect of change in accounting principle................................... $ (165,661) $ (99,421)
Losses per share before cumulative effect of change in accounting principle..... $ (2.78) $ (1.73)
================== ==================
Net losses ..................................................................... $ (165,661) $ (113,147)
Losses per share................................................................ $ (2.78) $ (1.96)
================== ==================
Weighted average shares outstanding............................................. 59,523 57,621
DILUTED:
Net losses before cumulative effect of change in accounting principle........... $ (165,661) $ (99,421)
Losses per share before cumulative effect of change in accounting principle..... $ (2.78) $ (1.73)
================== ==================
Net losses ..................................................................... $ (165,661) $ (113,147)
Losses per share................................................................ $ (2.78) $ (1.96)
================== ==================
Weighted average shares outstanding............................................. 59,523 57,621
</TABLE>
18
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(11) OTHER EVENTS
(A) LITIGATION
The Company and substantially all of its U.S. operating subsidiaries filed
voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code
with the Bankruptcy Court (case nos. 99-3657 through 99-3841, inclusive). On
February 3, 2000, an additional indirect subsidiary of the Company commenced its
Chapter 11 case in the Bankruptcy Court (case no. 00-00841). The Company is
currently operating its business as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court.
In May 1999, a former employee of SunBridge filed a proposed class action
complaint against SunBridge in the Western District of Washington (the
"SunBridge Action"). The plaintiff sought to represent certain current and
former employees of SunBridge who were allegedly not paid appropriate wages
under federal and state law since May 1996. In August 1999, several former
employees of SunDance filed a proposed class action complaint against SunDance
in the Western District of Washington (the "SunDance Action"). The plaintiffs
sought to represent certain current and former employees of SunDance who were
allegedly not paid appropriate wages under federal and state law since August
1996. The plaintiffs in both of these actions are represented by the same legal
counsel. These lawsuits are currently stayed as a result of the Company's
pending Chapter 11 cases. In June 2000, the plaintiffs in the SunBridge Action
and the SunDance Action filed motions in the Bankruptcy Court seeking to certify
their respective classes they seek to represent and an enlargement of the bar
date for their class members. Plaintiffs filed claims in the pending Chapter 11
cases in the amount of $780.0 million in the SunDance Action and $242.0 million
in the SunBridge Action, plus interest, costs and attorney fees. Although the
Company and its subsidiaries intend to vigorously defend themselves in these
matters, there can be no assurance that the outcome of either of these matters
will not have a material adverse effect on the results of operations and
financial condition of the Company.
In March 1999 and through April 19, 1999, several stockholders of the
Company filed class action lawsuits against the Company and three officers of
the Company in the United States District Court for the District of New Mexico.
The lawsuits allege, among other things, that the Company did not disclose
material facts concerning the impact that PPS would have on the Company's
results of operations. The lawsuits seek compensatory damages and other relief
for stockholders who purchased the Company's common stock during the
class-action period. As a result of the Company's commencement of its Chapter 11
cases, these lawsuits have been stayed with respect to the Company. Pursuant to
an agreement among the parties, the Company will be dismissed without prejudice.
Although the Company and its officers intend to vigorously defend its officers
in this matter, there can be no assurance that the outcome of this matter will
not have a material adverse effect on the results of operations and financial
condition of the Company.
The Company and certain of its subsidiaries are defendants in two QUI TAM
lawsuits brought by private citizens in the United States District Court for the
Eastern District of California alleging violations of the Federal False Claims
Act. The plaintiffs allege that skilled nursing facilities operated by the
subsidiaries and others conspired over the last decade to (i) falsely certify
compliance with regulatory requirements in order to participate in the Medicare
and Medicaid programs, and (ii) falsify records to conceal failures to provide
services in accordance with such regulatory requirements. Although the Company
and its subsidiaries intend to vigorously defend themselves in these matters,
there can be no assurance that the outcome of any one of these matters will not
have a material adverse effect on the results of operations and financial
condition of the Company. These lawsuits are currently stayed as a result of the
Company's filing for chapter 11 bankruptcy protection.
The Company and certain of its subsidiaries are defendants in a QUI TAM
lawsuit brought by a private citizen in the United States District Court of the
Central District of California alleging violations of the Federal False Claims
Act and a related wrongful termination. The plaintiff alleges that a home health
agency operated by one of the Company's subsidiaries submitted bills for several
years that were improper for various reasons, including bills for patients whose
treatment had not been authorized by their physicians. The government intervened
to the extent that the lawsuit alleges billing without obtaining proper and
timely physician authorization, but declined to intervene in the remainder of
the lawsuit. Although the Company and its subsidiaries intend to vigorously
defend themselves in this matter, there can be no assurance that the outcome of
this matter will not have a material adverse effect on the results of operations
and financial condition of the Company. This lawsuit is currently stayed as a
result of the Company's filing for chapter 11 bankruptcy protection.
19
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In addition, the Department of Health & Human Services (the "HHS") and the
Department of Justice (the "DOJ") periodically investigate matters that have
come to their attention concerning the Company, including cost reporting
matters. To expedite resolution of any outstanding investigations, the Company
has requested that the HHS and the DOJ inform it of any such investigations or
outstanding concerns. In response, the DOJ informed the Company of the existence
of a number of outstanding inquiries, some of which were prompted by the filing
of QUI TAM lawsuits that remain under seal and which are not described above.
The DOJ has recently advised the Company of the nature of several of the
allegations under investigation regarding the Company"s subsidiaries, including
allegations that the Company's subsidiaries were inappropriately reimbursed for
(i) certain management fees related to the provision of therapy services,
(ii) nursing services provided by skilled nursing facilities for which there was
inadequate documentation and (iii) respiratory therapy services.
The DOJ and the Company are having ongoing discussions regarding a possible
global settlement of these investigations. The Company believes that any such
settlement would include a monetary payment to the government and a requirement
that the Company enter into a corporate integrity agreement with the HHS' Office
of Inspector General requiring the Company to implement further internal
controls with respect to its quality of care standards and its Medicare and
Medicaid billing, reporting and claims submission processes. Although the
Company and its subsidiaries intend to vigorously defend themselves in these
matters, the Company is unable to determine at this time when the investigations
will be concluded, how large a monetary payment, if any, the parties would agree
on, 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 investigations will have a material adverse effect
on the Company's financial condition or results of operations. In 1999, the
Company recorded a charge of approximately $3.0 million to cover the estimated
costs of professional advisory services related to this matter.
The Company is a party to various other legal actions and administrative
proceedings and is subject to various claims arising in the ordinary course of
its business, including claims that its services have resulted in injury or
death to the residents of its facilities. The Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. The Company believes that this trend is endemic to the
long-term care industry and is a result of the increasing number of large
judgments, including large punitive damage awards, against long-term care
providers in recent years resulting in an increased awareness by plaintiff's
lawyers of potentially large recoveries. In certain states in which the Company
has significant operations, including California, insurance coverage for the
risk of punitive damages arising from general and professional liability
litigation is not available due to state law public policy prohibitions. There
can be no assurance that the Company will not be liable for punitive damages
awarded in litigation arising in states for which punitive damage insurance
coverage is not available. The Company also believes that there has been, and
will continue to be, an increase in governmental investigations of long-term
care providers, particularly in the area of Medicare/Medicaid false claims as
well as an increase in enforcement actions resulting from these investigations.
Adverse determinations in legal proceedings or governmental investigations,
whether currently asserted or arising in the future, could have a material
adverse effect on the Company.
(B) OTHER INQUIRIES
From time to time, fiscal intermediaries and Medicaid agencies examine cost
reports filed by predecessor operators of the Company's skilled nursing
facilities. If, as a result of any such examination, it is concluded that
overpayments to a predecessor operator were made, the Company, as the current
operator of such facilities, may be held financially responsible for such
overpayments. At this time the Company is unable to predict the outcome of any
existing or future examinations.
(C) LEGISLATION, REGULATIONS AND MARKET CONDITIONS
The Company 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, the Company'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.
The Company believes that it is in substantial compliance with the applicable
laws and regulations. However, if the Company is ever found to have engaged in
improper practices, it could be subjected to civil, administrative or criminal
fines, penalties or restitutionary relief which may have a material adverse
impact on the Company's financial results and operations.
20
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(12) SUMMARIZED FINANCIAL INFORMATION
The Company acquired The Mediplex Group, Inc. ("Mediplex") on June 23, 1994
and became a co-obligor with Mediplex with respect to the 6.5% Debentures and
the 11.8% Debentures subsequent to the acquisition. Summarized financial
information of Mediplex is provided below (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets.............................................................. $ 77,410 $ 78,726
Noncurrent assets........................................................... 144,562 145,922
Current liabilities......................................................... 9,053 8,765
Noncurrent liabilities...................................................... 52,564 53,130
Due to parent............................................................... 307,374 291,150
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Net revenues................................................................ $ 110,309 $ 111,435
Costs and expenses.......................................................... (105,219) (109,128)
Cumulative effect of change in accounting principle......................... - (2,520)
--------------------- -------------------
Earnings (losses) before intercompany charges and
income taxes.......................................................... 5,090 (213)
Intercompany charges (1) ................................................... (23,711) (18,767)
--------------------- -------------------
Losses before income taxes ................................................. (18,621) (18,980)
Income tax expense ......................................................... - (363)
--------------------- -------------------
Net losses.................................................................. $ (18,621) $ (19,343)
===================== ===================
</TABLE>
(1) Through various intercompany agreements entered into by Sun and
Mediplex, Sun provides management services, licenses the use of its trademarks
and acts on behalf of Mediplex to make financing available for its operations.
Sun charged Mediplex for management services totaling approximately $3.7 million
for the three months ended March 31, 2000 and 1999. Royalty fees charged to
Mediplex for the three months ended March 31, 1999 for the use of Sun trademarks
were approximately $1.7 million. Sun discontinued charging Mediplex for royalty
fees at December 31, 1999. Intercompany interest charged to Mediplex for the
three months ended March 31, 2000 and 1999 for advances from Sun was
approximately $20.0 million and $18.8 million, respectively.
21
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(13) SEGMENT INFORMATION
See Overview in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<TABLE>
<CAPTION>
Rehabilitation
and Pharmaceutical
Respiratory and Medical
Inpatient Therapy Supply International Other Intersegment
Services Services Services Operations Operations Corporate Eliminations Consolidated
-------- -------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Total Net Revenues......... $ 438,272 $ 57,516 $ 73,831 $ 75,136 $ 49,780 $ 88 $ (56,631) $ 637,992
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable.. 421,794 47,353 70,467 75,323 49,945 24,946 (56,566) 633,262
Depreciation and
amortization............ 5,542 994 1,348 2,502 1,739 2,356 (65) 14,416
Interest, net............. 2,407 48 17 2,983 1,415 1,354 - 8,224
---------- ---------- ------------ ----------- ---------- ---------- ----------- ------------
Earnings (losses) before
corporate allocations... 8,529 9,121 1,999 (5,672) (3,319) (28,568) - (17,910)
Corporate interest
allocation.............. 6,209 2,834 2,693 4,443 2,103 (18,282) - -
Corporate management fees. 17,315 2,285 2,932 742 1,807 (25,081) - -
---------- ---------- ------------ ----------- ---------- ---------- ------------ ------------
Net segment earnings
(losses)................ $(14,995) $ 4,002 $ (3,626) $ (10,857) $ (7,229) $ 14,795 $ - $ (17,910)
========== ========== ============ =========== ========== ========== ============ ============
Intersegment revenues..... $ 150 $ 31,480 $ 20,962 $ - $ 2,748 $ - $ (55,340) $ -
Identifiable segment assets $ 356,637 $ 67,942 $ 106,266 $ 112,035 $ 114,869 $1,155,406 $ (680,070) $ 1,233,085
Segment capital
expenditures, net....... $ 2,409 $ (22) $ 253 $ 2,085 $ 246 $ 4,389 $ - $ 9,360
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Total Net Revenues........ $ 461,105 $ 70,066 $ 75,822 $ 71,664 $ 64,514 $ (968) $ (69,171) $ 673,032
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable.. 447,201 67,426 73,766 67,560 63,075 30,548 (69,171) 680,405
Depreciation and
amortization............ 8,464 2,140 2,072 3,514 2,751 2,507 - 21,448
Interest, net............. 2,260 74 21 3,214 2,047 29,554 - 37,170
Dividends on Preferred
Securities.............. - - - - - 6,516 - 6,516
---------- ---------- ------------ ----------- ---------- ---------- ------------ ------------
Earnings (losses) before
corporate allocations... 3,180 426 (37) (2,624) (3,359) (70,093) - (72,507)
Corporate interest
allocation.............. 13,517 3,463 3,398 5,122 2,904 (28,404) - -
Corporate management fees. 18,140 2,795 3,007 711 1,902 (26,555) - -
---------- ---------- ------------ ----------- ---------- ---------- ------------ ------------
Net segment losses........ (28,477) (5,832) (6,442) (8,457) (8,165) (15,134) - (72,507)
========== ========== ============ =========== ========== ========== ============ ============
Intersegment revenues..... $ 150 $ 38,770 $ 23,774 $ - $ 6,428 $ 49 $ (69,171) $ -
Identifiable segment assets $727,417 $205,866 $ 131,072 $ 448,701 $ 284,509 $1,631,676 $(1,044,326) $2,384,915
Segment capital
expenditures, net....... $ 11,362 $ 1,490 $ 1,487 $ 2,630 $ 5,696 $ 16,804 $ - $ 39,469
</TABLE>
(14) SUMMARIZED CONSOLIDATING INFORMATION
In connection with the Company's offering of the 9.5% Notes in July 1997
and the 9.4% Notes in May, 1998 all direct and indirect subsidiaries of the
Company other than the Company's direct and indirect foreign subsidiaries,
CareerStaff and its direct and indirect subsidiaries, and certain other
immaterial subsidiaries of the Company (the "Guarantors") have, jointly and
severally, unconditionally guaranteed the 9.5% Notes and 9.4% Notes. These
guarantees are subordinated to all existing and future senior debt and
guarantees of the Guarantors and are unsecured.
The Company conducts all of its business through and derives virtually all
of its income from its subsidiaries. Therefore, the Company's ability to make
required payments with respect to its indebtedness (including the 9.5% Notes and
the 9.4% Notes) and other obligations depends on the financial results and
condition of its subsidiaries and its ability to receive funds from its
subsidiaries.
22
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Pursuant to Rule 3-10 of Regulation S-X, the following summarized
consolidating information is for the Company, the wholly-owned Guarantors, and
the Company's non-Guarantor subsidiaries with respect to the 9.5% Notes and the
9.4% Notes. This summarized financial information has been prepared from the
books and records maintained by the Company, the Guarantors and the
non-Guarantor subsidiaries. The summarized financial information may not
necessarily be indicative of results of operations or financial position had the
Guarantors or non-Guarantor subsidiaries operated as independent entities. The
separate financial statements of the Guarantors are not presented because
management has determined they would not be material to investors.
23
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 8,028 $ 7,952 $ 11,757 $ - $ 27,737
Accounts receivable, net.................... - 222,794 (4,057) (1,710) 217,027
Other receivables, net...................... 301,286 (191,581) (108,709) - 996
Inventory, net.............................. - 32,077 326 - 32,403
Prepaids and other assets................... (8,840) 30,898 476 - 22,534
--------------- --------------- ---------------- ------------- --------------
Total current assets......................... 300,474 102,140 (100,207) (1,710) 300,697
Property and equipment, net.................... 95,742 151,123 21,044 - 267,909
Goodwill, net.................................. - 400,802 373 - 401,175
Notes receivable, net.......................... 14,750 16,012 - (14,750) 16,012
Assets held for sale........................... - 18,037 177,119 - 195,156
Other assets, net.............................. 23,366 30,398 3,372 (5,000) 52,136
Investment in subsidiaries..................... (2,266,701) - - 2,266,701 -
--------------- --------------- ---------------- ------------- --------------
Total assets................................. $ (1,832,369) $ 718,512 $ 101,701 $ 2,245,241 $ 1,233,085
=============== =============== ================ ============= ==============
Current liabilities:
Current portion of long-term debt........... $ 34,147 $ 617 $ 28,644 $ - $ 63,408
Current portion of obligations under capital
leases.................................... - 34 294 - 328
Accounts payable............................ 20,441 14,265 15,169 (2,256) 47,619
Accrued compensation and benefits........... 14,917 68,594 11,533 - 95,044
Accrued interest............................ - 3,667 799 - 4,466
Accrued self-insurance obligations.......... (23,468) 75,154 1,460 - 53,146
Other accrued liabilities................... 41,695 66,540 18,104 - 126,339
Income tax payables......................... 20,596 (9,167) 2,354 - 13,783
--------------- --------------- ---------------- ------------- --------------
Total current liabilities.................... 108,328 219,704 78,357 (2,256) 404,133
Long-term debt, net of current portion......... - 47,424 28,565 (19,750) 56,239
Obligations under capital leases, net of current
portion...................................... - 100 57,025 - 57,125
Other long-term liabilities.................... - 32,652 2,055 - 34,707
Liabilities subject to compromise (see Note 2). 1,426,579 110,859 3,670 - 1,541,108
--------------- --------------- ---------------- ------------- --------------
Total liabilities............................ 1,534,907 410,739 169,672 (22,006) 2,093,312
Intercompany payables/(receivables)............ (2,501,005) 2,246,661 253,798 546 -
Commitments and contingencies..................
Minority interest.............................. - 5,964 80 - 6,044
Company-obligated manditorily redeemable
convertible preferred securities of a
subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of
the Company.................................. 322,978 - - - 322,978
Total stockholders' deficit.................... (1,189,249) (1,944,852) (321,849) 2,266,701 (1,189,249)
--------------- --------------- ---------------- ------------- --------------
Total liabilities and stockholders' deficit.... $ (1,832,369) $ 718,512 $ 101,701 $ 2,245,241 $ 1,233,085
=============== =============== ================ ============= ==============
</TABLE>
24
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 13,049 $ 6,693 $ 5,305 $ - $ 25,047
Accounts receivable, net.................... - 235,745 20,659 (1,940) 254,464
Other receivables, net...................... 296,034 (191,118) (89,000) - 15,916
Inventory, net.............................. - 35,333 7,650 - 42,983
Prepaids and other assets................... 1,796 8,825 4,466 - 15,087
--------------- --------------- ---------------- ------------- --------------
Total current assets......................... 310,879 95,478 (50,920) (1,940) 353,497
Property and equipment, net.................... 94,264 144,643 207,269 - 446,176
Goodwill, net.................................. - 407,093 68,474 - 475,567
Notes receivable, net.......................... 14,750 1,436 6,512 - 22,698
Assets held for sale........................... - 67,116 3,493 - 70,609
Other assets, net.............................. 37,229 25,280 7,432 - 69,941
Investment in subsidiaries..................... (1,242,314) - - 1,242,314 -
--------------- --------------- ---------------- ------------- --------------
Total assets................................. $ (785,192) $ 741,046 $ 242,260 $ 1,240,374 $ 1,438,488
=============== =============== ================ ============= ==============
Current liabilities:
Current portion of long-term debt........... $ 12,126 $ 1,225 $ 31,425 $ - $ 44,776
Current portion of obligations under capital
leases.................................... - 107 326 - 433
Accounts payable............................ 28,177 14,545 13,214 (2,149) 53,787
Accrued compensation and benefits........... 13,011 61,642 9,464 - 84,117
Accrued interest............................ - 2,034 938 - 2,972
Accrued self-insurance obligations.......... (12,703) 70,512 1,266 - 59,075
Other accrued liabilities................... 36,685 60,483 19,321 - 116,489
Income tax payables......................... 17,498 (9,271) 903 - 9,130
--------------- --------------- ---------------- ------------- --------------
Total current liabilities.................... 94,794 201,277 76,857 (2,149) 370,779
Long-term debt, net of current portion......... - 53,387 47,378 - 100,765
Obligations under capital leases, net of current
portion...................................... - 8,188 57,487 - 65,675
Other long-term liabilities.................... - 34,768 2,026 - 36,794
Liabilities subject to compromise (see Note 2). 1,427,020 131,498 - - 1,558,518
--------------- --------------- ---------------- ------------- --------------
Total liabilities............................ 1,521,814 429,118 183,748 (2,149) 2,132,531
Intercompany payables/(receivables)............ (1,606,984) 1,622,789 (16,015) 210 -
Commitments and contingencies..................
Minority interest.............................. - 5,821 158 - 5,979
Company-obligated manditorily redeemable
convertible preferred securities of a
subsidiary trust holding solely 7.0% convertible
junior subordinated debentures of the Company 344,119 - - - 344,119
Total stockholders' equity (deficit)........... (1,044,141) (1,316,682) 74,369 1,242,313 (1,044,141)
--------------- --------------- ---------------- ------------- --------------
Total liabilities and stockholders' equity
(deficit).................................... $ (785,192) $ 741,046 $ 242,260 $ 1,240,374 $ 1,438,488
=============== =============== ================ ============= ==============
</TABLE>
25
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Total net revenues.......................... $ 88 $ 551,924 $ 87,770 $ (1,790) $ 637,992
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs.......................... - 496,687 86,537 (1,790) 581,434
Corporate general and administrative..... 32,837 6,673 3,285 - 42,795
Depreciation and amortization............ 2,227 9,539 2,650 - 14,416
Provision for losses on accounts
receivable............................. - 8,941 92 - 9,033
Interest, net (contractual interest
expense of $51,041 for the three
months ended March 31, 2000)........... 1,243 3,664 3,317 - 8,224
Gain sale of assets...................... (1,989) (6,963) - - (8,952)
Equity interest in losses of
subsidiaries........................... 207,932 - - (207,932) -
Intercompany interest expense (income) .. (5,031) 5,031 - - -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses................. 237,219 523,572 95,881 (209,722) 646,950
--------------- --------------- ---------------- --------------- ---------------
Intercompany charges........................ (122,590) 122,180 410 _ -
--------------- --------------- ---------------- --------------- ---------------
Losses before reorganization costs and
income taxes.............................. (114,541) (93,828) (8,521) 207,932 (8,958)
Reorganization costs, net................... 51,062 11,677 93,906 - 156,645
Income taxes................................ 58 - - - 58
--------------- --------------- ---------------- --------------- ---------------
Net losses.................................. $ (165,661) $ (105,505) $ (102,427) $ 207,932 $ (165,661)
=============== =============== ================ =============== ===============
</TABLE>
26
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
AS OF MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Total net revenues.......................... $ (968) $ 580,426 $ 93,574 $ - $ 673,032
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs.......................... - 536,094 88,476 - 624,570
Corporate general and administrative..... 31,530 6,740 3,747 - 42,017
Depreciation and amortization............ 2,066 15,411 3,971 - 21,448
Provision for losses on accounts
receivable............................. - 13,699 119 - 13,818
Loss on sale of assets, net.............. 3,007 8,099 1,000 - 12,106
Interest, net............................ 28,732 4,886 3,552 - 37,170
Restructuring costs...................... 3,805 6,358 1,265 - 11,428
Loss on termination of interest rate swap 2,488 - - - 2,488
Equity interest in losses of subsidiary. 120,147 - - (120,147) -
Intercompany interest (income) .......... (5,031) 5,031 - - -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses................. 186,744 596,318 102,130 (120,147) 765,045
--------------- --------------- ---------------- --------------- ---------------
Operating income............................ (187,712) (15,892) (8,556) 120,147 (92,013)
Dividends on convertible preferred
securities of subsidiary.................. 6,516 - - - 6,516
Management fee (income) expense............. (89,669) 87,923 1,746 - -
--------------- --------------- ---------------- --------------- ---------------
Loss before income taxes and cumulative
effect of change in accounting principle.. (104,559) (103,815) (10,302) 120,147 (98,529)
Income taxes................................ 5,519 (5,038) 411 - 892
--------------- --------------- ---------------- --------------- ---------------
Earnings before cumulative effect of change
in accounting principle................... (110,078) (98,777) (10,713) 120,147 (99,421)
Cumulative effect of change in accounting
principle................................. (3,069) (9,351) (1,306) - (13,726)
--------------- --------------- ---------------- --------------- ---------------
Net losses.................................. $ (113,147) $ (108,128) $ (12,019) $ 120,147 $ (113,147)
=============== =============== ================ =============== ===============
</TABLE>
27
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses.................................... $ (165,661) $ (105,505) $ (102,427) $ 207,932 $ (165,661)
-------------- --------------- ----------------- ---------------- --------------
Adjustments to reconcile net losses to net
cash provided by (used for) operating
activities:
Equity interest in losses of subsidiaries 207,932 - - (207,932) -
Reorganization costs, net............... 51,062 11,677 93,906 - 156,645
Depreciation and amortization........... 2,227 9,539 2,650 - 14,416
Provision for losses on accounts
receivable............................. - 8,941 92 - 9,033
Gain on sale of assets.................. (1,989) (6,963) - - (8,952)
Other, net.............................. (482) - - - (482)
Changes in operating assets and liabilities:
Accounts receivable........................ - (1,178) (4,893) - (6,071)
Other current assets....................... (9,550) (4,905) 14,606 - 151
Income tax payables........................ 18,637 (15,435) 1,451 - 4,653
Other current liabilities.................. (17,532) 6,166 2,433 - (8,933)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities before reorganization costs...... 84,644 (97,663) 7,818 - (5,201)
Net cash paid for reorganization costs........ - (998) - - (998)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities.................................. 84,644 (98,661) 7,818 - (6,199)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net..................... (4,389) (2,886) (2,085) - (9,360)
Proceeds from sale of assets held for sale.... - - 5,690 - 5,690
Decrease (increase) in long-term notes
receivable.................................. - 209 1,301 - 1,510
Decrease (increase) in other assets........... 13,309 13,915 (31,793) - (4,569)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) investing
activities.................................. 8,920 11,238 (26,887) - (6,729)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit
Agreement (postpetition) ................... 22,021 - - - 22,021
Long-term debt borrowings..................... 3,550 4 2,924 - 6,478
Long-term debt repayments (prepetition)....... - - (11,785) - (11,785)
Principal payments on prepetition debt
authorized by Bankruptcy Court.............. - (992) - - (992)
Other financing activities.................... (6) - - - (6)
Intercompany advances......................... (124,053) 89,670 34,383 - -
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) financing
activities.................................. (98,488) 88,682 25,522 - 15,716
-------------- --------------- ----------------- ---------------- --------------
Effect of exchange rate on cash and cash
equivalents................................. (98) - - - (98)
-------------- --------------- ----------------- ---------------- --------------
Net increase (decrease) in cash and cash
equivalents................................. (5,022) 1,259 6,453 - 2,690
Cash and cash equivalents at beginning of year 13,049 6,693 5,305 - 25,047
-------------- --------------- ----------------- ---------------- --------------
Cash and cash equivalents at end of period.... $ 8,027 $ 7,952 $ 11,758 $ - $ 27,737
============== =============== ================= ================ ==============
</TABLE>
28
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
AS OF MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses.................................... $ (113,147) $ (108,128) $ (12,019) $ 120,147 $ (113,147)
-------------- --------------- ----------------- ---------------- --------------
Adjustments to reconcile net losses to net
cash provided by (used for) operating
activities:
Equity interest in losses of subsidiaries 120,147 - - (120,147) -
Depreciation and amortization........... 2,066 15,411 3,971 - 21,448
Provision for losses on accounts
receivable............................ - 13,699 119 - 13,818
Loss on sale of assets, net............. 3,007 8,099 1,000 - 12,106
Cumulative effect of change in
accounting principle.................. 3,069 9,351 1,306 - 13,726
Other, net.............................. 786 - - - 786
Changes in operating assets and liabilities:
Accounts receivable........................ 1,811 59,843 8,780 - 70,434
Other current assets....................... 3,060 1,293 3,460 - 7,813
Other current liabilities.................. (61,264) 16,897 3,071 - (41,296)
Income tax payables........................ (481) - - - (481)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities.................................. (40,946) 16,465 9,688 - (14,793)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net..................... (16,096) (17,163) (6,210) - (39,469)
Acquisitions, net of cash acquired............ - (1,901) 676 - (1,225)
Increase in long-term notes receivable........ 1,779 (4,108) 286 - (2,043)
Other assets expenditures..................... (6,177) (96) 4,293 - (1,980)
-------------- --------------- ----------------- ---------------- --------------
Net cash used for investing activities........ (20,494) (23,268) (955) - (44,717)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings..................... 103,351 (2,333) 9,387 - 110,405
Long-term debt repayments (prepetition)....... (4,511) (20,093) (3,049) - (27,653)
Conversion of Mediplex 6.5% subordinated
debentures due 2003......................... - (5,840) - - (5,840)
Net proceeds from issuance of common stock.... 462 - - - 462
Purchases of treasury stock................... (264) - - - (264)
Other financing activities.................... 394 (281) (396) - (283)
Intercompany advances......................... (35,121) 52,491 (17,370) - -
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) financing
activities.................................. 64,311 23,944 (11,428) - 76,827
-------------- --------------- ----------------- ---------------- --------------
Effect of exchange rate on cash and cash
equivalents................................. - - 2,347 - 2,347
-------------- --------------- ----------------- ---------------- --------------
Net increase (decrease) in cash and cash
equivalents................................. 2,871 17,141 (348) - 19,664
Cash and cash equivalents at beginning of year (9,964) 26,406 11,062 - 27,504
-------------- --------------- ----------------- ---------------- --------------
Cash and cash equivalents at end of period.... $ (7,093) $ 43,547 $ 10,714 $ - $ 47,168
============== =============== ================= ================ ==============
</TABLE>
29
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
(15) FILER/NON-FILER FINANCIAL STATEMENTS
In accordance with SOP 90-7, the debtor entities are required to present
condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
ASSETS
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 16,813 $ 10,924 $ - $ 27,737
Accounts receivable, net.................................... 210,718 7,455 (1,146) 217,027
Other receivables, net...................................... 109,494 (108,498) - 996
Inventory, net.............................................. 31,559 844 - 32,403
Prepaids and other assets................................... 22,063 471 - 22,534
------------- ------------ ------------- --------------
Total current assets........................................ 390,647 (88,804) (1,146) 300,697
Property and equipment, net................................... 239,177 28,732 - 267,909
Goodwill, net................................................. 400,802 373 - 401,175
Notes receivable, net......................................... 16,012 - - 16,012
Assets held for sale.......................................... 18,037 177,119 - 195,156
Other assets, net............................................. 45,463 6,673 - 52,136
Investment in subsidiaries.................................... (26,850) - 26,850 -
------------- ------------ ------------- --------------
Total assets................................................ $ 1,083,288 $ 124,093 $ 25,704 $ 1,233,085
============= ============ ============= ==============
</TABLE>
(Continued on next page.)
30
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current liabilities:
Current portion of long-term debt............................. $ 34,649 $ 28,759 $ - $ 63,408
Current portion of obligations under capital leases........... 26 302 - 328
Accounts payable.............................................. 34,683 14,628 (1,692) 47,619
Accrued compensation and benefits............................. 84,153 10,891 - 95,044
Accrued interest.............................................. 3,050 1,416 - 4,466
Accrued self-insurance obligations............................ 52,391 755 - 53,146
Other accrued liabilities..................................... 107,059 19,280 - 126,339
Income tax payables........................................... 13,032 751 - 13,783
------------- -------------- ------------- ---------------
Total current liabilities..................................... 329,043 76,782 (1,692) 404,133
Long-term debt, net of current portion......................... 18,612 37,627 - 56,239
Obligations under capital leases, net of current portion....... 71 57,054 - 57,125
Other long-term liabilities.................................... 32,652 2,055 - 34,707
Liabilities subject to compromise (see Note 2)................. 1,541,108 - - 1,541,108
------------- -------------- ------------- ---------------
Total liabilities............................................ 1,921,486 173,518 (1,692) 2,093,312
Commitments and contingencies..................................
Minority interest.............................................. 3,147 2,897 - 6,044
------------- -------------- ------------- ---------------
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of the Company.... 322,978 - - 322,978
------------- -------------- ------------- ---------------
Intercompany................................................... 24,926 (25,472) 546 -
------------- -------------- ------------- ---------------
Stockholders' equity (deficit):
Preferred stock of $.01 par value, authorized
5,000,000 shares, none issued.............................. - - - -
Common stock of $.01 par value, authorized
155,000,000 shares, 63,937,302 shares issued and outstanding
as of March 31, 2000....................................... 636 2,579 (2,579) 636
Additional paid-in capital................................... 798,399 273,662 (273,662) 798,399
Accumulated deficit.......................................... (1,951,168) (293,530) 293,530 (1,951,168)
Accumulated other comprehensive loss......................... (9,561) (9,561) 9,561 (9,561)
------------- -------------- ------------- ---------------
(1,161,694) (26,850) 26,850 (1,161,694)
Less:
Common stock held in treasury, at cost, 2,212,983
shares as of March 31, 2000.............................. (27,376) - - (27,376)
Grantor stock trust, at market, 1,915,935 shares as of
March 31, 2000........................................... (179) - - (179)
------------- -------------- ------------- ---------------
Total stockholders' deficit ................................. (1,189,249) (26,850) 26,850 (1,189,249)
------------- -------------- ------------- ---------------
Total liabilities and stockholders' deficit.................. $1,083,288 $ 124,093 $ 25,704 $ 1,233,085
============= ============== ============= ===============
</TABLE>
31
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 18,532 $ 6,515 $ - $ 25,047
Accounts receivable, net.................................... 221,800 33,692 (1,028) 254,464
Other receivables, net...................................... 104,689 (88,773) - 15,916
Inventory, net.............................................. 34,485 8,498 - 42,983
Prepaids and other assets................................... 10,592 4,495 - 15,087
------------- ------------ ------------- --------------
Total current assets........................................ 390,098 (35,573) (1,028) 353,497
Property and equipment, net.................................. 226,357 219,819 - 446,176
Goodwill, net................................................ 407,093 68,474 - 475,567
Notes receivable, net........................................ 16,185 6,513 - 22,698
Assets held for sale......................................... 67,116 3,493 - 70,609
Other assets, net............................................ 51,664 18,277 - 69,941
Investment in subsidiaries................................... 69,230 - (69,230) -
------------- ------------ ------------- --------------
Total assets................................................ $1,227,743 $ 281,003 $ (70,258) $ 1,438,488
============= ============ ============= ==============
</TABLE>
(Continued on next page.)
32
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current liabilities:
Current portion of long-term debt............................. $ 13,290 $ 31,486 - $ 44,776
Current portion of obligations under capital leases........... 70 363 - 433
Accounts payable.............................................. 43,796 11,566 (1,575) 53,787
Accrued compensation and benefits............................. 74,737 9,380 - 84,117
Accrued interest.............................................. 1,572 1,400 - 2,972
Accrued self-insurance obligations............................ 58,463 612 - 59,075
Other accrued liabilities..................................... 97,153 19,336 - 116,489
Income tax payables........................................... 8,227 903 - 9,130
------------- -------------- ------------- ---------------
Total current liabilities..................................... 297,308 75,046 (1,575) 370,779
Long-term debt, net of current portion......................... 47,872 52,893 - 100,765
Obligations under capital leases, net of current portion....... 8,187 57,488 - 65,675
Other long-term liabilities.................................... 34,768 2,026 - 36,794
Liabilities subject to compromise (see Note 2)................. 1,558,518 - - 1,558,518
------------- -------------- ------------- ---------------
Total liabilities............................................. 1,946,653 187,453 (1,575) 2,132,531
Commitments and contingencies..................................
Minority interest.............................................. 3,394 2,585 - 5,979
------------- -------------- ------------- ---------------
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of the Company..... 344,119 - - 344,119
------------- -------------- ------------- ---------------
Intercompany................................................... (22,282) 21,735 547 -
------------- -------------- ------------- ---------------
Stockholders' equity (deficit):
Preferred stock of $.01 par value, authorized
5,000,000 shares, none issued............................... - - - -
Common stock of $.01 par value, authorized
155,000,000 shares, 63,937,302 shares issued and
outstanding as of December 31, 1999......................... 639 2,579 (2,579) 639
Additional paid-in capital.................................... 777,164 263,250 (263,250) 777,164
Accumulated deficit........................................... (1,785,507) (191,582) 191,582 (1,785,507)
Accumulated other comprehensive loss.......................... (5,017) (5,017) 5,017 (5,017)
------------- -------------- ------------- ---------------
(1,012,721) 69,230 (69,230) (1,012,721)
Less:
Unearned compensation................................. (3,966) - - (3,966)
Common stock held in treasury, at cost, 2,212,983
shares as of December 31, 1999...................... (27,376) - - (27,376)
Grantor stock trust, at market, 1,915,935 shares as of
December 31, 1999................................... (78) - - (78)
------------- -------------- -------------- -------------
Total stockholders' equity (deficit) ......................... (1,044,141) 69,230 (69,230) (1,044,141)
------------- -------------- ------------- ---------------
Total liabilities and stockholders' equity (deficit).......... $1,227,743 $ 281,003 $ (70,258) $ 1,438,488
============= ============== ============= ===============
</TABLE>
33
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total net revenues................................................ $ 551,102 $ 88,079 $ (1,189) $ 637,992
-------------- ------------- -------------- ---------------
Costs and expenses:
Operating costs................................................. 496,957 85,666 (1,189) 581,434
Corporate general and administrative............................ 39,511 3,284 - 42,795
Depreciation and amortization................................... 11,704 2,712 - 14,416
Provision for losses on accounts receivable..................... 8,888 145 - 9,033
Interest, net (contractual interest expense of $51,041 for the
three months ended March 31, 2000)............................. 4,749 3,475 - 8,224
Gain on sale of assets.......................................... (8,952) - - (8,952)
Equity interest in losses of subsidiaries....................... 101,948 - (101,948) -
-------------- ------------- -------------- ---------------
Total costs and expenses........................................ 654,805 95,282 (103,137) 646,950
Management fee (income) expense................................... (839) 839 - -
-------------- ------------- -------------- ---------------
Losses before reorganization costs, net and income taxes.......... (102,864) (8,042) 101,948 (8,958)
Reorganization costs, net......................................... 62,739 93,906 - 156,645
Income taxes...................................................... 58 - - 58
-------------- ------------- -------------- ---------------
Net losses........................................................ $ (165,661) $ (101,948) $ 101,948 $ (165,661)
============== ============= ============== ===============
</TABLE>
34
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
AS OF MARCH 31, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses............................................................ $ (165,661) $ (101,948) $ 101,948 $ (165,661)
-------------- --------------- ------------- -------------
Adjustments to reconcile net losses to net cash provided by (used for)
operating activities:
Equity interest in losses of subsidiaries............................ 96,080 5,868 (101,948) -
Reorganization costs, net............................................ 15,565 141,080 - 156,645
Depreciation and amortization........................................ 11,704 2,712 - 14,416
Provision for losses on accounts receivable.......................... 8,888 145 - 9,033
Gain on sale of assets............................................... (8,952) - - (8,952)
Other, net........................................................... (482) - - (482)
Changes in operating assets and liabilities:
Accounts receivable................................................. (2,764) (3,425) 118 (6,071)
Other current assets................................................ (14,834) 14,985 - 151
Income taxes payable................................................ 4,805 (152) - 4,653
Other current liabilities........................................... (13,451) 4,636 (118) (8,933)
-------------- --------------- ------------- -------------
Net cash provided by (used for) operating activities before
reorganization costs ................................................. (69,102) 63,901 - (5,201)
-------------- --------------- ------------- -------------
Net cash paid for reorganization costs................................. (998) - - (998)
Net cash provided by (used for) operating activities................ (70,100) 63,901 - (6,199)
-------------- --------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................. (7,275) (2,085) - (9,360)
Proceeds from sale of assets held for sale............................ - 5,690 - 5,690
Increase in long-term notes receivable................................ 208 1,302 - 1,510
Decrease (increase) in other assets................................... 3,762 (8,331) - (4,569)
-------------- --------------- ------------- -------------
Net cash used for investing activities............................... (3,305) (3,424) - (6,729)
-------------- --------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit Agreement (postpetition) ....... 22,021 - - 22,021
Long-term debt borrowings............................................. 3,554 2,924 - 6,478
Long-term debt repayments (prepetition)............................... - (11,785) - (11,785)
Principal payments on prepetition debt authorized by Bankruptcy Court. (992) - - (992)
Intercompany advances................................................. 47,207 (47,207) - -
Other financing activities............................................ (6) - - (6)
-------------- --------------- -------------- -------------
Net cash provided by (used for) financing activities................. 71,784 (56,068) - 15,716
-------------- --------------- -------------- -------------
Effect of exchange rate on cash and cash equivalents................... (98) - - (98)
-------------- --------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................... (1,719) 4,409 - 2,690
Cash and cash equivalents at beginning of year......................... 18,532 6,515 - 25,047
-------------- --------------- ------------- -------------
Cash and cash equivalents at end of period............................. $ 16,813 $ 10,924 $ - $ 27,737
============== =============== ============= =============
</TABLE>
35
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(16) SUBSEQUENT EVENTS
The Company executed a purchase agreement to sell its therapy equipment
manufacturing operations in the second quarter of 2000 and the transaction was
completed in the third quarter of 2000. The purchase agreement transfered most
assets of the business, including equipment and accounts receivable, to the
purchaser. However, the Company retained some assets for its use in providing
therapy services. The Company received no cash consideration from this sale.
Instead, consideration for the sale was the settlement of certain prepetition
claims the purchaser held against the Company.
During the second quarter of 2000, Sun divested 13 pharmacies in the United
Kingdom for an amount which approximates the Company's investment in such
operations.
In the first quarter of 2000, the Company entered into an agreement to sell
16 assisted living facilities, of which one campus includes a skilled nursing
facility. A part of the transaction involving 12 facilities was completed during
the first quarter of 2000. See Note 7 - Assets Held for Sale. During the second
quarter of 2000, the final part of the transaction involving four facilities was
completed. The cash consideration received from this second quarter transaction
was approximately $0.2 million. The aggregate debt, capital leases and other
liabilities assumed by the purchaser in this second quarter transaction totaled
approximately $15.8 million. The Company previously recorded the anticipated
loss on the aggregate sale of the 16 facilities by recording a loss on assets
held for sale of approximately $17.4 million and $53.8 million during 1999 and
1998, respectively.
During the second quarter of 2000, the Company transferred two assisted
living facilities from the other operations segment to the inpatient services
segment.
During the second quarter of 2000, the Company divested 21 skilled nursing
facilities. The net revenues and net operating losses for the three months ended
March 31, 2000 for these 20 facilities were approximately $18.7 million and $1.0
million, respectively. The aggregate net loss on disposal estimated for these
divestitures during the second quarter to reduce the carrying value of the
facilites to the Company's estimate of net realizable book value was
approximately $5.3 million. The Company had recorded losses during 1999 and in
the first quarter of 2000 to reduce the carrying value of certain of these
facilities to the Company's estimates of net realizable book value.
As of August 31, 2000, the Company had identified 69 additional skilled
nursing facilities as candidates for divestiture through foreclosure sales,
lease terminations through mutual agreement with the lessors, or transferring
operations to successor operators. The net revenues and net operating losses for
the three months ended March 31, 2000 for these 69 facilities were approximately
$79.7 million and $4.9 million, respectively. See Note 7 - Assets Held for Sale.
During the second quarter of 2000, the Company identified one
rehabilitation facility for divestiture.
Divestitures require Bankruptcy Court approval.
36
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sun Healthcare Group, Inc., through its direct and indirect subsidiaries
(collectively referred to as "Sun" or the "Company"), is one of the largest
providers of long-term, subacute and related specialty healthcare services in
the United States and the United Kingdom. The Company also has operations in
Spain, Germany and Australia. The Company operates through four principal
business segments. In October 1999, the Company commenced cases under Chapter 11
of the U.S. Bankruptcy code and is currently operating its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
INPATIENT SERVICES: This segment provides, among other services, inpatient
skilled nursing and custodial services as well as rehabilitative, restorative
and transitional medical services. The Company provides 24-hour nursing care in
these facilities by registered nurses, licenses practical nurses and certified
nursing assistants. At March 31, 2000, the Company operated 347 long-term and
subacute care facilities with 39,282 licensed beds compared to 397 facilities
with 44,930 licensed beds at March 31, 1999. Included in the preceding as of
August 31, 2000, are 69 facilities with 8,240 licensed beds which the Company
has announced its intention to divest through foreclosure sales, lease
terminations through mutual agreement with the lessors or transferring
operations to successor operators. See "Note 7 - Assets Held for Sale and Note
16 - Subsequent Events in the Company's Consolidated Financial Statements."
REHABILITATION AND RESPIRATORY THERAPY SERVICES: This segment provides,
among other things, physical, occupational, speech and respiratory therapy
services, respiratory therapy supplies, equipment and oxygen to affiliated and
nonaffiliated skilled nursing facilities. As of March 31, 2000, the Company's
rehabilitation and respiratory therapy services segment provided services to
1,483 facilities in 41 states, of which 1,111 were operated by nonaffiliated
parties compared to 1,620 facilities in 44 states as of March 31, 1999, of which
1,237 were operated by nonaffiliated parties. As of August 31, 2000, the Company
has announced its intention to divest one rehabilitation facility.
PHARMACEUTICAL AND MEDICAL SUPPLY SERVICES: This segment is comprised of an
institutional pharmaceutical subsidiary and a medical supply subsidiary. The
pharmaceutical subsidiary provides pharmaceutical products primarily to
long-term and subacute care facilities for such purposes as infusion therapy,
pain management, antibiotic therapy and parenteral nutrition, as well as
providing consultant pharmacist services. The medical supply subsidiary
primarily provides medical supplies to long-term care and subacute care
facilities. The Company's pharmaceutical subsidiary provided pharmaceutical
products and services to 821 long-term and subacute care facilities, including
511 nonaffiliated facilities, as of March 31, 2000 through its 40 pharmacies and
pharmaceutical billing and consulting center. As of March 31, 1999,
pharmaceutical products and services were provided to approximately 955
facilities, including 592 nonaffiliated facilities. The medical supply
subsidiary provided products to over 1,563 affiliated and nonaffiliated
facilities as of March 31, 2000 compared to 2,070 affiliated and nonaffiliated
facilities as of March 31, 1999.
INTERNATIONAL OPERATIONS: This segment consists of long-term care
facilities in the United Kingdom, Spain and Germany as well as acute care
hospitals in Australia. This segment also provides pharmaceutical services in
the United Kingdom, Germany and Australia and medical supplies in Australia. At
March 31, 2000, the Company operated 146 inpatient facilities with 8,326
licensed beds in the United Kingdom; 11 inpatient facilities with 1,688 beds in
Spain; 17 facilities with 1,220 licensed beds in Germany and 5 hospitals with
336 licensed beds in Australia, compared to 155 facilities with 8,705 licensed
beds in the United Kingdom; 10 facilities with 1,604 licensed beds in Spain; 16
facilities with 1,122 licensed beds in Germany; and 5 hospitals with 309
licensed beds in Australia as of March 31, 1999.
The Company is currently soliciting offers to purchase its international
operations. The Company sold five pharmacies in the United Kingdom during the
first quarter of 2000 and sold 13 pharmacies in the United Kingdom during the
second quarter of 2000. See "Note 7 - Assets Held for Sale and Note 16 -
Subsequent Events in the Company's Consolidated Financial Statements." No
assurance can be given that the remaining international operations will be sold.
37
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company completed the sale of its Canadian operations in the first
quarter of 1999. An additional loss on sale of approximately $2.0 million was
recorded in the first quarter of 1999. The charge was recorded in loss on sale
of assets, net in the Company's Consolidated Statements of Losses.
OTHER OPERATIONS
During the first quarter of 2000, the Company's other operations included
temporary therapy services, assisted living services, home health, software
development and other ancillary services. The Company divested its hospice
operations in the fourth quarter of 1999. The Company's temporary therapy
service operations provided 202,105 temporary therapy staffing hours and 101,255
non-therapy hours to nonaffiliates for the three months ended March 31, 2000
compared to 290,417 temporary therapy staffing hours for the three months ended
March 31, 1999. The assisted living subsidiary which is classified as assets
held for sale as of March 31, 2000 and December 31, 1999, operated 32 assisted
living facilities with 3,450 beds in the United States as of March 31, 1999. In
October 1999, the Company entered into an agreement to divest certain of its
assisted living facilities in the United States. In December 1999, the Company
divested eight assisted living facilities in which it had held a ten-percent
equity interest. In addition, during December 1999 the Company sold a majority
interest in four assisted living facilities housed on three campuses, one of
which included a skilled nursing facility. During the first quarter of 2000, the
Company entered into an agreement to sell 16 assisted living facilities, one of
which includes a skilled nursing facility on its campus. During the first
quarter of 2000, 12 of the assisted living facilities were divested under this
agreement. During the second quarter of 2000, four of the assisted living
facilities were divested under this agreement. The assisted living subsidiary
operated six assisted living facilities with 539 beds in the United States as of
March 31, 2000. See "Note 7 - Assets Held for Sale and Note 16 - Subsequent
Events in the Company's Consolidated Financial Statements."
38
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain operating data for the Company as of
the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999 1999
---------------------- ----
<S> <C> <C> <C>
Inpatient Services:
Facilities................................................. 347 397 354
Licensed beds.............................................. 39,282 44,930 39,867
Rehabilitation and Respiratory Therapy Service Operations:
Nonaffiliated facilities served............................ 1,111 1,237 1,158
Affiliated facilities served............................... 372 383 373
--------------- ---------------- -------------------
Total................................................. 1,483 1,620 1,531
=============== ================ ===================
Pharmaceutical and Medical Supply Services:
Nonaffiliated facilities served............................ 1,560 592 (1) 1,805
Affiliated facilities served............................... 373 363 (1) 702
--------------- ---------------- -------------------
Total................................................. 1,933 955 2,507
=============== ================ ===================
(1) Includes only pharmaceutical facilities served.
International Operations:
Facilities
United Kingdom......................................... 146 155 145
Other foreign.......................................... 33 31 33
--------------- ---------------- -------------------
Total................................................. 179 186 178
=============== ================ ===================
Licensed beds
United Kingdom......................................... 8,326 8,705 8,320
Other foreign.......................................... 3,244 3,035 3,192
--------------- ---------------- -------------------
Total................................................. 11,570 11,740 11,512
=============== ================ ===================
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth the amount of certain elements of total net
revenues for the periods presented (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Inpatient Services.............................................................. $ 438,272 $ 461,105
Rehabilitation and Respiratory Therapy Services................................. 57,516 70,066
Pharmaceutical and Medical Supply Services...................................... 73,831 75,822
International Operations........................................................ 75,136 71,664
Other Operations................................................................ 49,780 64,514
Corporate....................................................................... 88 (968)
Intersegment Eliminations....................................................... (56,631) (69,171)
------------------ -----------------
Total Net Revenues.............................................................. $ 637,992 $ 673,032
================== =================
</TABLE>
39
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Inpatient facilities revenues for long-term care, subacute care and
assisted living services include revenues billed to patients for therapy and
pharmaceutical services and medical supplies provided by the Company's
affiliated operations. Revenues for rehabilitation and respiratory therapy
services provided to domestic affiliated facilities were approximately $31.5
million and $38.8 million for the three months ended March 31, 2000 and 1999,
respectively. Revenues for pharmaceutical and medical supply services provided
to domestic affiliated facilities were approximately $22.2 million and $23.8
million for the three months ended March 31, 2000 and 1999, respectively.
Revenues for services provided by other non-reportable segments to affiliated
facilities were approximately $2.7 million and $6.4 million for the three months
ended March 31, 2000 and 1999, respectively.
The following table sets forth the amount of net segment earnings (losses)
for the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Inpatient Services..................................................... $ 8,529 $ 3,180
Rehabilitation and Respiratory Therapy Services........................ 9,121 426
Pharmaceutical and Medical Supply Services............................. 1,999 (37)
International Operations............................................... (5,672) (2,624)
Other Operations....................................................... (3,319) (3,359)
-------------------- -------------------
Earnings (losses) before income taxes and corporate
allocation of interest and management fees........................ 10,658 (2,414)
Corporate.............................................................. (28,568) (70,093)
-------------------- -------------------
Net segment losses ................................................... $(17,910) $(72,507)
==================== ===================
</TABLE>
40
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate expenses include amounts for interest and corporate general and
overhead expenses including those related to managing the Company's
subsidiaries. The Company allocates these to its segments through management
fees and intercompany interest charges. Management fees are assessed based on
segment net revenues. Interest is charged based upon average net asset balances
at rates determined by management.
The following table presents the percentage of total net revenues
represented by certain items for the Company for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Total net revenues 100.0% 100.0%
Costs and expenses:
Operating costs ...................................................... 91.1% 92.8%
Corporate general and administrative.................................. 6.7% 6.2%
Depreciation and amortization......................................... 2.3% 3.2%
Provision for losses on accounts receivable........................... 1.4% 2.1%
Interest, net......................................................... 1.3% 5.5%
Restructuring costs................................................... - 1.7%
Loss on sale of assets, net........................................... - 1.8%
Loss on termination of interest rate swaps............................ - 0.4%
Gain on sale of assets................................................ (1.4%) -
--------------------- --------------------
Total costs, expenses and gains before reorganization costs..... 101.4% 113.7%
Dividends on convertible preferred securities................... - 1.0%
--------------------- --------------------
Losses before reorganization costs, income taxes and cumulative effect
of change in accounting principle............................... (1.4%) (14.7%)
Reorganization costs.................................................. 24.6% -
Income taxes.......................................................... 0.0% 0.1%
--------------------- --------------------
Net losses before cumulative effect of change
in accounting principle......................................... (26.0%) (14.8%)
Cumulative effect of change in accounting principle................... - (2.0%)
--------------------- --------------------
Net losses ............................................................... (26.0%) (16.8%)
===================== ====================
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
INPATIENT SERVICES
On a same store basis, net revenues, which include revenues generated from
therapy and pharmaceutical services provided at the Inpatient Services
facilities, increased approximately $15.9 million from approximately $422.4
million for the three months ended March 31, 1999 to approximately $438.3
million for the three months ended March 31, 2000, a 3.7% increase. This
increase is primarily the result of enhanced Medicaid rates partially offset by
decreased Medicare rates.
On a same store basis, operating expenses, which include rent expense of
approximately $48.8 million and $48.1 million for the three months ended March
31, 2000 and 1999, respectively, increased 3.5% from approximately $394.6
million for the three months ended March 31, 1999 to approximately $408.3
million for the three months ended March 31, 2000. The increase was primarily
due to increasing labor costs. On a same store basis, operating expenses as a
percentage of net revenues decreased from 93.4% for the three months ended March
31, 1999 to 93.2% for the three months ended March 31, 2000.
41
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On a same store basis, corporate general and administrative expenses, which
include regional costs related to the supervision of operations, were
approximately $10.1 million and $8.2 million for the three months ended March
31, 2000 and 1999, respectively. On a same store basis, as a percentage of net
revenues, corporate general and administrative expenses increased from 1.9% for
the three months ended March 31, 1999 to 2.3% for the three months ended March
31, 2000. This change is primarily due to an increase in the corporate overhead
allocation partially offset by a reduction in regional overhead due to facility
divestitures.
On a same store basis, the provision for losses on accounts receivable
decreased 27.0% from approximately $3.7 million for the three months ended March
31, 1999 to approximately $2.7 million for the three months ended March 31,
2000. On a same store basis, as a percentage of net revenues, provision for
losses on accounts receivable decreased from 0.9% for the three months ended
March 31, 1999 to 0.6% for the three months ended March 31, 2000. During the
first quarter of 1999, the Company increased its reserves due to a deterioration
in the aging of certain accounts receivable. A similar increase was not
necessary in the first quarter of 2000.
On a same store basis, depreciation and amortization decreased 31.3% from
approximately $8.0 million for the three months ended March 31, 1999 to
approximately $5.5 million for the three months ended March 31, 2000. On a same
store basis, as a percentage of net revenues, depreciation and amortization
expense decreased from 1.9% for the three months ended March 31, 1999 to 1.3%
for the three months ended March 31, 2000. The decrease is primarily the result
of the determination that certain of the Company's long-lived assets were
impaired, which resulted in the write-down of certain long-lived assets in the
second and fourth quarters of 1999.
Net interest expense increased 33.3% from approximately $1.8 million for
the three months ended March 31, 1999 to approximately $2.4 million for the
three months ended March 31, 2000. As a percentage of net revenues, interest
expense increased from 0.4% for the three months ended March 31, 1999 to 0.5%
for the three months ended March 31, 2000.
REHABILITATION AND RESPIRATORY THERAPY SERVICES
Net revenues from rehabilitation and respiratory therapy services decreased
18.1% from approximately $70.1 million for the three months ended March 31, 1999
to approximately $57.4 million for the three months ended March 31, 2000.
Revenues from services provided to affiliated facilities decreased from
approximately $38.8 million for the three months ended March 31, 1999 to
approximately $31.3 million for the three months ended March 31, 2000, a
decrease of 19.3%. Revenues from services provided to nonaffiliated facilities
decreased approximately $5.2 million, or 16.6%, from approximately $31.3 million
for the three months ended March 31, 1999 to approximately $26.1 million for the
three months ended March 31, 2000. These decreases are a result of the
industry's transition to PPS. PPS resulted in a reduction of therapy provided
(volume) and downward pressure on market rates as contract therapy companies
lowered prices in an effort to remain competitive with other methods of therapy
provision. Specifically, many facilities moved away from the use of contract
therapy companies in favor of "in-house" rehabilitation and respiratory therapy
models in an effort to better control costs under a fixed reimbursement system.
This was especially existent within respiratory therapy as this service was not
covered under the ancillary component of the PPS rate structure. The net
revenues for the three months ended March 31, 1999 were significantly down from
prior periods as this was the first quarter in which PPS was fully implemented
for the majority of the industry. The net revenues decline has continued, with a
significant reduction in contracts from the first quarter of 1999 to the first
quarter of 2000. Specifically, there were 1,620 affiliated and nonaffiliated
contracts as of March 31, 1999 as compared to 1,483 affiliated and nonaffiliated
contracts as of March 31, 2000.
Operating expenses decreased 33.5% from approximately $65.1 million for the
three months ended March 31, 1999 to approximately $43.3 million for the three
months ended March 31, 2000. The decrease resulted primarily from the decline in
the demand for the Company's therapy services resulting in a reduction in the
number of therapists employed by the Company's therapy services (see "Other
Special and Non-Recurring Charges - Restructuring Costs"). Operating expenses as
a percentage of total revenue decreased from 92.9% for the three months ended
March 31, 1999 to 75.4% for the three months ended March 31, 2000. This decrease
is attributable to reductions in the cost structure. The Company's
rehabilitation subsidiary went through a significant restructuring in the first
quarter of 1999 which has dramatically reduced its cost structure by reducing
overhead costs through the reduction of regional offices. In addition, new
operating models were put in place to improve the productivity of the
therapists.
42
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for losses on accounts receivable increased 13.0% from
approximately $2.3 million for the three months ended March 31, 1999 to
approximately $2.6 million for the three months ended March 31, 2000. As a
percentage of net revenues, provision for losses on accounts receivable
increased from 3.3% for the three months ended March 31, 1999 to 4.5% for the
three months ended March 31, 2000. Reserves were increased due to the impact of
PPS, which for certain nonaffiliated customers has negatively affected their
cash flows, adversely affecting the collectibility of amounts due to the
Company.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, were approximately $1.5 million for
the three months ended March 31, 2000. The Company did not allocate corporate
general and administrative expenses to the rehabilitation and respiratory
services segment during the three months ended March 31, 1999.
Depreciation and amortization decreased 52.7% from approximately $2.1
million for the three months ended March 31, 1999 to approximately $1.0 million
for the three months ended March 31, 2000. As a percentage of net revenues,
depreciation and amortization expense decreased from 3.0% for the three months
ended March 31, 1999 to 1.7% for the three months ended March 31, 2000,
respectively. The decrease is primarily a result of the determination that
certain of the Company's long-lived assets were impaired, which resulted in
write-downs of certain long-lived assets in the second and fourth quarters of
1999.
PHARMACEUTICAL AND MEDICAL SUPPLY SERVICES
Net revenues from pharmaceutical and medical supply services decreased 2.6%
from approximately $75.8 million for the three months ended March 31, 1999 to
approximately $73.8 for the three months ended March 31, 2000. Affiliated
pharmacy revenues decreased due to the Company's inpatient facility
divestitures. In addition, the pharmacy and medical supply operations both
experienced a loss of nonaffiliated contracts.
Operating expenses decreased 0.3% from approximately $67.1 million for the
three months ended March 31, 1999 to approximately $66.9 million for the three
months ended March 31, 2000. Operating expenses as a percentage of revenue
increased from 88.6% for the three months ended March 31, 1999 to 90.7% for the
three months ended March 31, 2000.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, were approximately $1.3 million for
the three months ended March 31, 2000. The Company did not allocate corporate
general and administrative expenses to the pharmaceutical and medical supply
services segment during the three months ended March 31, 1999.
Provision for losses on accounts receivable decreased from approximately
$6.6 million for the three months ended March 31, 1999 to approximately $2.3
million for the three months ended March 31, 2000. As a percentage of net
revenues, the provision for losses on accounts receivable decreased from 8.7%
for the three months ended March 31, 1999 to 3.1% for the three months ended
March 31, 2000. During the first quarter of 1999 the Company increased its
reserve as a result of the effect PPS had on non-affiliated customers' cash flow
which impacted the collectibility of accounts receivable. A similar increase was
not necessary during the first quarter of 2000.
Depreciation and amortization decreased 38.1% from approximately $2.1
million for the three months ended March 31, 1999 to approximately $1.3 million
for the three months ended March 31, 2000. As a percentage of net revenues,
depreciation and amortization expense decreased from 2.7% for the three months
ended March 31, 1999 to 1.8% for the three months ended March 31, 2000. The
decrease is primarily the result of the determination that certain of the
Company's long-lived assets were impaired, which resulted in write-down of
certain long-lived assets in the second and fourth quarters of 1999.
43
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first quarter of 2000, the Company identified two domestic
pharmacies for divestiture. See "Note 7 - Assets Held for Sale in the Company's
Consolidated Financial Statements."
INTERNATIONAL OPERATIONS
Revenues from international operations increased approximately $3.4
million, or 4.7%, from approximately $71.7 million for the three months ended
March 31, 1999 to approximately $75.1 million for the three months ended March
31, 2000. The increase was primarily the result of occupancy and rate increases
in the United Kingdom's inpatient facilities.
Operating expenses, which include rent expense of approximately $9.7
million and $10.8 million for the three months ended March 31, 1999 and 2000,
respectively, increased approximately 11.1% from approximately $64.8 million for
the three months ended March 31, 1999 to approximately $72.0 million for the
three months ended March 31, 2000. As a percentage of revenues, operating
expenses increased from 90.4% for the three months ended March 31, 1999 to 95.8%
for the three months ended March 31, 2000. The increase is primarily
attributable to increased leasing expense in the United Kingdom due to a sales
lease-back transaction completed in 1999 and increased labor costs due to wage
inflation and the use of temporary staffing.
Depreciation and amortization decreased 28.6% from approximately $3.5
million for the three months ended March 31, 1999 to approximately $2.5 million
for the three months ended March 31, 2000. The decrease is primarily the result
of the determination that certain of the Company's long-lived assets were
impaired, which resulted in the write-down of certain long-lived assets in the
second and fourth quarters of 1999.
The Company is currently soliciting offers to purchase its international
operations. The Company divested five pharmacies in the United Kingdom during
the first quarter of 2000 and 13 pharmacies in the United Kingdom during the
second quarter of 2000. No assurance can be given that the remaining
international operations will be sold. The Company recorded a charge of
approximately $141.1 million in the first quarter of 2000 to reduce the carrying
value of its international operations to its estimate of selling value less
costs to sell. The charge is recorded in reorganization costs in the Company's
Consolidated Statements of Losses. See "Note 7 - Assets Held for Sale and Note
16 - Subsequent Events in the Company's Consolidated Financial Statements."
OTHER NONREPORTABLE SEGMENTS AND CORPORATE GENERAL AND ADMINISTRATIVE
DEPARTMENTS
Nonreportable segments include temporary therapy staffing, home health,
assisted living, software development and other ancillary services. During the
fourth quarter of 1999, the Company divested 12 of its assisted living
facilities and its hospice operations in the United States. On a same store
basis, revenues from other nonreportable segments decreased 15.7% from
approximately $59.1 million for the three months ended March 31, 1999 to
approximately $49.8 million for the three months ended March 31, 2000.
Approximately $1.9 million of the decrease was in the Company's temporary
therapy staffing subsidiary which was adversely affected by the long-term care
industry's transition to PPS. Approximately $2.9 million of the decrease was in
the Company's subsidiary that provides Medicare billing services. During 1999,
Medicare billing services were provided to both affiliated and nonaffiliated
entities. During the first quarter of 2000, Medicare billing services were
provided only to nonaffiliated entities. Approximately $2.0 million of the
decrease was in the Company's subsidiary that provides home health care
services. The Company announced its intent to divest this subsidiary in the
second quarter of 1999 which caused a decrease in its customer base and
revenues. Although the Company no longer intends to divest the subsidiary,
customers and revenues have not returned to the first quarter 1999 levels.
Approximately $0.9 million of the decrease was in the Company's subsidiary that
provides radiology and laboratory services. Approximately $0.3 million of the
$0.9 million decrease was due to the closure of a laboratory in the second
quarter of 1999 and approximately $0.6 million of the decrease was due to an
increase in contractual allowances during the first quarter of 2000.
On a same store basis, operating expenses decreased 15.2% from
approximately $55.1 million for the three months ended March 31, 1999 to
approximately $46.7 for the three month periods ended March 31, 2000. Total
revenues and operating expenses for nonreportable segments represent less than
10% of the consolidated Company's results. Operating results were also
negatively impacted by expenses related to software development costs incurred
by the Company's subsidiary, Shared Healthcare Systems, Inc.. These costs are
being expensed in accordance with Statement of Financial Accounting Standards
No. 86: Accounting for Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Development of the Company's products are not expected to
reach the stage under which capitalization is permitted until 2001.
44
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Corporate general and administrative costs not directly attributed to
segments decreased 19.3% from approximately $30.5 million for the three months
ended March 31, 1999 to approximately $24.6 million at March 31, 2000. As a
percentage of consolidated net revenues of approximately $638.0 million and
$673.0 million for the three months ended March 31, 2000 and 1999, respectively,
corporate general and administrative expenses not directly attributed to
segments decreased from 4.5% to 3.7%.
Net interest expense not directly attributed to segments decreased 95.3%
from approximately $29.6 million for the three months ended March 31, 1999 to
approximately $1.4 million for the three months ended March 31, 2000. As a
percentage of consolidated net revenues, interest expense decreased from 4.4%
for the three months ended March 31, 1999 to 0.2% for the three months ended
March 31, 2000. During the first quarter of 2000, the Company did not pay or
accrue approximately $41.1 million of interest expense in accordance with SOP
90-7.
DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
In May 1998, the Company issued $345.0 million of 7.0% CTIPS. The Company
paid interest of approximately $6.0 million during the three months ended March
31, 1999. Beginning with the interest payment due on May 1, 1999, Sun exercised
its right to defer interest payments. As interest payments are deferred,
interest on the CTIPS and the deferred interest payments continues to accrue.
The Company does not expect to make principal or interest payments on the CTIPS
in the future. As of March 31, 2000, the amount of accrued and deferred interest
and penalties were approximately $18.3 million. Due to the Company's filing for
protection under Chapter 11 and in accordance with SOP 90-7, the Company did not
pay or accrue interest on the CTIPS during the first quarter of 2000. See "Note
9 - Convertible Trust Issued Preferred Securities in the Company's Consolidated
Financial Statements."
OTHER SPECIAL AND NON-RECURRING CHARGES
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5: "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). This statement requires costs of start-up activities and
organization costs to be expensed as incurred. The statement is effective for
financial statements for fiscal years beginning after December 15, 1998. In the
first quarter of 1999, the Company adopted the provisions of SOP 98-5 which
resulted in a cumulative effect of an accounting change pretax charge of $13.7
million.
OTHER LONG-LIVED ASSETS
Loss on Sale of Assets
During the first quarter of 2000, a net non-cash charge of approximately
$152.7 million was recorded to reduce the carrying amount of the Company's
international operations, certain domestic inpatient facilities and other
non-core businesses which are classified as assets held for sale in the
Company's Consolidated Balance Sheets. The charges are recorded in
reorganization costs in the Company's Consolidated Statements of Losses. See
"Note 2 - Petitions for Reorganization under Chapter 11, Note 7 - Assets Held
for Sale and Note 16 - Subsequent Events in the Company's Consolidated Financial
Statements."
Subsequent to December 31, 1998, the Company decided to dispose of several
non-core businesses, including assisted living facilities, rehabilitation
hospitals, certain inpatient facilities and other non-core businesses. The fair
value of these assets held for sale was based on the estimates of selling value
less selling costs. The Company recorded a loss of approximately $206.2 million
in 1998 to reduce the carrying amount of the non-core businesses identified for
disposal. During the first quarter of 1999, the Company recognized an additional
loss of approximately $17.1 million on certain of these non-core businesses
based on revised estimates of selling value less selling costs. During the first
quarter of 1999, the Company decided not to dispose of certain non-core
businesses previously recorded as assets held for sale at December 31, 1998. The
reversal of losses on assets held for sale of approximately $7.0 million was
recognized in the first quarter of 1999. The Company completed the sale of its
Canadian operations in the first quarter of 1999 resulting in additional loss on
the sale of approximately $2.0 million which was recorded in the first quarter
of 1999. The additional losses and loss reversal during the first quarter of
1999 are recorded in loss on sale of assets, net in the Company's Consolidated
Statements of Losses. See "Note 7 - Assets Held for Sale in the Company's
Consolidated Financial Statements."
45
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gain on Sale of Assets
During the first quarter of 2000, the Company recorded a gain of
approximately $9.0 million on the sale of assets which were held for sale as of
December 31, 1999. See "Note 7 - Assets Held for Sale in the Company's
Consolidated Financial Statements."
Restructuring Costs
In the fourth quarter of 1998, the Company initiated a corporate
restructuring plan focused primarily on reducing the operating expenses of its
United States operations. Related to the 1998 corporate restructuring plan, the
Company recorded a 1998 fourth quarter charge of approximately $4.6 million. The
1998 corporate restructuring plan included the elimination of approximately
7,500 positions, primarily in the Company's rehabilitation and respiratory
therapy operations, and also included the closure of approximately 70 divisional
and regional offices. The 1998 corporate restructuring charge consists of
approximately $3.7 million related to employee terminations and approximately
$0.9 million related to lease termination costs. As of March 31, 2000 and
December 31, 1999, the Company had paid approximately $2.5 million in
termination benefits to 1,440 employees that had been terminated and $0.1
million in lease termination costs under the 1998 corporate restructuring plan.
As of March 31, 2000 and December 31, 1999, the Company's 1998 corporate
restructuring costs reserve balances relating to employee terminations and lease
termination costs were approximately $1.2 million and $0.8 million,
respectively. Approximately $0.6 million of the 1998 corporate restructuring
costs reserve balance of approximately $2.0 million as of March 31, 2000 and
December 31, 1999 is comprised of prepetition severance accruals that are
classified as liabilities subject to compromise in the Company's Consolidated
Balance Sheets. As of March 31, 2000 and December 31, 1999, the Company's 1998
corporate restructuring plan was substantially complete.
In the first quarter of 1999, the Company initiated a second corporate
restructuring plan focused on further reducing the operating expenses of its
United States operations. Related to the 1999 corporate restructuring plan, the
Company recorded a first quarter charge of approximately $11.4 million. The 1999
corporate restructuring plan included the termination of approximately 3,000
employees, primarily in its rehabilitation and respiratory therapy services
operations. The 1999 corporate restructuring plan also includes the closure of
approximately 23 divisional and regional offices. In addition, the plan included
the relocation of the management of the Company's medical supply subsidiary and
temporary therapy services subsidiary to the Company's corporate headquarters in
Albuquerque, New Mexico. As part of the relocation, the Company terminated 96
employees of these subsidiaries. The 1999 corporate restructuring charge
consisted of approximately $9.1 million related to employee terminations,
approximately $1.4 million related to lease termination costs and $0.9 million
related to asset disposals or write-offs. During the first quarter of 1999, the
Company paid approximately $4.4 million in employee termination benefits under
the 1999 corporate restructuring plan. As of December 31, 1999, the Company's
1999 corporate restructuring plan was complete.
Loss on Termination of Interest Rate Swaps
In April 1999, the interest rate swap transactions were terminated due to
an event of default relating to the Company's non-compliance with certain
covenants contained in the Senior Credit Facility. The termination resulted in a
$2.5 million pre-tax charge in the first quarter of 1999. See "Note 4 -
Long-Term Debt in the Company's Consolidated Financial Statements."
46
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Results of Operations
The net loss for the three months ended March 31, 2000 was $165.7 million
compared to a net loss of $113.1 million for the three months ended March 31,
1999. Before considering the restructuring costs, the loss on sale of assets,
the loss on termination of the interest rate swaps, the gain on sale of assets,
reorganization costs and the cumulative effect of change in accounting
principle, the loss before income taxes was $17.9 million for the three months
ended March 31, 2000 compared to a loss of $72.5 million for the three months
ended March 31, 1999. In accordance with SOP 90-70, no interest has been paid or
accrued on prepetition debt, classified as liabilities subject to compromise in
the Company's Consolidated Balance Sheets, since the Filing Date. The
contractual interest expense that was not paid or accrued for the three months
ended March 31, 2000 was approximately $41.1 million. The net loss in the first
quarter of 2000 and 1999 is primarily due to the implementation of PPS and the
continuing adverse impact on the demand for the Company's ancillary services.
Income tax expense for the three months ended March 31, 2000 was
approximately $0.1 million compared to approximately $0.9 million for the three
months ended March 31, 1999. In the three months ended March 31, 1999, the
Company increased its valuation allowance by approximately $33.5 million for
deferred tax assets which may not be realized as a result of the adverse effect
of the new operating environment under PPS. Also, in the first quarter of 1999,
the Company established a valuation allowance of $1.5 million for United Kingdom
deferred tax assets, which may not be realizable.
LIQUIDITY AND CAPITAL RESOURCES
On October 14, 1999, the Company and substantially all of its U.S.
operating subsidiaries filed voluntary petitions for protection under Chapter 11
of the U.S. Bankruptcy Code with the Bankruptcy Court (case nos. 99-3657 through
99-3841, inclusive). On February 3, 2000, an additional indirect subsidiary of
the Company commenced its Chapter 11 case with the Bankruptcy Court (case no.
00-00841). The Company is currently operating its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
On October 14, 1999, the Company entered into a Revolving Credit Agreement
with CIT Group/Business Credit, Inc. and Heller Healthcare Finance, Inc. to
provide the Company with up to $200.0 million in debtor-in-possession financing
(the "DIP Financing Agreement"). The DIP Financing Agreement provides for
maximum borrowings by the Company equal to the sum of (i) up to 85.0% of the
then outstanding domestic eligible accounts receivable and (ii) the lessor of
$10.0 million or 50.0% of the aggregate value of eligible inventory.
On November 12, 1999, the Bankruptcy Court granted final approval of the
DIP Financing Agreement. As of July 31, 2000, up to approximately $134.1 million
was available to the Company under the DIP Financing Agreement, of which amount
the Company had borrowed approximately $46.6 million and had issued
approximately $26.1 million in letters of credit. In addition to the available
funds under the DIP financing agreement, the Company had cash book balances at
July 31, 2000 of approximately $12.6 million. In July 2000, the Company obtained
waivers on several defaults under the DIP Financing Agreement, subject to
certain conditions. If the Company is unable to comply with the covenants
contained in the DIP Financing Agreement or is unable to obtain a waiver of any
such future covenant violation, then the Company would lose its ability to
borrow under the DIP Financing Agreement for its working capital needs and could
lose access to a substantial portion of its operating cash until such time as
the outstanding debt under the DIP Financing Agreement was repaid. In such
event, the Company's liquidity would be insufficient to fund the Company's
ongoing operations. See "Note 3 - Debtor-in-Possession Financing in the
Company's Consolidated Financial Statements."
Under the Bankruptcy Code, actions to collect prepetition indebtedness are
enjoined. In addition, the Company may reject real estate leases, unexpired
lease obligations and other prepetition executory contracts under the Bankruptcy
Code. The Company is analyzing and reviewing its lease portfolio and expects to
terminate certain leases and/or seek rent relief for certain facilities. Parties
affected by these rejections may file claims with the Bankruptcy Court. If the
Company is able to successfully reorganize, substantially all liabilities as of
the petition date would be treated under a plan of reorganization to be voted
upon by all impaired classes of creditors and equity security holders and
approved by the Bankruptcy Court.
47
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 26, 1999, the Company announced that it had reached an agreement
in principle 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 principle are reflected in a restructuring
term sheet dated October 26, 1999, a copy of which was filed with the Securities
and Exchange Commission as an exhibit to the Company's Form 8-K dated October
14, 1999 and filed October 26, 1999. Implementation of the agreement in
principle 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 principle 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
principle 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 principle provides no recoveries for the
holders of Sun's outstanding convertible subordinated debt, CTIPS, or common
stock. The Company and other parties to the agreement in principle have
initiated discussions to amend the agreement in principle. No assurance can be
given that a plan of reorganization will be confirmed or that any plan of
reorganization that is confirmed will contain the terms of the agreement in
principle. The Bankruptcy Court has extended the Company's exclusive periods in
which to file a plan of reorganization to November 9, 2000 and to solicit
acceptances of the plan to January 8, 2001.
The Consolidated Financial Statements of the Company have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7: "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
principles, except as otherwise disclosed, assume that assets will be realized
and liabilities will be discharged in the normal course of business. The chapter
11 filings, the uncertainty regarding the eventual outcome of the reorganization
cases, and the effect of other unknown, adverse factors raise substantial doubt
about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the chapter 11 filing and circumstances relating to this
event, including the Company's leveraged financial structure and losses from
operations, such realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Company may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the Consolidated
Financial Statements. Further, a plan of reorganization could materially change
the amounts reported in the Company's Consolidated Financial Statements, which
do not give effect to all adjustments of the carrying value of assets or
liabilities that might be necessary as a consequence of a plan of
reorganization. The appropriateness of using the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization,
future successful operations, the ability to comply with the terms of the DIP
Financing Agreement and the ability to generate sufficient cash from operations
and financing arrangements to meet obligations.
Due to the failure to make payments and comply with certain financial
covenants and to the commencement of the chapter 11 cases, the Company is in
default on substantially all of its long-term obligations. These obligations are
classified as liabilities subject to compromise as of March 31, 2000 and
December 31, 1999 in the Company's Consolidated Balance Sheets. At March 31,
2000, the Company had a working capital deficit of $103.4 million and cash and
cash equivalents of $27.7 million as compared to a working capital deficit of
$17.3 million and cash and cash equivalents of $25.0 million at December 31,
1999.
For the three months ended March 31, 2000, net cash used for operating
activities was approximately $6.2 million compared to net cash used for
operating activities for the three months ended March 31, 1999 of $14.8 million.
The net cash used for operating activities for the three months ended March 31,
2000 is primarily the result of additional cash needed to fund an increase in
accounts receivable and a decrease in accounts payable, offset in part by
positive cash from operations after adjusting the net loss for noncash
adjustments.
48
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company incurred approximately $9.4 million in capital expenditures
during the three months ended March 31, 2000. Expenditures related primarily to
the construction of a corporate office building and routine capital
expenditures. The Company had construction commitments as of March 31, 2000,
under various contracts of approximately $6.8 million in the United States.
These include contractual commitments to improve existing facilities and to
complete construction on a corporate office building.
During the three months ended March 31, 2000, the Company recorded
reorganization costs of $156.6 million. See "Note 2 - Petitions for
Reorganization under Chapter 11 in the Company's Consolidated Financial
Statements."
The Company's insurance carriers declined to renew the Company's high
deductible general and professional liability insurance policies that expired on
December 31, 1999. Several major insurance companies are no longer providing
this type of coverage to long-term care providers due to general underwriting
issues with the long-term care industry. In January 2000, the Company
established a self-funded insurance program for general and professional
liability claims up to a base amount of $1.0 million per claim, and $3.0 million
aggregate per location, and obtained excess insurance for coverage above these
levels. There can be no assurance that this self-funded insurance program for
2000 will not have a material adverse impact on the Company's financial
condition and results of operations or that the Company will not be required to
continue this program in future years. In the recent past, the Company's
insurance companies have paid substantially more to third parties under these
policies than the Company paid in insurance premiums and deductibles. The
provision for such risks for the three months ended March 31, 2000 was
approximately $8.6 million. Claims paid under the self-funded insurance program
for general and professional liability for the three months ended March 31, 2000
were immaterial.
The Company also conducts business in the United Kingdom, Spain, Australia
and Germany. International operations accounted for approximately 12.0% and
11.0% of the Company's total net revenues during the three months ended March
31, 2000 and 1999, respectively, and 9.0% of the Company's consolidated total
assets as of March 31, 2000. The Company's financial condition and results of
operations are subject to foreign exchange risk. Exceptional planned foreign
currency cash flow requirements, such as acquisitions overseas, are hedged
selectively to prevent fluctuations in the anticipated foreign currency value.
Changes in the net worth of the Company's foreign subsidiaries arising from
currency fluctuations are reflected in the accumulated other comprehensive
income component of stockholders' equity.
Subsequent to December 31, 1998, the Company decided to dispose of several
non-core businesses, including assisted living facilities, rehabilitation
hospitals, certain inpatient facilities and other non-core businesses. The fair
value of these assets held for sale was based on the Company's estimates of
selling value less selling costs. The Company recorded a loss of approximately
$206.2 million in 1998 to reduce the carrying amount of the non-core businesses
identified for disposal. During the first quarter of 1999, the Company
recognized an additional loss of approximately $17.1 million on certain of these
non-core businesses based on revised estimates of selling value less selling
costs. During the first quarter of 1999, the Company decided not to dispose of
certain non-core businesses previously recorded as assets held for sale at
December 31, 1998. The reversal of losses on assets held for sale of
approximately $7.0 million was recognized in the first quarter of 1999. The
Company completed the sale of its Canadian operations in the first quarter of
1999 resulting in additional loss on the sale of approximately $2.0 million
which was recorded in the first quarter of 1999. The additional losses and loss
reversal are recorded in loss on sale of assets, net in the Company's
Consolidated Statements of Losses.
During the first quarter of 2000, the Company began soliciting offers to
purchase its international operations. The Company recognized a loss of
approximately $141.1 million in the first quarter of 2000 to reduce the carrying
value of its international operations to the Company's estimate of selling value
less selling costs. The charge is recorded in reorganization costs in the
Company's Consolidated Statements of Losses. During the first quarter of 2000,
Sun divested five pharmacies in the United Kingdom. The aggregate cash
consideration received for these divestitures during the first quarter of 2000
was approximately $5.7 million. Subsequent to March 31, 2000, Sun divested 13
pharmacies in the United Kingdom. See "Note 7 - Assets Held for Sale and Note 16
- Subsequent Events in the Company's Consolidated Financial Statements." No
purchase agreements have been entered into for the remaining international
operations and the Company cannot predict when, or if, these operations will be
sold.
49
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first quarter of 2000, the Company began pursuing the
disposition of certain non-core businesses including its SunCare respiratory
therapy business. The Company recognized a loss of approximately $7.8 million in
the first quarter of 2000 to reduce the carrying value of its respiratory
therapy business to the Company's estimate of selling value less selling costs.
The charge is recorded in reorganization costs in the Company's Consolidated
Statements of Losses. No purchase agreement has been entered into and the
Company cannot predict when, or if, this business will be sold.
During the first quarter of 2000, the Company identified two domestic
pharmacies for divestiture. The Company recognized a loss of approximately $0.5
million in the first quarter of 2000 to reduce the carrying value of these two
pharmacies to the Company's estimate of selling value less selling costs. The
charge is recorded in reorganization costs in the Company's Consolidated
Statements of Losses. No purchase agreements have been entered into for these
pharmacies and the Company cannot predict when, or if, these will be sold.
The Company is actively reviewing its portfolio of properties and intends
to divest those properties that it believes do not meet acceptable financial
performance standards or do not fit strategically into the Company's operations.
This process is expected to be ongoing throughout its bankruptcy cases. These
intended divestitures require Bankruptcy Court approval.
As of August 31, 2000, the Company had identified 69 additional skilled
nursing facilities, one rehabilitation facility and other non-core businesses
for disposal. The Company recorded a loss of approximately $3.3 million in the
first quarter of 2000 to reduce the carrying value of certain of these skilled
nursing facilities to the Company's estimate of selling value less cost to sell.
See "Note 16 - Subsequent Events in the Company's Consolidated Financial
Statements."
In the first quarter of 2000, the Company entered into an agreement to sell
16 assisted living facilities, one of which includes a skilled nursing facility
on its campus. A part of the transaction involving 12 facilities was completed
during the first quarter of 2000. The cash consideration received from this
first quarter transaction was approximately $1.0 million which was received
subsequent to March 31, 2000. In addition, the Company obtained a note
receivable of approximately $0.5 million. The aggregate debt, capital leases and
other liabilities assumed by the purchaser in the first quarter transaction
totaled approximately $49.8 million. The estimated aggregate net loss, which had
been previously recorded for the entire transaction was approximately $71.2
million of which approximately $17.4 million and $53.8 million was recorded to
loss on assets held for sale, net in 1999 and 1998, respectively. During the
first quarter of 2000, the Company reversed approximately $1.5 million of the
loss recorded in 1999. The reversal is recorded in gain on sale of assets in the
Company's Consolidated Statements of Losses. See "Note 7 - Assets Held for Sale
in the Company's Consolidated Financial Statements."
During the second quarter of 2000, the Company divested 21 skilled nursing
facilities. See "Note 16 - Subsequent Events in the Company's Consolidated
Financial Statements."
During the second quarter of 2000, the Company completed the sale of the
other four assisted living facilities which were part of the agreement entered
into during the first quarter of 2000. In addition, the Company transferred its
two remaining assisted living facilities from the other operations segment to
the inpatient services segment. See "Note 16 - Subsequent Events in the
Company's Consolidated Financial Statements."
On June 30, 1998, a wholly owned subsidiary of the Company merged with RCA,
an operator of skilled nursing facilities and assisted living centers in eight
states principally in the southeastern United States (the "RCA Merger"). In
connection with the RCA Merger, the Company recorded purchase liabilities
including $24.7 million for severance and related costs and $1.4 million for
costs associated with the shutdown of certain administrative facilities. As of
March 31, 2000 and December 31, 1999, the Company's purchase liabilities reserve
balance was approximately $12.4 million and $15.5 million, respectively.
50
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In May, 1997, the Company announced its intent to sell and divest of its
outpatient rehabilitation clinics in the United States as well as Canada. The
Company completed the sale of certain of the U.S. rehabilitation clinics and a
portion of the Canadian clinics during 1998. The remaining Canadian clinics were
sold during March 1999. The Company recorded a loss of approximately $2.0
million in the first quarter of 1999 in addition to losses of approximately
$11.4 million and $7.0 million during 1998 and 1997, respectively, to reduce the
carrying value of the Canadian operations to fair value based on revised
estimates of selling value less costs to sell. The results of operations of
these businesses is not material to the Company's consolidated results of
operations.
The common stock of the Company was suspended and then delisted from
trading on the New York Stock Exchange (the "Exchange") on June 29, 1999 and
August 20, 1999, respectively. The delisting was the result of the Company
falling below the Exchange's minimum continued listing criteria relating to the
Company's (i) net tangible assets available to common stock (less than $12.0
million) and (ii) average net income after taxes for the past three years (less
than $0.6 million. The Company's common stock has subsequently traded on the
Over-the-Counter Bulletin Board under the symbol "SHGE".
LITIGATION
The Company and substantially all of its U.S. operating subsidiaries filed
voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code
with the Bankruptcy Court (case nos. 99-3657 through 99-3841, inclusive). On
February 3, 2000, an additional indirect subsidiary of the Company commenced its
Chapter 11 case in the Bankruptcy Court (case no. 00-00841). The Company is
currently operating its business as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court.
In May 1999, a former employee of SunBridge filed a proposed class action
complaint against SunBridge in the Western District of Washington (the
"SunBridge Action"). The plaintiff sought to represent certain current and
former employees of SunBridge who were allegedly not paid appropriate wages
under federal and state law since May 1996. In August 1999, several former
employees of SunDance filed a proposed class action complaint against SunDance
in the Western District of Washington (the "SunDance Action"). The plaintiffs
sought to represent certain current and former employees of SunDance who were
allegedly not paid appropriate wages under federal and state law since August
1996. The plaintiffs in both of these actions are represented by the same legal
counsel. These lawsuits are currently stayed as a result of the Company's
pending Chapter 11 cases. In June 2000, the plaintiffs in the SunBridge Action
and the SunDance Action filed motions in the Bankruptcy Court seeking to certify
their respective classes they seek to represent and an enlargement of the bar
date for their class members. Plaintiffs filed claims in the pending Chapter 11
cases in the amount of $780.0 million in the SunDance Action and $242.0 million
in the SunBridge Action, plus interest, costs and attorney fees. Although the
Company and its subsidiaries intend to vigorously defend themselves in these
matters, there can be no assurance that the outcome of either of these matters
will not have a material adverse effect on the results of operations and
financial condition of the Company.
In March 1999 and through April 19, 1999, several stockholders of the
Company filed class action lawsuits against the Company and three officers of
the Company in the United States District Court for the District of New Mexico.
The lawsuits allege, among other things, that the Company did not disclose
material facts concerning the impact that PPS would have on the Company's
results of operations. The lawsuits seek compensatory damages and other relief
for stockholders who purchased the Company's common stock during the
class-action period. As a result of the Company's commencement of its Chapter 11
cases, these lawsuits are stayed with respect to the Company. Pursuant to an
agreement among the parties, the Company will be dismissed without prejudice.
Although the Company intends to vigorously defend itself and its officers in
this matter, there can be no assurance that the outcome of this matter will not
have a material adverse effect on the results of operations and financial
condition of the Company.
51
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company and certain of its subsidiaries are defendants in two QUI TAM
lawsuits brought by private citizens in the United States District Court for the
Eastern District of California alleging violations of the Federal False Claims
Act. The plaintiffs allege that skilled nursing facilities operated by the
subsidiaries and others conspired over the last decade to (i) falsely certify
compliance with regulatory requirements in order to participate in the Medicare
and Medicaid programs, and (ii) falsify records to conceal failures to provide
services in accordance with such regulatory requirements. Although the Company
and its subsidiaries intend to vigorously defend themselves in these matters,
there can be no assurance that the outcome of any one of these matters will not
have a material adverse effect on the results of operations and financial
condition of the Company. These lawsuits are currently stayed as a result of the
Company's filing for chapter 11 bankruptcy protection.
The Company and certain of its subsidiaries are defendants in a QUI TAM
lawsuit brought by a private citizen in the United States District Court of the
Central District of California alleging violations of the Federal False Claims
Act and a related wrongful termination. The plaintiff alleges that a home health
agency operated by one of the Company's subsidiaries submitted bills for several
years that were improper for various reasons, including bills for patients whose
treatment had not been authorized by their physicians. The government intervened
to the extent that the lawsuit alleges billing without obtaining proper and
timely physician authorization, but declined to intervene in the remainder of
the lawsuit. Although the Company and its subsidiaries intend to vigorously
defend themselves in this matter, there can be no assurance that the outcome of
this matter will not have a material adverse effect on the results of operations
and financial condition of the Company. This lawsuit is currently stayed as a
result of the Company's filing for chapter 11 bankruptcy protection.
In addition, the Department of Health & Human Services (the "HHS") and the
Department of Justice (the "DOJ") periodically investigate matters that have
come to their attention concerning the Company, including cost reporting
matters. To expedite resolution of any outstanding investigations, the Company
has requested that the HHS and the DOJ inform it of any such investigations or
outstanding concerns. In response, the DOJ informed the Company of the existence
of a number of outstanding inquiries, some of which were prompted by the filing
of QUI TAM lawsuits that remain under seal and which are not described above.
The DOJ has recently advised the Company of the nature of several of the
allegations under investigation regarding the Company's subsidiaries, including
allegations that the Company's subsidiaries were inappropriately reimbursed for
(i) certain management fees related to the provision of therapy services,
(ii) nursing services provided by skilled nursing facilities for which there was
inadequate documentation and (iii) respiratory therapy services.
The DOJ and the Company are having ongoing discussions regarding a possible
global settlement of these investigations. The Company believes that any such
settlement would include a monetary payment to the government and a requirement
that the Company enter into a corporate integrity agreement with the HHS' Office
of Inspector General requiring the Company to implement further internal
controls with respect to its quality of care standards and its Medicare and
Medicaid billing, reporting and claims submission processes. Although the
Company and its subsidiaries intend to vigorously defend themselves in these
matters, the Company is unable to determine at this time when the investigations
will be concluded, how large a monetary payment, if any, the parties would agree
on, 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 investigations will have a material adverse effect
on the Company's financial condition or results of operations.
52
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a party to various other legal actions and administrative
proceedings and is subject to various claims arising in the ordinary course of
its business, including claims that its services have resulted in injury or
death to the residents of its facilities. The Company has experienced an
increasing trend in the number and severity of litigation claims asserted
against the Company. The Company believes that this trend is endemic to the
long-term care industry and is a result of the increasing number of large
judgments, including large punitive damage awards, against long-term care
providers in recent years resulting in an increased awareness by plaintiff's
lawyers of potentially large recoveries. In certain states in which the Company
has significant operations, including California, insurance coverage for the
risk of punitive damages arising from general and professional liability
litigation is not available due to state law public policy prohibitions. There
can be no assurance that the Company will not be liable for punitive damages
awarded in litigation arising in states for which punitive damage insurance
coverage is not available. The Company also believes that there has been, and
will continue to be, an increase in governmental investigations of long-term
care providers, particularly in the area of Medicare/Medicaid false claims as
well as an increase in enforcement actions resulting from these investigations.
Adverse determinations in legal proceedings or governmental investigations,
whether currently asserted or arising in the future, could have a material
adverse effect on the Company.
53
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is found in "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Litigation" and
is incorporated by reference herein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was not in compliance with the EBITDA financial covenant in its
DIP Financing Agreement at December 31, 1999 and in each of the months for the
period ended June 30, 2000. The Company was also not in compliance with the DIP
Financing Agreement because the Company did not timely provide the DIP Lenders
with financial statements for the year ended December 31, 1999 and the quarters
ended March 31 and June 30, 2000. The Company obtained a conditional waiver of
these defaults on July 13, 2000 and which, as supplemented, currently extends
through September 22, 2000. The DIP Lenders have agreed to waive the defaults
subject to, among other things, the Company and the DIP Lenders entering into an
amendment of the DIP Financing Agreement to modify the cumulative EBITDA
covenant and the payment to the DIP Lenders of a $250,000 fee to enter into the
amendment, both of which will require the approval of the Bankruptcy Court. See
"Note 3 - Debtor-in-Possession Financing in the Company's Consolidated Financial
Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Settlement Agreement between Andrew Turner and the Company dated
July 13, 2000.
10.2 Expense Indemnification Agreement between Andrew Turner and the
Company dated July 13, 2000.
10.3 Incentive Bonus and Severance Agreement between Warren Schelling,
Sun Healthcare (Europe) B.V. and Sun Healthcare Group U.K Limited
dated July 31, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
54
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN HEALTHCARE GROUP, INC.
Date: September 8, 2000 By: /s/ Robert D. Woltil*
---------------------
Robert D. Woltil
Chief Financial Officer
* Signing on the behalf of the Registrant and as principal financial officer.
55
