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 June 30, 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 October 11, 2000, there were 65,230,853 shares of the Registrant's
$.01 par value Common Stock outstanding, net of treasury shares.
1
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INDEX
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Numbers
------------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999............................................... 3-4
Consolidated Statements of Losses
For the three and six months ended June 30, 2000 and 1999......................... 5-6
Consolidated Statements of Comprehensive Losses
For the three and six months ended June 30, 2000 and 1999......................... 7
Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999................................... 8-9
Notes to the Consolidated Financial Statements.................................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 72
Item 3. Defaults Upon Senior Securities................................................... 72
Item 6. Exhibits and Reports on Form 8-K.................................................. 72
Signatures........................................................................................... 73
</TABLE>
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 55,319 $ 25,047
Accounts receivable, net of allowance for doubtful accounts of $161,228
at June 30, 2000 and $151,841 at December 31, 1999.................. 207,608 254,464
Other receivables, net.................................................. 314 15,916
Inventory, net.......................................................... 33,304 42,983
Prepaids and other assets............................................... 11,102 15,087
----------------- ----------------
Total current assets................................................ 307,647 353,497
Property and equipment, net............................................... 270,787 446,176
Goodwill, net............................................................. 398,112 475,567
Notes receivable, net of allowance of $4,000 at June 30, 2000
and $6,556 at December 31, 1999......................................... 15,773 22,698
Assets held for sale...................................................... 193,923 70,609
Other assets, net......................................................... 45,589 69,941
----------------- ----------------
Total assets....................................................... $ 1,231,831 $ 1,438,488
================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
(Continued on next page.)
3
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt.................................................. $ 77,924 $ 44,776
Current portion of obligations under capital leases................................ 315 433
Accounts payable................................................................... 33,274 53,787
Accrued compensation and benefits.................................................. 103,913 84,117
Accrued interest................................................................... 6,037 2,972
Accrued self-insurance obligations................................................. 56,579 59,075
Other accrued liabilities.......................................................... 126,410 116,489
Income tax payables................................................................ 13,851 9,130
----------------- -----------------
Total current liabilities.......................................................... 418,303 370,779
Long-term debt, net of current portion............................................... 73,727 100,765
Obligations under capital leases, net of current portion............................. 54,579 65,675
Other long-term liabilities.......................................................... 33,210 36,794
Liabilities subject to compromise (see Note 2)....................................... 1,546,537 1,558,518
----------------- -----------------
Total liabilities.................................................................. 2,126,356 2,132,531
Commitments and contingencies........................................................
Minority interest.................................................................... 6,222 5,979
----------------- -----------------
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely 7.0% convertible junior subordinated debentures of
the Company........................................................................ 298,119 344,119
----------------- -----------------
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, 64,811,038
and 63,937,302 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively.................................................. 648 639
Additional paid-in capital......................................................... 823,184 777,164
Accumulated deficit................................................................ (1,982,613) (1,785,507)
Accumulated other comprehensive loss .............................................. (12,587) (5,017)
----------------- -----------------
(1,171,368) (1,012,721)
Less:
Unearned compensation.......................................................... - (3,966)
Common stock held in treasury, at cost, 2,212,983 shares at June 30, 2000 and
December 31, 1999.......................................................... (27,376) (27,376)
Grantor stock trust, at market, 1,915,935 shares at June 30, 2000 and
December 31, 1999.......................................................... (122) (78)
----------------- -----------------
Total stockholders' deficit ....................................................... (1,198,866) (1,044,141)
----------------- -----------------
Total liabilities and stockholders' deficit........................................ $ 1,231,831 $ 1,438,488
================= =================
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
4
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF LOSSES
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Total net revenues........................................................ $ 620,954 $ 600,914
------------------- ------------------
Costs and expenses:
Operating costs........................................................ 565,007 608,061
Corporate general and administrative................................... 38,203 40,257
Depreciation and amortization.......................................... 10,831 22,538
Interest, net (contractual interest expense of $52,624 for the three
months ended June 30, 2000) ........................................ 9,078 39,006
Provision for losses on accounts receivable............................ 7,670 15,407
Legal and regulatory costs............................................. 2,618 -
Impairment loss........................................................ 1,849 399,963
Loss on sale of assets, net............................................ 1,623 51,781
Financial restructuring costs.......................................... - 6,046
------------------- ------------------
Total costs and expenses before reorganization costs................... 636,879 1,183,059
Dividends on convertible preferred securities of subsidiary............... - 6,452
------------------- ------------------
Losses before reorganization costs and income taxes....................... (15,925) (588,597)
Reorganization costs, net................................................. 15,462 -
------------------- ------------------
Losses before income taxes................................................ (31,387) (588,597)
Income taxes.............................................................. 58 -
------------------- ------------------
Net losses................................................................ $ (31,445) $ (588,597)
=================== ==================
Net losses per common and common equivalent share:
Basic.............................................................. $ (0.54) $ (10.06)
=================== ==================
Diluted............................................................ $ (0.54) $ (10.06)
=================== ==================
Weighted average number of common and common equivalent
shares outstanding:
Basic.............................................................. 58,664 58,499
=================== ==================
Diluted............................................................ 58,664 58,499
=================== ==================
</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 LOSSES
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Total net revenues....................................................... $ 1,258,947 $ 1,273,946
------------------- ------------------
Costs and expenses:
Operating costs....................................................... 1,146,436 1,232,630
Corporate general and administrative.................................. 81,002 82,274
Depreciation and amortization......................................... 25,248 43,985
Interest, net (contractual interest expense of $103,665 for the six
months ended June 30, 2000)........................................ 17,302 76,177
Provision for losses on accounts receivable........................... 16,703 29,225
Corporate restructuring costs......................................... - 11,427
Legal and regulatory costs ........................................... 2,618 -
Impairment loss....................................................... 1,849 399,963
Loss on sale of assets, net........................................... 1,623 63,889
Financial restructuring costs ........................................ - 6,046
Loss on termination of interest rate swaps............................ - 2,488
Gain on sale of assets................................................ (8,952) -
------------------- ------------------
Total costs, expenses and gains before reorganization costs....... 1,283,829 1,948,104
Dividends on convertible preferred securities of subsidiary............... - 12,968
------------------- ------------------
Losses before reorganization costs, income taxes and cumulative effect of
change in accounting principle......................................... (24,882) (687,126)
Reorganization costs, net................................................. 172,108 -
------------------- ------------------
Losses before income taxes and cumulative effect of change in
accounting principle................................................. (196,990) (687,126)
Income taxes.............................................................. 116 892
------------------- ------------------
Losses before cumulative effect of change in accounting principle......... (197,106) (688,018)
Cumulative effect of change in accounting principle....................... - 13,727
------------------- ------------------
Net losses ............................................................... $ (197,106) $ (701,745)
=================== ==================
Losses per common and common equivalent share before
cumulative effect of change in accounting principle:
Basic............................................................. $ (3.34) $ (11.81)
=================== ==================
Diluted........................................................... $ (3.34) $ (11.81)
=================== ==================
Net losses per common and common equivalent share:
Basic............................................................. $ (3.34) $ (12.05)
=================== ==================
Diluted........................................................... $ (3.34) $ (12.05)
=================== ==================
Weighted average number of common and common equivalent
shares outstanding:
Basic............................................................. 59,091 58,252
=================== ==================
Diluted........................................................... 59,091 58,252
=================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Net losses............................................................. $ (31,445) $ (588,597)
Foreign currency translation adjustments, net of tax................... (3,026) (1,746)
-------------------- ------------------
Comprehensive losses................................................... $ (34,471) $ (590,343)
==================== ==================
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
Net losses............................................................. $ (197,106) $ (701,745)
Foreign currency translation adjustments, net of tax................... (7,570) (7,650)
-------------------- ------------------
Comprehensive losses................................................... $ (204,676) $ (709,395)
==================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses............................................................ $ (197,106) $ (701,745)
-------------------- --------------------
Adjustments to reconcile net losses to net cash provided by
(used for) operating activities:
Reorganization costs, net......................................... 172,108 -
Depreciation and amortization..................................... 25,248 43,985
Provision for losses on accounts and other receivables............ 18,086 29,225
Impairment loss................................................... 1,849 399,963
Loss on sale of assets, net....................................... 1,623 63,889
Gain on sale of assets............................................ (8,952) -
Cumulative effect of change in accounting principle............... - 13,727
Other, net........................................................ (2,898) 2,703
Changes in operating assets and liabilities:
Accounts receivable............................................... (575) 117,753
Other current assets.............................................. 25,875 28,165
Income taxes payable.............................................. 4,789 26,769
Other current liabilities......................................... (25,622) (33,788)
-------------------- --------------------
Net cash provided by (used for) operating activities before 14,425 (9,354)
reorganization costs..................................................
Net cash paid for reorganization costs................................ (6,053) -
-------------------- --------------------
Net cash provided by (used for) operating activities.................. 8,372 (9,354)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................. (25,381) (68,680)
Acquisitions, net of cash acquired.................................... (974) (2,134)
Proceeds from sale of assets held for sale............................ 13,570 -
Decrease in long-term notes receivable................................ 1,839 2,746
Increase in other assets.............................................. (4,355) -
Other assets expenditures............................................. - (2,181)
-------------------- --------------------
Net cash used for investing activities............................. (15,301) (70,249)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit Agreement (postpetition) ....... 41,966
Long-term debt borrowings............................................. 7,758 123,319
Long-term debt repayments............................................. (9,872) (38,377)
Principal payments on prepetition debt authorized by Bankruptcy Court. (1,930) -
Conversion of Mediplex 6.5% Convertible Subordinated
Debentures due 2003................................................ - (6,649)
Net proceeds from issuance of common stock............................ - 809
Purchases of treasury stock........................................... - (410)
Other financing activities............................................ (15) (1,052)
-------------------- --------------------
Net cash provided by financing activities.......................... 37,907 77,640
-------------------- --------------------
Effect of exchange rate on cash and cash equivalents....................... (706) 1,513
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents....................... 30,272 (450)
Cash and cash equivalents at beginning of year............................. 25,047 27,504
-------------------- --------------------
Cash and cash equivalents at end of period................................. $ 55,319 $ 27,054
==================== ====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
(Continued on next page.)
8
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest, net of $27 and $1,254 capitalized during
the six months ended June 30, 2000 and 1999,
respectively.................................... $ 16,915 $ 114,803
================= ==================
Income taxes......................................... $ (2,725) $ (30,085)
================= ==================
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
The Company's acquisitions during the six months ended
June 30, 2000 and 1999 involved the following:
Fair value of assets acquired........................ $ 974 $ 3,184
Liabilities assumed.................................. - (1,050)
----------------- ------------------
Cash payments made, net of cash received from
others.......................................... $ 974 $ 2,134
================= ==================
Note issued in exchange for property....................... $ 28,501 $ -
================= ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
9
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) NATURE OF BUSINESS AND BASIS OF PRESENTATION
Sun Healthcare Group, Inc., a Delaware corporation, through its direct and
indirect subsidiaries (hereinafter referred to individually as "Sun" or
collectively as 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 and Germany. During the second quarter, the Company also had
operations in Spain and Australia. See Note 15 - Subsequent Events.
In the opinion of management of Sun, the accompanying interim consolidated
financial statements present fairly the Company's financial position at June 30,
2000 and December 31, 1999, the consolidated results of its operations for the
three and six month periods ended June 30, 2000 and 1999, and the consolidated
statements of cash flows for the six month periods ended June 30, 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.
Certain amounts in the 1999 consolidated financial statements and notes
thereto have been reclassified to conform to the 2000 presentation.
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.
(2) PETITIONS FOR REORGANIZATION UNDER CHAPTER 11
On October 14, 1999 (the "Filing Date"), Sun 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 Company is currently seeking Bankruptcy Court
approval of an extension of the Company's exclusive periods in which to file a
plan of reorganization from November 9, 2000 to January 8, 2001 and to solicit
acceptances of the plan from January 8, 2001 to March 9, 2001.
10
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
accounting principles generally accepted in the United States 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. Commencing
on October 1, 2000, the parties to the agreement in principle have the right to
withdraw from such agreement. The Company is not currently aware of any
withdrawals from the agreement. 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 also would provide new
long-term debt, new preferred stock and new common stock to general unsecured
creditors, and reinstated a significant portion of Sun's secured debt. The
agreement in principle provides that holders of the Company's outstanding
convertible subordinated debt, convertible trust issued preferred securities
("CTIPS") and common stock would not receive any recovery in the plan of
reorganization. No assurance can be given that the parties will not withdraw
from the agreement in principle and that, if so, the Company would be able to
enter into a new agreement in principle. Further, 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 old, or a new, agreement in
principle.
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 June 30, 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.
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 June 30, 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.
11
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------- ---------------------
(in thousands)
-----------------------------------------------
<S> <C> <C>
Revolving Credit Facility............................................. $ 415,331 $ 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...................................................... 103,098 102,467
Convertible Subordinated Debentures due 2004.......................... 83,300 83,300
Prepetition trade and other miscellaneous claims...................... 71,102 79,948
Mortgage notes payable due at various dates through 2005.............. 50,601 51,593
Other long-term debt.................................................. 16,675 17,310
Capital leases........................................................ 12,837 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.......................... $ 1,546,537 $ 1,558,518
====================== =====================
</TABLE>
Since December 31, 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 June 30, 2000 and December 31, 1999 due
to the uncertainty surrounding the ultimate amount and settlement terms for such
liabilities in the Company's Chapter 11 proceedings.
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.
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, will be subject to a vote by the
Company's impaired creditors and stockholders and confirmation by the Bankruptcy
Court, and accordingly, the final terms of the plan are not presently
determinable.
12
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 proceedings, 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 (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, 2000 Ended June 30, 2000
-------------------------- --------------------------
REORGANIZATION COSTS:
<S> <C> <C>
Professional fees............................................ $ 9,782 $ 14,363
Loss on sale of assets....................................... 7,201 159,870
Miscellaneous................................................ 88 88
Less:
Gain on sale of assets..................................... (954) (954)
Interest earned on accumulated cash........................ (655) (1,259)
-------------------------- --------------------------
Total................................................... $ 15,462 $ 172,108
========================== ==========================
</TABLE>
(3) DEBTOR-IN-POSSESSION FINANCING
On October 14, 1999, Sun 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 Revolving Credit Agreement on November 12, 1999. The Revolving Credit
Agreement was amended as of September 21, 2000 and the Bankruptcy Court approved
the amendment on October 26, 2000. The Revolving Credit Agreement, as amended
(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 over one year. In connection with the
amendment, the Company paid to the DIP Lenders a $250,000 fee.
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% and 8.6% at June 30, 2000 and
December 31, 1999, respectively. The one-month LIBOR was approximately 6.6%, and
5.8% at June 30, 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.
The obligations of Sun under the DIP Financing Agreement are jointly and
severally guaranteed by each of Sun's subsidiaries in the United States that
filed for protection under Chapter 11 (the "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 Debtors). The DIP Obligations are secured by perfected liens on all or
substantially all of the assets of the 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 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.
13
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
As of June 30, 2000 and December 31, 1999, approximately $133.2 million and
$140.5 million, respectively, was available under the DIP Financing Agreement of
which amount the Company had borrowed approximately $54.1 million and $12.1
million as of June 30, 2000 and December 31, 1999, respectively. In addition,
letters of credit of approximately $21.1 million and $7.9 million were
outstanding under the facility as of June 30, 2000 and December 31, 1999,
respectively. Peak borrowings under the DIP Financing Agreement during 1999 were
approximately $56.7 million with an effective interest rate during the year of
approximately 8.8%. Peak borrowings under the DIP Financing Agreement for the
six months ended June 30, 2000 were approximately $62.2 million with an
effective interest rate during the six months ended June 30, 2000 of
approximately 9.5%.
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
14
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Minimum cumulative EBITDA at Month End for preceding continuous six month
period:
August 2000 $26,000,000
September 2000 $26,000,000
October 2000 $26,000,000
November 2000 $26,000,000
December 2000 $26,000,000
January 2001 $28,700,000
February 2001 $31,300,000
March 2001 $34,000,000
April 2001 $36,700,000
May 2001 $39,300,000
June 2001 $42,000,000
It would be an event of default if cumulative EBITDA for any continuous
six-month period beginning with or after July 2001 is less than $42,000,000.
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
quarters ended June 30, 2000 and September 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. In September 2000,
the DIP Lenders waived the defaults and the Company and the DIP Lenders entered
into an amendment of the DIP Financing Agreement to modify the cumulative EBITDA
covenant.
(4) LONG-TERM DEBT
As a result of the Chapter 11 filings, substantially all short and
long-term debt at the Filing Date was 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.
15
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Long-term debt consisted of the following (in thousands):
June 30, December 31,
-------- ------------
2000 1999
---- ----
<S> <C> <C>
DIP Financing Agreement.......................................................... $ 54,092 $ 12,126
Senior Credit Facility:
Revolving Credit Facility..................................................... 415,331 (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............................ 58,156 (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.......................................................................... 12,748 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........................................................................ 32,737 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. 13,027 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............................................................. 34,615 (4) 41,604 (4)
---------------- ----------------
Total long-term debt............................................................. 1,511,152 1,502,476
Less long-term debt subject to compromise........................................ (1,359,501) (1,356,935)
Less amounts due within one year................................................. (77,924) (44,776)
---------------- ----------------
Long-term debt, net of current portion........................................... $ 73,727 $100,765
================ ================
</TABLE>
Long-term debt at June 30, 2000 includes amounts owed under the DIP
Financing Agreement, one fully secured mortgage note payable, certain Industrial
Revenue Bonds, other debt and the Company's foreign debt obligations.
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
subsequent to December 31, 1999 by the purchaser in a Bankruptcy Court approved
sales transaction and the Company's foreign debt obligations.
(1) Classified as liabilities subject to compromise in the Company's
consolidated balance sheets.
(2) Approximately $50,602 and $47,703 is classified as liabilities subject to
compromise in the Company's consolidated balance sheets as of June 30, 2000
and December 31, 1999, respectively.
(3) Approximately $10,935 is classified as liabilities subject to compromise in
the Company's consolidated balance sheets as of June 30, 2000 and December
31, 1999.
16
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) Approximately $16,675 and $21,200 is classified as liabilities subject to
compromise in the Company's consolidated balance sheets as of June 30, 2000
and December 31, 1999, respectively.
The scheduled maturities of long-term debt (not including that which is
subject to compromise) as of June 30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
2000................................................................ $ 77,924
2001................................................................ 16,202
2002................................................................ 28,405
2003................................................................ 2,327
2004................................................................ 12,542
Thereafter.......................................................... 14,251
-----------------
$ 151,651
=================
</TABLE>
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 its DIP Financing Agreement. As of June 30, 2000, letters of
credit outstanding totaled approximately $41.1 million of which approximately
$20.0 million and $21.1 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 $46.2 million of which
approximately $38.3 million and $7.9 million were issued under the prepetition
credit facilities and the DIP Financing Agreement, respectively.
(5) CORPORATE 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 June 30, 2000 and
December 31, 1999, the Company had paid approximately $2.5 million in
termination benefits to 1,440 employees that had been terminated under the 1998
corporate restructuring plan. As of June 30, 2000 and December 31, 1999, the
Company had paid approximately $0.3 million and $0.1 million, respectively, in
lease termination costs under the 1998 corporate restructuring plan. As of June
30, 2000 and December 31, 1999, the Company's 1998 corporate restructuring costs
reserve balance relating to employee terminations was approximately $1.2
million. As of June 30, 2000 and December 31, 1999, the Company's 1998 corporate
restructuring reserve balance relating to lease termination costs was
approximately $0.6 million and $0.8 million, respectively. Approximately $0.6
million of the aggregate 1998 corporate restructuring costs reserve balance of
approximately $1.8 million as of June 30, 2000 and approximately $2.0 million as
of 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 June 30, 2000 and December 31, 1999, the Company's 1998
corporate restructuring plan was substantially complete.
17
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 approximately
$0.9 million related to asset disposals or write-offs. During the six months
ended June 30, 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.
(6) IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE
(A) IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121: "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121") requires impairment losses to be recognized for long-lived assets
used in operations when indications of impairment are present and the estimate
of undiscounted future cash flows is not sufficient to recover long-lived asset
carrying amounts. SFAS 121 also requires that long-lived assets held for
disposal be carried at the lower of carrying value or fair value less costs of
disposal, once management has committed to a plan of disposal.
The Balanced Budget Act of 1997 established, among other things, a new
Medicare PPS for skilled nursing facilities. PPS became effective for the
Company's skilled nursing facilities acquired from RCA on July 1, 1998, and for
the Company's remaining facilities on January 1, 1999. The Company's revenues
from its Inpatient Services segment, Rehabilitation and Respiratory Therapy
Services segment and Pharmaceutical and Medical Supply Services segment were
significantly and adversely impacted by the amount of the federally established
reimbursement rates. In the first quarter of 1999, the Company became aware that
these reductions were expected to have a material adverse impact on net revenues
in 1999 and the decline was other than temporary. This served as an indication
to the Company that the carrying values of the long-lived assets of its
Inpatient Services segment, Rehabilitation and Respiratory Therapy Services
segment and its Pharmaceutical and Medical Supply Services segment were
impaired.
During the second quarter of 1999, the Company revised its projections of
future cash flows for its various business units as current operating results
were worse than planned. The significant write-down of goodwill and other
long-lived assets resulted from the continued adverse impact of PPS on the level
of Medicare reimbursement and occupancy and the demand for the Company's
rehabilitation and respiratory therapy and pharmaceutical and medical supply
services. Additionally, certain of the United Kingdom facilities had not
achieved profitability targets established upon their acquisition.
The following is a summary of the impairment loss by segment for the six
months ended June 30, 2000 and June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Property
and
June 30, 2000: Goodwill Equipment Total
-------- --------- -----
<S> <C> <C> <C>
Other Operations....................... $ 1,000 $ 849 $ 1,849
=============== =============== ===============
</TABLE>
18
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Property
and Other
June 30, 1999: Goodwill Equipment Assets Total
-------- --------- ------ -----
<S> <C> <C> <C> <C>
Inpatient Services..................... $ 188,486 $ 84,156 $ 16,519 $ 289,161
Rehabilitation and Respiratory Therapy
Services............................. 32,190 7,257 11 39,458
Pharmaceuticals and Medical Supply
Services............................. 23,921 2,346 - 26,267
International Operations............... 16,707 17,641 - 34,348
Other Operations....................... 6,950 1,839 1,940 10,729
---------------- --------------- -------------- --------------
$ 268,254 $ 113,239 $ 18,470 $ 399,963
================ =============== ============== ==============
</TABLE>
(B) 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 six months ended June 30, 1999, the Company recorded losses
on assets held for sale of approximately $70.9 million. The losses include (i)
charges of approximately $52.0 million to further reduce the carrying amount of
assisted living facilities and other inpatient facilities classified as assets
held for sale based on revised estimates of selling value less selling costs,
(ii) approximately $16.9 million related to the sale of 11 long-term care
facilities in the United Kingdom, which the Company leased back under 12 year
leases and (iii) approximately $2.0 million of additional losses related to
completing the sale of its Canadian operations during the first quarter of 1999.
The losses are recorded in loss on sale of assets, net in the Company's
consolidated statements of losses.
During the first quarter of 1999, the Company decided not to dispose of
certain non-core businesses previously classified as assets held for sale at
December 31, 1998. The reversal of losses on assets held for sale of
approximately $7.0 million was recorded during the first quarter of 1999. The
loss reversals 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 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 June 30, 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 of the
loss is recorded in gain on sale of assets in the Company's consolidated
statements of losses.
During the second quarter of 2000, the final part of the transaction
involving the other four assisted living facilities was completed. The cash
consideration received subsequent to June 30, 2000 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 recorded an
additional loss of approximately $0.2 million during the second quarter of 2000
on this sales transaction. During the second quarter of 2000, the Company
transferred its two remaining assisted living facilities from its Other
Operations segment to its Inpatient Services segment.
19
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. The cash consideration received during the second
quarter of 2000 for the sale of the five pharmacies was approximately $1.2
million. During the second quarter of 2000, the Company divested 13 pharmacies
in the United Kingdom. The cash consideration received during the second quarter
of 2000 for the sale of the 13 pharmacies was approximately $6.7 million. The
cash consideration received subsequent to June 30, 2000 for the sale of the 13
pharmacies was approximately $0.8 million.
During the first quarter of 2000, the Company began soliciting offers to
purchase its international operations. The Company recorded 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. During the second quarter of 2000, the Company recorded an
additional loss of approximately $1.7 million to reduce the carrying value of
its international operations to its revised estimate of selling value less
selling costs. The first and second quarter charges were recorded in
reorganization costs, net in the Company's consolidated statements of losses.
See Note 2 - Petitions for Reorganization under Chapter 11.
The Company's operations in Australia were placed in receivorship by its
secured creditors in September, 2000. The Company divested its operations in
Spain in October 2000. See Note 15 - Subsequent Events.
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 recorded a loss of approximately $7.8 million in
the first quarter of 2000 to reduce the carrying value of its SunCare
respiratory therapy business to the Company's estimate of selling value less
selling costs. The charges were recorded in reorganization costs, net 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. See Note 2 - Petitions for Reorganization under Chapter
11.
During the first quarter of 2000, the Company identified two domestic
pharmacies for divestiture. The Company recorded 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 was recorded in reorganization costs, net 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 pharmacies will be
sold. The results of operations of these two pharmacies are immaterial. See Note
2 - Petitions for Reorganization under Chapter 11.
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
divestitures require Bankruptcy Court approval. See Note 15 - Subsequent Events.
During the six months ended June 30, 2000, the Company divested 20 skilled
nursing facilities and one assisted living facility. The net revenues and net
operating losses for the six months ended June 30, 2000 for these 21 facilities
were approximately $16.1 million and $1.4 million, respectively. The aggregate
net loss on disposal during the six months ended June 30, 2000 for these
divestitures was approximately $5.3 million, of which approximately $5.5 million
of losses and $0.2 million of gains are included in reorganization costs, net in
the Company's consolidated statements of losses. The Company also recorded
losses during the year ended December 31, 1999 to reduce the carrying value of
certain of these facilities to the Company's estimates of selling value less
selling costs. See Note 2 - Petitions for Reorganization under Chapter 11.
20
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company executed an 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. Under the agreement the Company
transferred 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.
The following is a summary (in thousands) of the carrying amounts of assets
held for sale as of June 30, 2000 and the losses or gains on the sale of assets
and the losses on assets held for sale for the six months ended June 30, 2000.
The losses are recorded in loss on sale of assets, net, and reorganization
costs, net and the gains are recorded in gain on sale of assets and
reorganization costs, net 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.................................. $ 191,688 $ 142,748 $ -
Assisted living facilities................................ 418 197 (1,532)
Inpatient facilities...................................... - 10,280 (8,196)
Other non-core businesses................................. 1,817 8,268 (178)
------------------- ----------------- ----------------
$ 193,923 $ 161,493 $ (9,906)
=================== ================= ================
</TABLE>
(7) COMMITMENTS
(A) CONSTRUCTION COMMITMENTS
The Company had construction commitments of approximately $4.1 million as
of June 30, 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 10 - 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.
21
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) 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 June 30, 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 six months ended June 30, 2000. The original
agreement in principle discussed in Note 2 - Petitions for Reorganization under
Chapter 11, provided that holders of the CTIPS would not receive any recovery
under the original plan of reorganization. During the second quarter of 2000,
approximately $24.9 million of CTIPS were converted into approximately 1.2
million shares of common stock with a par value of approximately $12,000
resulting in an increase in additional paid-in capital of approximately $24.8
million.
22
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) 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 and
six month periods ended June 30, 2000 and 1999, the Company's stock options and
convertible debentures were anti-dilutive.
Losses per share is calculated as follows for the three and six months
ended June 30, (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC:
Net losses before cumulative effect of change
in accounting principle...................... $ (31,445) $ (588,597) $ (197,106) $ (688,018)
Losses per share..................................... $ (0.54) $ (10.06) $ (3.34) $ (11.81)
============ ============ ============= =============
Net losses........................................... $ (31,445) $ (588,597) $ (197,106) $ (701,745)
Losses per share..................................... $ (0.54) $ (10.06) $ (3.34) $ (12.05)
============ ============ ============= =============
Weighted average shares outstanding.................. 58,664 58,499 59,091 58,252
DILUTED:
Net losses before cumulative effect of change
in accounting principle...................... $ (31,445) $ (588,597) $ (197,106) $ (688,018)
Losses per share before cumulative effect of change
in accounting principle...................... $ (0.54) $ (10.06) $ (3.34) $ (11.81)
============= ============== ============== ===============
Net losses........................................... $ (31,445) $ (588,597) $ (197,106) $ (701,745)
Losses per share..................................... $ (0.54) $ (10.06) $ (3.34) $ (12.05)
============= ============== ============== ===============
Weighted average shares outstanding.................. 58,664 58,499 59,091 58,252
</TABLE>
23
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) 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.
24
<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 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 the fourth
quarter of 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.
25
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(11) 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>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets............................................................... $ 77,861 $ 78,726
Noncurrent assets............................................................ 142,973 145,922
Current liabilities.......................................................... 10,546 8,765
Noncurrent liabilities....................................................... 52,082 53,130
Due to parent................................................................ 322,629 291,150
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues................................................. $ 110,367 $ 112,588 $ 220,676 $ 224,023
Costs and expenses........................................... (103,399) (106,127) (208,619) (215,255)
Cumulative effect of change in accounting principle.......... - - - (2,520)
------------ ------------- ------------ -------------
Earnings before intercompany charges and income taxes........ 6,968 6,461 12,057 6,248
Intercompany charges (1) .................................... (24,375) (23,434) (48,086) (42,201)
------------ ------------- ------------ -------------
Losses before income taxes................................... (17,407) (16,973) (36,029) (35,953)
Income tax expense........................................... - - - (363)
------------ ------------- ------------ -------------
Net losses................................................... (17,407) (16,973) (36,029) (36,316)
============ ============= ============ =============
</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 $2.9 million and $3.8
million for the three months ended June 30, 2000 and 1999, respectively and
$6.6 million and $7.5 million for the six months ended June 30, 2000 and
1999, respectively. Royalty fees charged to Mediplex for the three and six
months ended June 30, 1999 for the use of Sun trademarks were $1.8 million
and $3.6 million, respectively. Sun discontinued charging Mediplex for
royalty fees as of December 31, 1999. Intercompany interest charged to
Mediplex for the three months ended June 30, 2000 and 1999 for advances
from Sun was $21.4 million and $17.8 million, respectively and $41.4
million and $31.1 million for the six months ended June 30, 2000 and 1999,
respectively.
26
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(12) SEGMENT INFORMATION
See Overview in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(in thousands)
<TABLE>
<CAPTION>
Rehabilitation Pharmaceutical
and 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 JUNE 30, 2000
Total Net Revenues....... $ 433,760 $ 53,198 $ 75,442 $ 70,445 $ 43,134 $ 370 $ (55,395) $ 620,954
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 417,293 43,778 71,181 69,813 44,033 20,177 (55,395) 610,880
Depreciation and
amortization........... 5,240 865 1,671 - 894 2,161 - 10,831
Interest, net............ 2,682 56 16 3,184 24 3,116 - 9,078
---------- ---------- ------------ ----------- ---------- ---------- ---------- ------------
Earnings (losses) before
corporate allocations.. 8,545 8,499 2,574 (2,552) (1,817) (25,084) - (9,835)
Corporate interest
allocation............. 5,937 2,713 2,691 3,903 1,645 (16,889) - -
Corporate management fees 10,738 1,329 1,870 691 1,047 (15,675) - -
---------- ---------- ------------ ----------- ---------- ---------- ---------- ------------
Net segment earnings
(losses)............... $ (8,130) $ 4,457 $ (1,987) $(7,146) $(4,509) $ 7,480 - $ (9,835)
========== ========== ============ =========== ========== ========== =========== ============
Intersegment revenues.... $ 150 $ 29,555 $ 23,042 $ - $ 2,648 $ - $ (55,395) $ -
Identifiable segment assets $ 348,294 $ 55,900 $ 107,693 $137,421 $ 85,471 $1,171,458 $(674,406) $ 1,231,831
Segment capital
expenditures, net...... $ 7,993 $ 23 $ 92 $ 2,505 $ 65 $ 5,343 $ - $ 16,021
FOR THE THREE MONTHS ENDED JUNE 30, 1999
Total Net Revenues....... $ 392,893 $ 58,240 $ 72,791 $ 73,551 $ 58,035 $ (1,002) $ (53,594) $ 600,914
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 430,679 58,908 68,237 70,883 60,462 28,150 (53,594) 663,725
Depreciation and
amortization........... 9,062 2,242 2,121 3,715 2,611 2,787 - 22,538
Interest, net............ 2,253 71 21 3,633 1,959 31,069 - 39,006
Dividends on Preferred
Securities............. - - - - - 6,452 - 6,452
---------- ---------- ------------ ----------- ---------- ---------- --------- ------------
Earnings (losses) before
corporate allocations.. (49,101) (2,981) 2,412 (4,680) (6,997) (69,460) - (130,807)
Corporate interest
allocation............. 12,043 3,042 3,117 4,889 2,665 (25,756) - -
Corporate management fees 18,170 2,361 2,914 732 1,844 (26,021) - -
Regional allocation...... (235) - - - (52) 287 - -
---------- ----------- ------------ ------------ ----------- ----------- ---------- ------------
Net segment losses....... $(79,079) $ (8,384) $ (3,619) $(10,301) $ (11,454) $ (17,970) $ - $(130,807)
========== =========== ============ ============ =========== =========== ========== ============
Intersegment revenues.... $ 150 $ 30,242 $ 18,115 $ - $ 5,136 $ (49) $ (53,594) $ -
Identifiable segment assets $ 225,109 $ 80,007 $ 88,734 $ 326,951 $ 206,182 $1,548,452 $(642,644) $1,832,791
Segment capital
expenditures, net........ $ 16,788 $ 1,299 $ (4,874) $ 5,083 $ 2,073 $ 8,842 $ - $ 29,211
</TABLE>
27
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Rehabilitation Pharmaceutical
and 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 SIX MONTHS ENDED JUNE 30, 2000
Total Net Revenues....... $ 871,989 $ 110,715 $ 149,273 $ 145,581 $ 92,914 $ 458 $ (111,983) $ 1,258,947
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 839,084 91,132 141,649 145,136 94,013 45,110 (111,983) 1,244,141
Depreciation and
amortization........... 10,824 1,859 3,019 2,502 2,592 4,452 - 25,248
Interest, net............ 5,131 105 33 6,167 1,396 4,470 - 17,302
---------- ------------- --------------- ----------- ---------- ---------- ----------- ----------
Earnings (losses) before
corporate allocations.. 16,950 17,619 4,572 (8,224) (5,087) (53,574) - (27,744)
Corporate interest
allocation............. 12,146 5,547 5,384 8,346 3,748 (35,171) - -
Corporate management fees 21,612 2,753 3,703 1,433 2,222 (31,723)
---------- ------------- --------------- ----------- ---------- ---------- ----------- ----------
Net segment earnings
(losses)............... $(16,808) $ 9,319 $ (4,515) $ (18,003) $(11,057) $ 13,320 $ - $ (27,744)
========== ============= =============== =========== ========== ========== =========== ==========
Intersegment revenues.... $ 299 $ 61,036 $ 45,252 $ - $ 5,396 $ - $(111,983) $ -
Identifiable segment assets $ 348,294 $ 55,900 $ 107,693 $ 137,421 $ 85,471 $1,171,458 $(674,406) $1,231,831
Segment capital
expenditures, net........ $ 10,402 $ 1 $ 345 $ 4,590 $ 311 $ 9,732 $ - $ 25,381
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Total Net Revenues....... $ 855,878 $ 128,306 $ 148,612 $ 145,213 $ 120,671 $ (1,969) $(122,765) $1,273,946
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 877,880 126,334 142,003 138,443 123,537 58,697 (122,765) 1,344,129
Depreciation and
amortization........... 17,763 4,381 4,182 7,231 5,229 5,199 - 43,985
Interest, net............ 4,514 145 42 6,846 4,006 60,624 - 76,177
Dividends on Preferred
Securities............. - - - - - 12,968 - 12,968
---------- ------------- --------------- ----------- ---------- ---------- ----------- ----------
Earnings (losses) before
corporate allocations.. (44,279) (2,554) 2,385 (7,307) (12,101) (139,457) - (203,313)
Corporate interest
allocation............. 25,625 6,505 6,514 10,011 5,538 (54,193) - -
Corporate management fees 36,673 5,155 5,920 1,443 3,692 (52,883) - -
Regional allocation...... (502) - - - (154) 656 - -
---------- ------------- --------------- ----------- ---------- ---------- ------------ ----------
Net segment losses....... $(106,075) $ (14,214) $ (10,049) $ (18,761) $(21,177) $(33,037) $ - $(203,313)
========== ============= =============== =========== ========== ========== =========== ==========
Intersegment revenues.... $ 299 $ 69,012 $ 41,888 $ - $ 11,566 $ - $(122,765) $ -
Identifiable segment assets $ 225,109 $ 80,007 $ 88,734 $ 326,951 $ 206,182 $1,548,452 $(642,644) $1,832,791
Segment capital
expenditures, net...... $ 28,150 $ 2,789 $ (3,387) $ 7,713 $ 7,769 $ 25,646 $ - $ 68,680
</TABLE>
28
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(13) SUMMARIZED CONSOLIDATING INFORMATION
In connection with Sun's offering of the 9.5% Notes in July 1997 and the
9.4% Notes in May 1998 all direct and indirect subsidiaries of Sun other than
Sun's direct and indirect foreign subsidiaries, CareerStaff and its direct and
indirect subsidiaries, and certain other immaterial subsidiaries of Sun have,
jointly and severally, unconditionally guaranteed the 9.5% Notes and 9.4% Notes
(the "Guarantors"). These guarantees are subordinated to all existing and future
senior debt and guarantees of the Guarantors and are unsecured.
Sun conducts all of its business through and derives virtually all of its
income from its subsidiaries. Therefore, Sun'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.
Pursuant to Rule 3-10 of Regulation S-X, the following summarized
consolidating information is for Sun, the wholly-owned Guarantors, and Sun'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.
29
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 36,381 $ 10,337 $ 8,601 $ - $ 55,319
Accounts receivable, net.................... - 196,961 12,282 (1,635) 207,608
Other receivables, net...................... 289,198 (191,073) (97,811) - 314
Inventory, net.............................. - 32,976 328 - 33,304
Prepaids and other assets................... 1,929 9,034 139 - 11,102
Deferred tax assets......................... (15,538) 15,538 - - -
--------------- --------------- ---------------- ------------- --------------
Total current assets......................... 311,970 73,773 (76,461) (1,635) 307,647
Property and equipment, net.................... 99,604 155,113 16,070 - 270,787
Goodwill, net.................................. - 397,785 327 - 398,112
Notes receivable, net.......................... 14,750 15,773 - (14,750) 15,773
Assets held for sale........................... - 2,235 191,688 - 193,923
Other assets, net.............................. 19,783 27,775 3,031 (5,000) 45,589
Investment in subsidiaries..................... (2,381,855) - - 2,381,855 -
--------------- --------------- ---------------- ------------- --------------
Total assets................................. $ (1,935,748) $ 672,454 $ 134,655 $ 2,360,470 $ 1,231,831
=============== =============== ================ ============= ==============
Current liabilities:
Current portion of long-term debt........... $ 54,092 $ 409 $ 23,423 $ - $ 77,924
Current portion of obligations under capital
leases.................................... - 37 278 - 315
Accounts payable............................ 23,098 867 10,944 (1,635) 33,274
Accrued compensation and benefits........... 22,580 67,806 13,527 - 103,913
Accrued interest............................ - 5,296 741 - 6,037
Accrued self-insurance obligations.......... (17,675) 72,547 1,707 - 56,579
Other accrued liabilities................... 44,262 63,943 18,205 - 126,410
Income tax payables......................... 22,147 (9,167) 871 - 13,851
--------------- --------------- ---------------- ------------- --------------
Total current liabilities.................... 148,504 201,738 69,696 (1,635) 418,303
Long-term debt, net of current portion......... - 32,469 61,008 (19,750) 73,727
Obligations under capital leases, net of current - - 54,579 - 54,579
portion......................................
Other long-term liabilities.................... - 31,113 2,097 - 33,210
Liabilities subject to compromise (see Note 2). 1,424,032 122,462 43 - 1,546,537
--------------- --------------- ---------------- ------------- --------------
Total liabilities............................ 1,572,536 387,782 187,423 (21,385) 2,126,356
Intercompany payables/(receivables)............ (2,607,537) 2,344,324 263,213 - -
Commitments and contingencies..................
Minority interest.............................. - 6,174 48 - 6,222
Company-obligated manditorily redeemable
convertible preferred securities of a
subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of
the Company.................................. 298,119 - - - 298,119
Total stockholders' deficit................... (1,198,866) (2,065,826) (316,029) 2,381,855 (1,198,866)
--------------- --------------- ---------------- ------------- --------------
Total liabilities and stockholders' deficit.... $ (1,935,748) $ 672,454 $ 134,655 $ 2,360,470 $ 1,231,831
=============== =============== ================ ============= ==============
</TABLE>
30
<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 344,119 - - - 344,119
the Company..................................
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>
31
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF EARNINGS (LOSSES)
FOR THE THREE MONTHS ENDED JUNE 30, 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......................... $ 370 $ 532,288 $ 82,814 $ 5,482 $ 620,954
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs......................... - 485,457 74,068 5,482 565,007
Corporate general and administrative.... 12,010 21,890 4,303 - 38,203
Depreciation and amortization........... 2,000 8,835 (4) - 10,831
Interest, net (contractual interest
expense of $52,624 for the three
months ended June 30, 2000)........... 2,963 2,821 3,294 - 9,078
Provision for losses on accounts
receivable............................ - 7,523 147 - 7,670
Legal and regulatory costs.............. - 2,618 - - 2,618
Impairment loss......................... - 1,849 - - 1,849
Loss on sale of assets, net............. 2 1,621 - - 1,623
Equity interest in losses of
subsidiaries.......................... 112,128 - - (112,128) -
Intercompany interest expense (income) . (5,031) 5,031 - - -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses................ 124,072 537,645 81,808 (106,646) 636,879
--------------- --------------- ---------------- --------------- ---------------
Intercompany charges....................... (112,351) 110,851 1,500 - -
--------------- --------------- ---------------- --------------- ---------------
Losses before reorganization costs and
income taxes............................. (11,351) (116,208) (494) 112,128 (15,925)
Reorganization costs, net.................. 20,035 4,767 (9,340) - 15,462
Income tax expense (benefit)............... 59 - (1) - 58
--------------- --------------- ---------------- --------------- ---------------
Net losses................................. $ (31,445) $ (120,975) $ 8,847 $ 112,128 $ (31,445)
=============== =============== ================ =============== ===============
</TABLE>
32
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
FOR THE THREE MONTHS ENDED JUNE 30, 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......................... $ (1,002) $ 515,628 $ 86,288 $ - $ 600,914
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs......................... - 525,759 82,302 - 608,061
Impairment loss......................... 1,941 359,694 38,328 - 399,963
Loss on sale of assets.................. - 34,895 16,886 - 51,781
Corporate general and administrative.... 28,005 7,824 4,428 - 40,257
Interest, net........................... 30,129 4,900 3,977 - 39,006
Depreciation and amortization........... 2,416 16,189 3,933 - 22,538
Provision for losses on accounts
receivable............................ - 15,356 51 - 15,407
Financial restructuring costs........... 6,046 - - - 6,046
Restructuring costs..................... (14) 14 - - -
Equity interest in losses of
subsidiaries.......................... 622,641 - - (622,641) -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses................
691,164 964,631 149,905 (622,641) 1,183,059
--------------- --------------- ---------------- --------------- ---------------
Dividends on Preferred Securities.......... 6,452 - - - 6,452
Management fee (income) expense............ (110,020) 108,815 1,205 - -
------------------------------------------------------------------------------------
Losses before income taxes................. (588,598) (557,818) (64,822) 622,641 (588,597)
Income taxes............................... - - - - -
--------------- --------------- ---------------- --------------- ---------------
Net losses................................. $ (588,598) $ (557,818) $ (64,822) $ 622,641 $ (588,597)
=============== =============== ================ =============== ===============
</TABLE>
33
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
FOR THE SIX MONTHS ENDED JUNE 30, 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........................ $ 459 $ 1,084,212 $ 171,773 $ 2,503 $ 1,258,947
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs........................ - 982,139 161,794 2,503 1,146,436
Corporate general and administrative... 44,847 28,566 7,589 - 81,002
Depreciation and amortization.......... 4,227 18,375 2,646 - 25,248
Interest, net (contractual interest
expense of $103,665 for the six months
ended June 30, 2000)................ 4,206 6,485 6,611 - 17,302
Provision for losses on accounts
receivable........................... - 16,464 239 - 16,703
Legal and regulatory costs............. - 2,618 - - 2,618
Impairment loss........................ - 1,849 - - 1,849
Loss on sale of assets, net............ - 1,623 - - 1,623
Gain on sale of assets................. (1,987) (6,965) - - (8,952)
Equity interest in losses of
subsidiaries......................... 320,060 - - (320,060) -
Intercompany interest expense (income) (10,062) 10,062 - - -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses............... 361,291 1,061,216 178,879 (317,557) 1,283,829
--------------- --------------- ---------------- --------------- ---------------
Intercompany charges...................... (234,941) 233,031 1,910 - -
--------------- --------------- ---------------- --------------- ---------------
Losses before reorganization costs and (125,891) (210,035) (9,016) 320,060 (24,882)
income taxes............................
Reorganization costs, net................. 71,098 16,444 84,566 - 172,108
Income tax expense (benefit).............. 117 - (1) - 116
--------------- --------------- ---------------- --------------- ---------------
Net losses................................ $ (197,106) $ (226,479) $ (93,581) $ 320,060 $ (197,106)
=============== =============== ================ =============== ===============
</TABLE>
34
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
FOR THE SIX MONTHS ENDED JUNE 30, 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........................ $ (1,970) $ 1,096,054 $ 179,862 $ - $ 1,273,946
-------------- ------------- --------------- ------------- ----------------
Costs and expenses:
Operating costs........................ - 1,061,852 170,778 - 1,232,630
Impairment loss........................ 1,940 359,695 38,328 - 399,963
Corporate general and administrative... 59,535 14,564 8,175 - 82,274
Interest, net.......................... 58,861 9,787 7,529 - 76,177
Loss on sale of assets, net............ 3,009 42,994 17,886 - 63,889
Depreciation and amortization.......... 4,482 31,599 7,904 - 43,985
Provision for losses on accounts
receivable.......................... - 29,055 170 - 29,225
Corporate restructuring costs.......... 3,789 6,373 1,265 - 11,427
Financial restructuring................ 6,046 - - - 6,046
Loss on termination of interest rate
swaps............................... 2,488 - - - 2,488
Equity interest in losses of
subsidiaries........................ 742,788 - - (742,788) -
Intercompany interest (income) expense. (5,031) 5,031 - - -
-------------- ------------- --------------- ------------- ----------------
Total costs and expenses......... 877,907 1,560,950 252,035 (742,788) 1,948,104
-------------- ------------- --------------- ------------- ----------------
Dividends on Preferred Securities......... 12,968 - - - 12,968
Management fee (income) expense........... (199,689) 196,738 2,951 - -
-------------- ------------- --------------- ------------- ----------------
Losses before income taxes and cumulative
effect of change in accounting principle (693,156) (661,634) (75,124) 742,788 (687,126)
Income tax expense (benefit).............. 5,519 (5,038) 411 - 892
-------------- ------------- --------------- ------------- ----------------
Earnings before cumulative effect of change
in accounting principle............. (698,675) (656,596) (75,535) 742,788 (688,018)
Cumulative effect of change in accounting
principle.............................. 3,070 9,351 1,306 - 13,727
-------------- ------------- --------------- ------------- ----------------
Net losses................................ $ (701,745) $ (665,947) $ (76,841) $ 742,788 $ (701,745)
============== ============= =============== ============= ================
</TABLE>
35
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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.................................... $ (197,106) $ (226,479) $ (93,581) $ 320,060 $ (197,106)
-------------- --------------- ----------------- ---------------- --------------
Adjustments to reconcile net losses to net
cash provided by (used for) operating
activities:
Equity interest in losses of subsidiaries 320,060 - - (320,060)
Reorganization costs, net............... 71,098 16,444 84,566 - 172,108
Depreciation and amortization........... 4,227 18,375 2,646 - 25,248
Provision for losses on accounts and
other receivables..................... - 17,847 239 - 18,086
Impairment loss......................... - 1,849 - - 1,849
Loss on sale of assets, net............. - 1,623 - - 1,623
Gain on sale of assets.................. (1,987) (6,965) - - (8,952)
Other, net.............................. (2,898) - - - (2,898)
Changes in operating assets and liabilities:
Accounts receivable........................ - 17,332 (17,907) - (575)
Other current assets....................... 7,963 21,047 (3,135) - 25,875
Income tax payables........................ 20,188 (14,137) (1,262) - 4,789
Other current liabilities.................. (11,644) (14,479) 501 - (25,622)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities before reorganization costs...... 209,901 (167,543) (27,933) - 14,425
Net cash paid for reorganization costs........ - (6,053) - - (6,053)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities................................... 209,901 (173,596) (27,933) - 8,372
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net..................... (9,732) (11,535) (4,114) - (25,381)
Acquisitions, net of cash acquired............ - (974) - - (974)
Proceeds from sale of assets held for sale.... - - 13,570 - 13,570
Decrease in long-term notes receivable........ - 448 1,391 - 1,839
Increase in other assets...................... 17,057 (25,601) 4,189 - (4,355)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) investing
activities................................. 7,325 (37,662) 15,036 - (15,301)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit
Agreement (postpetition) ................... 41,966 - - - 41,966
Long-term debt borrowings..................... 4,195 7,126 (3,563) - 7,758
Long-term debt repayments..................... - 44 (9,916) - (9,872)
Principal payments on prepetition debt
authorized by Bankruptcy Court.............. - (1,930) - - (1,930)
Other financing activities.................... (15) - - - (15)
Intercompany advances......................... (239,332) 209,748 29,584 - -
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) financing
activities................................. (193,186) 214,988 16,105 - 37,907
-------------- --------------- ----------------- ---------------- --------------
Effect of exchange rate on cash and cash
equivalents................................. (706) - - - (706)
-------------- --------------- ----------------- ---------------- --------------
Net increase in cash and cash equivalents..... 23,334 3,730 3,208 - 30,272
Cash and cash equivalents at beginning of year 13,049 6,693 5,305 - 25,047
-------------- --------------- ----------------- ---------------- --------------
Cash and cash equivalents at end of period.... $ 36,383 $ 10,423 $ 8,513 $ - $ 55,319
============== =============== ================= ================ ==============
</TABLE>
36
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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 ............................ $ (701,745) $ (665,947) $ (76,841) $ 742,788 $ (701,745)
-------------- ------------- --------------- ------------- ----------------
Adjustments to reconcile net losses to
net cash provided by (used for)
operating activities:
Impairment loss..................... 1,940 359,695 38,328 - 399,963
Cumulative effect of change in
accounting principle................ 3,070 9,351 1,306 - 13,727
Loss on sale of assets.............. 3,009 42,994 17,886 - 63,889
Equity interest in losses of
subsidiaries..................... 742,788 - - (742,788) -
Depreciation and amortization....... 4,482 31,599 7,904 43,985
Provision for losses on accounts
receivable...................... - 29,055 170 - 29,225
Other, net......................... 2,703 - - - 2,703
Changes in operating assets and
liabilities:
Accounts receivable............. - 111,678 6,075 - 117,753
Other current assets............ (4,706) 20,632 12,239 - 28,165
Income taxes payable............ 27,659 649 (1,539) - 26,769
Other current liabilities....... (69,713) 45,306 (9,381) - (33,788)
-------------- ------------- --------------- ------------- ----------------
Net cash provided by (used for)
operating activities............... $ 9,487 $ (14,988) $ (3,853) $ - $ (9,354)
-------------- ------------- --------------- ------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.............. $ (22,564) $ (34,588) $ (11,528) $ - $ (68,680)
Acquisitions, net of cash acquired..... - (1,321) (813) - (2,134)
Decrease (increase) in long-term note
receivable.......................... 2,769 (633) 610 - 2,746
Other assets expenditures.............. 3,227 (5,782) 374 - (2,181)
-------------- ------------- --------------- ------------- ----------------
Net cash used for investing
activities....................... $ (16,568) $ (42,324) $ (11,357) $ - $ (70,249)
-------------- ------------- --------------- ------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings.............. $ 86,056 $ 20,839 $ 16,424 $ - $ 123,319
Long-term debt repayments.............. (10,456) (23,153) (4,768) - (38,377)
Conversion of Mediplex 6.5% Convertible
Subordinated Debentures due 2003.... (6,649) - - - (6,649)
Net proceeds from issuance of common
stock............................... 809 - - - 809
Purchase of treasury stock............. (410) - - - (410)
Other Financing activities............. (1,052) - - - (1,052)
Intercompany advances.................. (57,458) 56,458 1,000 - -
-------------- ------------- --------------- ------------- ----------------
Net cash provided by financing
activities...................... $ 10,840 $ 54,144 $ 12,656 $ - $ 77,640
-------------- ------------- --------------- ------------- ----------------
Effect of exchange rate on cash and cash
equivalents............................ $ - $ - $ 1,513 $ - $ 1,513
-------------- ------------- --------------- ------------- ----------------
Net increase (decrease) in cash and cash
equivalents............................ $ 3,759 $ (3,168) $ (1,041) $ - $ (450)
Cash and cash equivalents at beginning of -
year................................... (9,964) 26,406 11,062 27,504
-------------- ------------- --------------- ------------- ----------------
Cash and cash equivalents at end of period $ (6,205) $ 23,238 $ 10,021 $ - $ 27,054
============== ============= =============== ============= ================
</TABLE>
37
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(14) FILER/NON-FILER FINANCIAL STATEMENTS
In accordance with SOP 90-7, the debtor entities are required to present
condensed consolidated financial statements.
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 45,680 $ 9,639 $ - $ 55,319
Accounts receivable, net.................................. 201,007 7,623 (1,022) 207,608
Other receivables, net.................................... 97,943 (97,629) - 314
Inventory, net............................................ 32,424 880 - 33,304
Prepaids and other assets................................. 10,996 106 - 11,102
------------- ------------ ------------- --------------
Total current assets...................................... 388,050 (79,381) (1,022) 307,647
Property and equipment, net.... ........................... 247,026 23,761 - 270,787
Goodwill, net............................................... 397,785 327 - 398,112
Notes receivable, net....................................... 15,773 - - 15,773
Assets held for sale........................................ 2,235 191,688 - 193,923
Other assets, net........................................... 39,313 6,276 - 45,589
Investment in subsidiaries.................................. (24,953) - 24,953 -
------------- ------------ ------------- --------------
Total assets.............................................. $ 1,065,229 $ 142,671 $ 23,931 $ 1,231,831
============= ============ ============= ==============
</TABLE>
(Continued on next page.)
38
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS EXCEPT PER 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........................... $ 54,386 $ 23,538 $ - $ 77,924
Current portion of obligations under capital leases......... - 315 - 315
Accounts payable............................................ 24,183 10,696 (1,605) 33,274
Accrued compensation and benefits........................... 90,846 13,067 - 103,913
Accrued interest............................................ 4,524 1,513 - 6,037
Accrued self-insurance obligations.......................... 55,564 1,015 - 56,579
Other accrued liabilities................................... 108,787 17,623 - 126,410
Income tax payables......................................... 12,980 871 - 13,851
------------- -------------- ------------- ---------------
Total current liabilities................................... 351,270 68,638 (1,605) 418,303
Long-term debt, net of current portion........................ 7,259 66,468 - 73,727
Obligations under capital leases, net of current portion...... - 54,579 - 54,579
Other long-term liabilities................................... 31,113 2,097 - 33,210
Liabilities subject to compromise (see Note 2)................ 1,546,537 - - 1,546,537
------------- -------------- ------------- ---------------
Total liabilities........................................... 1,936,179 191,782 (1,605) 2,126,356
Commitments and contingencies.................................
Minority interest............................................. 3,148 3,074 - 6,222
------------- -------------- ------------- ---------------
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of the Company... 298,119 - - 298,119
------------- -------------- ------------- ---------------
Intercompany payables/(receivables)........................... 26,649 (27,232) 583 -
------------- -------------- ------------- ---------------
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, 64,811,038 shares issued and
outstanding as of June 30, 2000.......................... 648 2,573 (2,573) 648
Additional paid-in capital.................................. 823,184 273,662 (273,662) 823,184
Accumulated deficit......................................... (1,982,613) (288,601) 288,601 (1,982,613)
Accumulated other comprehensive loss........................ (12,587) (12,587) 12,587 (12,587)
------------- -------------- ------------- ---------------
(1,171,368) (24,953) 24,953 (1,171,368)
Less:
Common stock held in treasury, at cost, 2,212,983
shares at June 30, 2000................................. (27,376) - - (27,376)
Grantor stock trust, at market, 1,915,935 shares at
June 30, 2000........................................... (122) - - (122)
------------- -------------- -------------- ---------------
Total stockholders' deficit ................................ (1,198,866) (24,953) 24,953 (1,198,866)
------------- -------------- ------------- ---------------
Total liabilities and stockholders' deficit................. $ 1,065,229 $ 142,671 $ 23,931 $ 1,231,831
============= ============== ============= ===============
</TABLE>
39
<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)
ASSETS
<TABLE>
<CAPTION>
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.)
40
<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 PER 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 payables/(receivables)........................... (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 at 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 at December 31, 1999...................... (27,376) - - (27,376)
Grantor stock trust, at market, 1,915,935 shares at
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>
41
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF EARNINGS (LOSSES)
FOR THE THREE MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total net revenues.............................................. $ 538,640 $ 83,614 $ (1,300) $ 620,954
-------------- ------------- -------------- ---------------
Costs and expenses:
Operating costs............................................... 485,538 80,769 (1,300) 565,007
Corporate general and administrative.......................... 34,594 3,609 - 38,203
Depreciation and amortization................................. 10,774 57 - 10,831
Interest, net (contractual interest expense of $52,624 for the
three months ended June 30, 2000)........................... 5,628 3,450 - 9,078
Provision for losses on accounts receivable................... 7,504 166 - 7,670
Legal and regulatory costs.................................... 2,618 - - 2,618
Impairment loss............................................... 1,849 - - 1,849
Loss on sale of assets, net................................... 1,623 - - 1,623
Equity interest in losses of subsidiaries..................... (4,903) - 4,903 -
-------------- ------------- -------------- ---------------
Total costs and expenses...................................... 545,225 88,051 3,603 636,879
Management fee (income) expense................................. - - - -
-------------- ------------- -------------- ---------------
Losses before reorganization costs, net and income taxes........ (6,585) (4,437) (4,903) (15,925)
Reorganization costs, net....................................... 24,802 (9,340) - 15,462
Income taxes.................................................... 58 - - 58
-------------- ------------- -------------- ---------------
Net earnings (losses)......................................... $ (31,445) $ 4,903 $ (4,903) $ (31,445)
============== ============= ============== ===============
</TABLE>
42
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total net revenues.............................................. $ 1,089,743 $ 171,693 $ (2,489) $ 1,258,947
-------------- ------------- -------------- ---------------
Costs and expenses:
Operating costs............................................... 983,421 165,504 (2,489) 1,146,436
Corporate general and administrative.......................... 74,109 6,893 - 81,002
Depreciation and amortization................................. 22,479 2,769 - 25,248
Interest, net (contractual interest expense of $103,665 for the
six months ended June 30, 2000)............................ 10,377 6,925 - 17,302
Provision for losses on accounts receivable................... 16,393 310 - 16,703
Legal and regulatory costs.................................... 2,618 - - 2,618
Impairment loss............................................... 1,849 - - 1,849
Loss on sale of assets, net................................... 1,623 - - 1,623
Gain on sale of assets........................................ (8,952) - - (8,952)
Equity interest in losses of subsidiaries..................... 97,019 - (97,019) -
-------------- ------------- -------------- ---------------
Total costs and expenses...................................... 1,200,936 182,401 (99,508) 1,283,829
Management fee (income) expense................................. (1,745) 1,745 - -
-------------- ------------- -------------- ---------------
Losses before reorganization costs, net and income taxes........ (109,448) (12,453) 97,019 (24,882)
Reorganization costs, net....................................... 87,542 84,566 - 172,108
Income taxes.................................................... 116 - - 116
-------------- ------------- -------------- ---------------
Net losses.................................................... $ (197,106) $ (97,019) $ 97,019 $ (197,106)
============== ============= ============== ===============
</TABLE>
43
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses.......................................................... $ (197,106) $ (97,019) $ 97,019 $ (197,106)
-------------- --------------- ------------- -------------
Adjustments to reconcile net losses to net cash provided by (used for)
operating activities:
Equity interest in losses of subsidiaries........................... 97,019 - (97,019)
Reorganization costs, net........................................... 87,542 84,566 - 172,108
Depreciation and amortization....................................... 22,479 2,769 - 25,248
Provision for losses on accounts and other receivables.............. 17,776 310 - 18,086
Impairment loss..................................................... 1,849 - - 1,849
Loss on sale of assets, net......................................... 1,623 - - 1,623
Gain on sale of assets.............................................. (8,952) - - (8,952)
Other, net.......................................................... (2,898) - - (2,898)
Changes in operating assets and liabilities:
Accounts receivable................................................. (4,753) 4,178 - (575)
Other current assets................................................ 16,939 8,936 - 25,875
Income taxes payable................................................ 5,975 (1,186) - 4,789
Other current liabilities........................................... (11,789) (13,833) - (25,622)
-------------- --------------- ------------- -------------
Net cash provided by (used for) operating activities before
reorganization costs.............................................. 25,704 (11,279) - 14,425
Net cash paid for reorganization costs............................... (6,053) - - (6,053)
-------------- --------------- ------------- -------------
Net cash provided by (used for) operating activities................. 19,651 (11,279) - 8,372
-------------- --------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net........................................... (20,749) (4,632) - (25,381)
Acquisitions, net of cash acquired.................................. (974) - - (974)
Proceeds from sale of assets held for sale.......................... - 13,570 - 13,570
Decrease in long-term notes receivable.............................. 447 1,392 - 1,839
Increase in other assets........................................ (16,495) 12,140 - (4,355)
-------------- --------------- ------------- -------------
Net cash provided by (used for) investing activities............... (37,771) 22,470 - (15,301)
-------------- --------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit Agreement (postpetition) ..... 41,966 - - 41,966
Long-term debt borrowings........................................... 4,195 3,563 - 7,758
Long-term debt repayments........................................... - (9,872) - (9,872)
Principal payments on prepetition debt authorized by Bankruptcy Court (1,930) - - (1,930)
Intercompany advances............................................... 1,758 (1,758) - -
Other financing activities.......................................... (15) - - (15)
-------------- --------------- ------------- -------------
Net cash provided by (used for)financing activities.. ............. 45,974 (8,067) - 37,907
-------------- --------------- ------------- -------------
Effect of exchange rate on cash and cash equivalents................. (706) - - (706)
-------------- --------------- ------------- -------------
Net increase in cash and cash equivalents............................ 27,148 3,124 - 30,272
Cash and cash equivalents at beginning of year....................... 18,532 6,515 - 25,047
-------------- --------------- ------------- -------------
Cash and cash equivalents at end of period........................... $ 45,680 $ 9,639 $ - $ 55,319
============== =============== ============= =============
</TABLE>
44
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(15) SUBSEQUENT EVENTS
The Company divested its operations in Spain for approximately $8.0 million
in October 2000. The Company's operations in Australia were placed in
receivorship by its secured creditors in September 2000. Under Australian
receivorship procedures, the assets will be sold and the proceeds used to pay
the secured creditors, and then any remaining value would be distributed to its
unsecured creditors, which includes the Company. No assurance can be given that
the Company will receive any proceeds from the sale of the Australia operations.
The Company is currently seeking to divest its operations in Germany and the
United Kingdom. No assurance can be given that the Company will successfully
divest its operations in Germany and the United Kingdom. See Note 6 - Impairment
of Long-Lived Assets and Assets Held for Sale.
During the third quarter of 2000, the Company will divest six skilled
nursing facilities. The Company will record losses in the third quarter of 2000
related to these divestitures. The Company has previously recorded losses on
certain of these skilled nursing facilities. The aggregate net revenues and
aggregate net operating losses for the six months ended June 30, 2000 for these
six skilled nursing facilities were approximately $10.0 million and $1.6
million, respectively.
As of October 10, 2000, the Company had identified 67 skilled nursing
facilities, six comprehensive outpatient rehabilitation facilities, three
assisted living facilities and one medical office building for disposal. The
Company will record losses during the third quarter of 2000 to reduce the
carrying amount of the skilled nursing facilities, comprehensive outpatient
rehabilitation facilities, assisted living facilities and the medical office
building to the Company's estimate of selling value less selling costs. The
Company has previously recorded losses on certain of these skilled nursing
facilities. The aggregate net revenues and aggregate net operating losses for
the six months ended June 30, 2000 for the 67 skilled nursing facilities were
approximately $169.1 million and $7.9 million, respectively. The aggregate net
revenues and aggregate net operating income for the six months ended June 30,
2000 for the six comprehensive outpatient rehabilitation facilities were
approximately $1.4 million and $0.2 million, respectively. The aggregate net
revenues and aggregate net operating loss for the six months ended June 30, 2000
for the three assisted living facilities were approximately $0.6 million and
$0.9 million, respectively. The aggregate net revenues and aggregate net
operating loss for the six months ended June 30, 2000 for the medical office
building were approximately $0.9 million and $1.0 million, respectively.
Divestitures require Bankruptcy Court approval.
45
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sun Healthcare Group, Inc., through its direct and indirect subsidiaries
(hereinafter referred to individually as "Sun" or collectively as 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 Germany. 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, licensed practical nurses and certified
nursing assistants. As of June 30, 2000, the Company operated 327 inpatient
facilities with 37,110 licensed beds compared to 385 facilities with 43,343
licensed beds as of June 30, 1999. Included in the preceding are six skilled
nursing facilities with 674 licensed beds which the Company will divest during
the third quarter of 2000. Also included in the preceding are 67 skilled nursing
facilities with 8,642 licensed beds and three assisted living facilities with
124 licensed beds which as of October 10, 2000, the Company has announced its
intention to divest through foreclosure sales, lease terminations through mutual
agreements with the lessors or by transferring operations to successor
operators. The Company has also identified six comprehensive outpatient
rehabilitation facilities and one medical office building for divestiture. See
"Note 6 - Impairment of Long-Lived Assets and Assets Held for Sale and Note 15 -
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 June 30, 2000, the Company's
rehabilitation and respiratory therapy services segment provided services to
1,195 facilities in 41 states, of which 865 were operated by nonaffiliated
parties compared to 1,500 facilities in 45 states as of June 30, 1999, of which
1,047 were operated by nonaffiliated parties.
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
consultant pharmacist services. The medical supply subsidiary primarily provides
medical supplies to long-term care and subacute care facilities. The
pharmaceutical and medical supply subsidiaries provided pharmaceutical products
and services and medical supplies to 1,616 long-term and subacute care
facilities, including 1,300 nonaffiliated facilities, as of June 30, 2000. As of
June 30, 1999, pharmaceutical products and services were provided to
approximately 927 facilities including 586 nonaffiliated facilities through its
43 pharmacies and pharmaceutical billing and consulting center.
INTERNATIONAL OPERATIONS: During the second quarter of 2000, this segment
consisted of long-term care facilities in the United Kingdom, Spain and Germany,
and acute care hospitals in Australia. During the second quarter of 2000, this
segment also provides pharmaceutical services in the United Kingdom, Germany and
Australia and medical supplies in Australia. As of June 30, 2000, the Company
operated 146 inpatient facilities with 8,326 licensed beds in the United
Kingdom; 11 inpatient facilities with 1,688 licensed beds in Spain; 17
facilities with 1,221 licensed beds in Germany and 5 hospitals with 336 licensed
beds in Australia compared to 148 facilities with 8,370 licensed beds in the
United Kingdom; 11 facilities with 1,604 licensed beds in Spain; 16 facilities
with 1,122 licensed beds in Germany; and 5 hospitals with 338 licensed beds in
Australia as of June 30, 1999.
The Company sold five pharmacies and 13 pharmacies in the United Kingdom
during the first and second quarter of 2000, respectively. The Company divested
its operations in Spain for approximately $8.0 million in October 2000. The
Company's operations in Australia were placed in receivorship by its secured
creditors in September, 2000. Under Australian receivorship procedures, the
assets will be sold and the proceeds used to pay the secured creditors, and then
any remaining value would be distributed to its unsecured creditors, which
includes the Company. No assurance can be given that the Company will receive
any proceeds from the sale of the Australia operations. The Company is also
seeking to divest its operations in Germany and the United Kingdom. No assurance
can be given that the Company will successfully divest its operations in Germany
and the United Kingdom. See "Note 6 - Impairment of Long-Lived Assets and Assets
Held for Sale and Note 15 - Subsequent Events in the Company's consolidated
financial statements."
46
<PAGE>
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. During the second quarter of 1999, the
Company recorded a loss of approximately $16.9 million related to the
sale-leaseback of 11 facilities in the United Kingdom, which was completed in
July 1999. The charges were recorded in loss on sale of assets, net in the
Company's consolidated statements of losses.
OTHER OPERATIONS
During the second 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 assisted living subsidiary
operated 29 assisted living facilities with 3,239 beds in the United States as
of June 30, 1999. The assisted living subsidiary, which was classified as assets
held for sale as of March 31, 2000 and December 31, 1999 was disposed of through
sales transactions in the fourth quarter of 1999 and the first and second
quarters of 2000. In addition, two assisted living facilities were transferred
to the Company's Inpatient Services segment during the second quarter of 2000.
See "Note 6 - Impairment of Long-Lived Assets and Assets Held for Sale in the
Company's consolidated financial statements" and Liquidity and Capital
Resources. The Company's temporary therapy service operations provided 403,667
temporary therapy staffing hours and 218,265 non-therapy hours to nonaffiliates
for the six months ended June 30, 2000 compared to 539,381 temporary therapy
staffing hours and 36,077 non-therapy hours for the six months ended June 30,
1999.
47
<PAGE>
The following table sets forth certain operating data for the Company as of
the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Inpatient Services:
Facilities 327 385 354
Licensed beds 37,110 43,343 39,867
Rehabilitation and Respiratory Therapy Services:
Nonaffiliated facilities served 865 1,047 1,158
Affiliated facilities served 330 453 373
------------- ------------ -----------------
Total 1,195 1,500 1,531
============= ============ =================
Pharmaceutical and Medical Supply Services:
Nonaffiliated facilities served 1,300 586 (1) 1,805
Affiliated facilities served 316 341 (1) 702
------------- ------------ -----------------
Total 1,616 927 2,507
============= ============ =================
(1) Includes only pharmaceutical contracts.
International Operations:
Facilities
United Kingdom 146 148 145
Other foreign 33 32 33
------------- ------------ -----------------
Total 179 180 178
============= ============ =================
Licensed beds
United Kingdom 8,326 8,370 8,320
Other foreign 3,245 3,064 3,192
------------- ------------ -----------------
Total 11,571 11,434 11,512
============= ============ =================
</TABLE>
48
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amount of certain elements of total net
revenues for the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Services $ 433,760 $ 392,893 $ 871,989 $ 855,878
Rehabilitation and Respiratory Therapy Services 53,198 58,240 110,715 128,306
Pharmaceutical and Medical Supply Services 75,442 72,791 149,273 148,612
International Operations 70,445 73,551 145,581 145,213
Other Operations 43,134 58,035 92,914 120,671
Corporate 370 (1,002) 458 (1,969)
Intersegment Eliminations (55,395) (53,594) (111,983) (122,765)
-------------- -------------- -------------- --------------
Total Net Revenues $ 620,954 $ 600,914 $ 1,258,947 $ 1,273,946
============== ============== ============== ==============
</TABLE>
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 $29.6 million and $30.2
million for the three months ended June 30, 2000 and 1999, respectively and
$61.0 million and $69.0 million for the six months ended June 30, 2000 and 1999,
respectively. Revenues for pharmaceutical and medical supply services provided
to domestic affiliated facilities were $23.0 million and $19.5 million for the
three months ended June 30, 2000 and 1999, respectively and $45.3 million and
$43.2 million for the six months ended June 30, 2000 and 1999, respectively.
Revenues for services provided by other non-reportable segments to affiliated
facilities were $2.6 million and $5.3 million for the three months ended June
30, 2000 and 1999, respectively and $5.4 million and $11.7 million for the six
months ended June 30, 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Services $ 8,545 $ (49,101) $ 16,950 $ (44,279)
Rehabilitation and Respiratory Therapy Services 8,499 (2,981) 17,619 (2,554)
Pharmaceutical and Medical Supply Services 2,574 2,412 4,572 2,385
International Operations (2,552) (4,680) (8,224) (7,307)
Other Operations (1,817) (6,997) (5,087) (12,101)
------------- --------------- ------------ ------------
Earnings (losses) before income taxes and corporate
allocation of interest and management fees 15,249 (61,347) 25,830 (63,856)
Corporate (25,084) (69,460) (53,574) (139,457)
------------- --------------- ------------ ------------
Net segment losses $ (9,835) $(130,807) $ (27,744) $ (203,313)
============= =============== ============ ============
</TABLE>
49
<PAGE>
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
and intercompany payables 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 JUNE 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Total net revenues 100.0% 100.0%
Costs and expenses:
Operating costs ...................................................... 91.0% 101.2%
Corporate general and administrative.................................. 6.2% 6.7%
Depreciation and amortization......................................... 1.7% 3.7%
Interest, net......................................................... 1.5% 6.5%
Provision for losses on accounts receivable........................... 1.2% 2.6%
Legal and regulatory costs............................................ 0.4% -
Impairment loss....................................................... 0.3% 66.6%
Loss on sale of assets, net........................................... 0.3% 8.6%
Financial restructuring costs......................................... - 1.0%
--------------------- --------------------
Total costs and expenses before reorganization costs............ 102.6% 196.9%
Dividends on convertible preferred securities of subsidiary..... - 1.1%
--------------------- --------------------
Losses before reorganization costs and income taxes .................. (2.6%) (98.0%)
Reorganization costs, net............................................. 2.5% -
Income taxes.......................................................... 0.0% -
--------------------- --------------------
Net losses ........................................................... (5.1%) (98.0%)
===================== ====================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Total net revenues 100.0% 100.0%
Costs and expenses:
Operating costs ...................................................... 91.1% 96.8%
Corporate general and administrative.................................. 6.4% 6.5%
Depreciation and amortization......................................... 2.0% 3.5%
Interest, net......................................................... 1.4% 6.0%
Provision for losses on accounts receivable........................... 1.3% 2.3%
Corporate restructuring costs......................................... - 0.9%
Legal and regulatory costs............................................ 0.2% -
Impairment loss....................................................... 0.2% 31.3%
Loss on sale of assets, net........................................... 0.1% 5.0%
Financial restructuring costs......................................... - 0.4%
Loss on termination of interest rate swaps............................ - 0.2%
Gain on sale of assets................................................ (0.7%) -
--------------------- --------------------
Total costs, expenses and gains before reorganization costs..... 102.0% 152.9%
Dividends on convertible preferred securities of subsidiary..... - 1.0%
--------------------- --------------------
Losses before reorganization costs, income taxes and cumulative effect
of change in accounting principle ............................. (2.0%) (53.9%)
Reorganization costs, net............................................. 13.7% -
Income taxes.......................................................... 0.0% 0.1%
--------------------- --------------------
Losses before cumulative effect of change in accounting principle .... (15.7%) (54.0%)
Cumulative effect of change in accounting principle................... - (1.1%)
--------------------- --------------------
Net losses ........................................................... (15.7%) (55.1%)
===================== ====================
</TABLE>
50
<PAGE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 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 $68.3 million from $365.6 million for the
three months ended June 30, 1999 to $433.9 million for the three months ended
June 30, 2000, an 18.7% increase. Net revenues were negatively impacted in the
second quarter of 1999 by certain changes in accounting estimates for third
party settlements. In the second quarter of 1999, the Company recorded negative
revenue adjustments totaling approximately $66.3 million. The adjustments
included $12.2 million for the projected settlement of 1998 facility costs
reports based on the Company's filing of its 1998 cost reports with its fiscal
intermediary in the second quarter and $6.7 million of revenue adjustments
related to the results of certain Medicare and Medicaid cost report audits. In
addition, the negative revenue adjustments included reserves of $47.4 million
for certain Medicare cost reimbursements, primarily requests for exceptions to
the Medicare established routine cost limitations, which have been delayed
pending review by the Health Care Financing Administration ("HCFA").
Historically, such reimbursement was formula-based and approval was ordinarily
given upon confirmation of the calculation by the Company's Medicare fiscal
intermediary. Revenue was recognized when a reasonable estimate of the amount
receivable was determined. Due to the pending review, the Company believed it
could no longer make a reasonable estimate of the amount receivable and
accordingly reserved the amount outstanding during the second quarter of 1999.
On a same store basis, excluding the effect of the 1999 negative revenue
adjustments, net revenues for the three months ended June 30, 1999, increased
$2.0 million or 0.5% from $431.9 million to $433.9 million for the three months
ended June 30, 2000. The Company received enhanced Medicaid rates during the
first quarter of 2000. In addition, certain Medicare rates showed some
improvement during April 2000 but the Company's Medicare census decreased.
On a same store basis, operating expenses, which include rent expense of
$48.1 million and $48.5 million for the three months ended June 30, 2000 and
1999, respectively, increased $17.6 million, or 4.6%, from $386.4 million for
the three months ended June 30, 1999 to $404.0 million for the three months
ended June 30, 2000. The increase is primarily due to increasing labor costs. On
a same store basis, operating expenses as a percentage of net revenues,
excluding the effect of the 1999 negative revenue adjustments, increased from
89.5% for the three months ended June 30, 1999 to 93.1% for the three months
ended June 30, 2000.
On a same store basis, corporate general and administrative expenses, which
include regional costs related to the supervision of operations, increased $2.5
million, or 32.1%, from $7.8 million for the three months ended June 30, 1999 to
$10.3 million for the three months ended June 30, 2000. This change is primarily
due to an increase in the corporate overhead allocation partially offset by a
reduction in regional overhead due to skilled nursing facility divestitures. On
a same store basis, as a percentage of net revenues, excluding the effect of the
1999 negative revenue adjustments, corporate general and administrative expenses
increased from 1.8% for the three months ended June 30, 1999 to 2.4% for the
three months ended June 30, 2000.
On a same store basis, the provision for losses on accounts receivable
decreased $4.2 million, or 61.8%, from $6.8 million for the three months ended
June 30, 1999 to $2.6 million for the three months ended June 30, 2000. During
the second quarter of 1999, the Company increased it reserves due to a
deterioration in the aging of certain accounts receivable. An equivalent
increase was not necessary in the second quarter of 2000. As a percentage of net
revenues, excluding the effect of the 1999 negative revenue adjustments, the
provision for losses on accounts receivable decreased from 1.6% for the three
months ended June 30, 1999 to 0.6% for the three months ended June 30, 2000.
On a same store basis, depreciation and amortization decreased $3.4
million, or 39.5%, from $8.6 million for the three months ended June 30, 1999 to
$5.2 million for the three months ended June 30, 2000. On a same store basis, as
a percentage of net revenues, excluding the effect of the 1999 negative revenue
adjustments, depreciation and amortization expense decreased from 2.0% for the
three months ended June 30, 1999 to 1.2% for the three months ended June 30,
2000. These decreases are primarily the 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 and
facility divestitures during 1999. See "Note 6 - Impairment of Long-Lived Assets
and Assets Held for Sale in the Company's consolidated financial statements."
51
<PAGE>
On a same store basis, net interest expense increased $0.5 million, or
22.7%, from $2.2 million for the three months ended June 30, 1999 to $2.7
million for the three months ended June 30, 2000. The increase is primarily due
to interest charges incurred related to the late filing of certain Medicare cost
reports. As a percentage of net revenues, excluding the effect of the 1999
negative revenue adjustments, interest expense increased from 0.5% for the three
months ended June 30, 1999 to 0.6% for the three months ended June 30, 2000.
REHABILITATION AND RESPIRATORY THERAPY SERVICES
Net revenues from rehabilitation and respiratory therapy services decreased
$5.0 million, or 8.6%, from $58.2 million for the three months ended June 30,
1999 to $53.2 million for the three months ended June 30, 2000. Revenues from
services provided to affiliated facilities decreased $0.6 million, or 2.0%, from
$30.2 million for the three months ended June 30, 1999 to $29.6 million for the
three months ended June 30, 2000. Revenues from services provided to
nonaffiliated facilities decreased approximately $4.4 million, or 15.7%, from
$28.0 million for the three months ended June 30, 1999 to $23.6 million for the
three months ended June 30, 2000. These decreases are primarily the 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 with 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 June 30, 1999 were significantly down from
prior periods in 1998 because PPS was fully implemented for most of the industry
during the first quarter of 1999. The decline in net revenues has continued,
with a significant reduction in contracts from the second quarter of 1999 to the
second quarter of 2000. Specifically, there were 1,195 affiliated and
nonaffiliated contracts as of June 30, 2000 compared to 1,500 affiliated and
nonaffiliated contracts as of June 30, 1999. During the second quarter of 2000,
the Company terminated certain nonaffiliated contracts based on issues related
to customers' credit worthiness. In addition, certain nonaffiliated contracts
were terminated in the ordinary course of business. The decrease in affiliated
contracts is partially a result of the Company's inpatient facility divestitures
in 1999 and 2000.
Operating expenses decreased $13.5 million, or 25.3%, from $53.4 million
for the three months ended June 30, 1999 to $39.9 million for the three months
ended June 30, 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 - Corporate Restructuring Costs"). Operating expenses as a
percentage of net revenues decreased from 91.8% for the three months ended June
30, 1999 to 75.0% for the three months ended June 30, 2000. This decrease is
attributable to reductions in 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. Equipment
rental costs decreased approximately $3.2 million during the second quarter of
2000 due to the Company shutting down its therapy equipment manufacturing
operations.
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 June 30, 2000. Corporate general and administrative
expenses as a percentage of net revenues were 2.4% for the three months ended
June 30, 2000. The Company did not allocate corporate general and administrative
expenses to the Rehabilitation and Respiratory Therapy Services segment during
the three months ended June 30, 1999. The Company began allocating costs
directly attributable to the segment in January 2000. This allocation will more
accurately state the operational costs of corporate and the segment.
Provision for losses on accounts receivable decreased, $2.9 million, or
52.7%, from $5.5 million for the three months ended June 30, 1999 to $2.6
million for the three months ended June 30, 2000. As a percentage of net
revenues, provision for losses on accounts receivable decreased from 9.5% for
the three months ended June 30, 1999 to 4.9% for the three months ended June 30,
2000. During the second quarter of 1999, the Company increased its reserves due
to the impact of PPS, which for certain nonaffiliated customers had negatively
affected their cash flows adversely affecting the collectibility of amounts due
the Company. During the second quarter of 2000, approximately $4.0 million was
received for accounts receivable that the Company had previously fully reserved.
Due in part to this receipt, a provision for losses on accounts receivable in
the second quarter of 2000 equivalent to the provision recorded in the second
quarter of 1999 was not necessary.
52
<PAGE>
Depreciation and amortization decreased $1.3 million, or 59.1%, from $2.2
million for the three months ended June 30, 1999 to $0.9 million for the three
months ended June 30, 2000. As a percentage of net revenues, depreciation and
amortization expense decreased from 3.8% for the three months ended June 30,
1999 to 1.7% for the three months ended June 30, 2000, respectively. The
decrease is primarily the 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. See "Note 6
- Impairment of Long-Lived Assets and Assets Held for Sale in the Company's
consolidated financial statements."
PHARMACEUTICAL AND MEDICAL SUPPLY SERVICES
Net revenues from pharmaceutical and medical supply services increased $2.6
million, or 3.6%, from $72.8 million for the three months ended June 30, 1999 to
$75.4 million for the three months ended June 30, 2000. Pharmaceutical services'
net revenues from nonaffiliated and affiliated parties increased approximately
$1.2 million, or 2.9%, and $2.0 million, or 16.7%, respectively. The increase in
nonaffiliated revenues is primarily due to an increase in the average price per
prescription. The increase in affiliated revenues is primarily due to an
increase in the pricing structure related to the Company's Inpatient Services
segment partially offset by a decrease due to the Company's inpatient facility
divestitures in 1999 and 2000. Medical supply services' net revenues from
nonaffiliated parties decreased approximately $3.5 million, or 26.7%, while net
revenues from affiliated parties increased approximately $2.9 million, or 46.4%.
The Company experienced a loss in nonaffiliated contracts when sales personnel
left the Company and certain of their customers ceased doing business with the
Company. The increase in affiliated revenues is a result of an increase in sales
to the Company's Inpatient Services segment including non-recurring sales of
approximately $1.2 million in the second quarter of 2000.
Operating expenses increased $1.7 million, or 2.5%, from $67.4 million for
the three months ended June 30, 1999 to $69.1 million for the three months ended
June 30, 2000. As a percentage of net revenues, operating expenses decreased
from 92.6% for the three months ended June 30, 1999 to 91.6% for the three
months ended June 30, 2000. Pharmaceutical services' operating expenses
increased approximately $2.4 million, or 5.0%. The increase in the
pharmaceutical services' operating expenses is primarily attributed to increases
in labor, benefit and insurance costs along with an increase in cost of goods
sold based on an increase in sales. Medical supply services' operating expenses
decreased approximately $0.7 million, or 3.6%. The decrease in medical supply
services' cost of goods sold is a result of the decrease in sales.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, were approximately $0.9 million and
$0.3 million for the three months ended June 30, 2000 for pharmaceutical
services and medical supply services, respectively. Corporate general and
administrative expenses as a percentage of net revenues were 15.9% for the three
months ended June 30, 2000. The Company did not allocate corporate general and
administrative expenses to the Pharmaceutical and Medical Supply Services
segment during the three months ended June 30, 1999. The Company began
allocating costs directly attributable to the segment in January 2000. This
allocation will more accurately state the operational cost of corporate and the
segment.
Provision for losses on accounts receivable was $0.9 million for the three
months ended June 30, 2000 and 1999. As a percentage of net revenues, the
provision for losses on accounts receivable was 1.2% for the three months ended
June 30, 2000 and 1999.
Depreciation and amortization decreased $0.4 million, or 19.0%, from $2.1
million for the three months ended June 30, 1999 to $1.7 million for the three
months ended June 30, 2000. As a percentage of net revenues, depreciation and
amortization expense decreased from 2.9 % for the three months ended June 30,
1999 to 2.3% for the three months ended June 30, 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-downs of certain long-lived assets in the
second and fourth quarters of 1999. See "Note 6 - Impairment of Long-Lived
Assets and Assets Held for Sale in the Company's consolidated financial
statements."
During the first quarter of 2000, the Company identified two domestic
pharmacies for divestiture. See "Note 6 - Impairment of Long-Lived Assets and
Assets Held for Sale in the Company's consolidated financial statements."
53
<PAGE>
INTERNATIONAL OPERATIONS
Revenues from international operations decreased $3.2 million, or 4.3%,
from $73.6 million for the three months ended June 30, 1999 to $70.4 million for
the three months ended June 30, 2000. This decrease is primarily due to the sale
of 18 pharmacies in the United Kingdom, which took place at the end of the first
quarter and the beginning of the second quarter of 2000. Revenues were also
negatively impacted by the weakening of world currencies in relation to the
United States' dollar.
Operating expenses which include rent expense of $9.3 million and $10.4
million for the three months ended June 30, 1999 and 2000, respectively,
decreased approximately $0.5 million, or 0.7%, from $66.7 million for the three
months ended June 30, 1999 to $66.2 million for the three months ended June 30,
2000. As a percentage of net revenues, operating expenses increased from 90.6%
for the three months ended June 30, 1999 to 94.0% for the three months ended
June 30, 2000. Operating expenses increased due to a sale-leaseback transaction
completed in July 1999, however, the increase was offset by the sale of the 18
pharmacies in the United Kingdom during the first and second quarters of 2000
and by the weakening of world currencies in relation to the United States'
dollar.
Corporate general and administrative expenses decreased $0.6 million, or
14.3%, from $4.2 million for the three months ended June 30, 1999 to $3.6
million for the three months ended June 30, 2000. The decrease is primarily due
to the reduction in overhead due to the sale of the 18 pharmacies in the United
Kingdom during the first and second quarters of 2000 and by the weakening of
world currencies in relation to the United States' dollar. As a percentage of
net revenues, corporate general and administrative expenses decreased from 5.7%
for the three months ended June 30, 1999 to 5.1% for the three months ended June
30, 2000.
Depreciation and amortization for the three months ended June 30, 1999 was
$3.7 million. No depreciation or amortization was recorded for the three months
ended June 30, 2000 because the international operations were classified as
assets held for sale in the Company's consolidated balance sheets as of March
31, 2000. In accordance with FAS 121, the Company wrote down the assets held for
sale to the Company's estimate of selling value less selling costs, and
accordingly, did not record depreciation or amortization expense for the three
months ended June 30, 2000. The carrying value of the assets held for sale as of
June 30, 2000 will ultimately be realized as a result of disposition rather than
through operations. Depreciation and amortization was 5.0% of net revenues for
the three months ended June 30, 1999. See "Note 6 - Impairment of Long-Lived
Assets and Assets Held for sale in the Company's consolidated financial
statements."
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 selling costs.
The Company recorded additional losses of approximately $1.6 million in the
second quarter of 2000 to reduce the carrying value of its international
operations to its revised estimate of selling value less selling costs. The
losses on the sale of assets are recorded in reorganization costs, net in the
Company's consolidated statements of losses. See "Note 2 - Petitions for
Reorganization under Chapter 11, Note 6 - Impairment of Long-Lived Assets and
Assets Held for Sale and Note 15 - Subsequent Events in the Company's
consolidated financial statements."
The Company divested its operations in Spain for approximately $8.0 million
in October 2000. The Company's operations in Australia were placed in
receivorship by its secured creditors in September 2000. Under Australian
receivorship procedures, the assets will be sold and the proceeds used to pay
the secured creditors, and then any remaining value would be distributed to its
unsecured creditors, which includes the Company. No assurance can be given that
the Company will receive any proceeds from the sale of the Australia operations.
The Company is also seeking to divest its operations in Germany and the United
Kingdom. No assurance can be given that the Company will successfully divest its
operations in Germany and the United Kingdom. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale and Note 15 - Subsequent Events in
the Company's consolidated financial statements."
54
<PAGE>
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. During the first
quarter of 2000, the Company entered into an agreement to sell 16 assisted
living facilities of which one campus included a skilled nursing facility. A
part of the transaction involving 12 facilities was completed during the first
quarter of 2000. 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 6 - Impairment
of Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements." On a same store basis, net revenues from other
nonreportable segments decreased approximately $1.6 million, or 3.6%, from $44.7
million for the three months ended June 30, 1999 to $43.1 million for the three
months ended June 30, 2000. Approximately $1.9 million of the decrease was in
the Company's subsidiary that provides home healthcare 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 second quarter 1999 levels. Approximately $0.8 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 second quarter of 2000,
Medicare billing services were provided only to nonaffiliated entities.
Approximately $0.7 million of the decrease was in the Company's subsidiary that
provides radiology and laboratory services. The decrease was due to the closure
of a laboratory in the second quarter of 1999 and increases in contractual
allowances. Net revenues of the Company's subsidiary that provides temporary
therapy staffing services increased approximately $0.7 million. Net revenues of
the Company's subsidiary that develops software increased approximately $0.6
million. The net revenue of the Company's subsidiary that provides orthotic
products increased approximately $0.5 million.
On a same store basis, operating expenses decreased $8.7 million, or 17.8%,
from $48.8 million for the three months ended June 30, 1999 to $40.1 for the
three months ended June 30, 2000. Total net revenues and operating expenses for
nonreportable segments represent less than 10.0% of the Company's consolidated
results. Operating results were 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.
Corporate general and administrative costs not directly attributed to
segments decreased $7.9 million, or 28.5%, from $27.7 million for the three
months ended June 30, 1999 to $19.8 million for the three months ended June 30,
2000. As a percentage of consolidated net revenues of approximately $621.0
million and $667.2 million for the three months ended June 30, 2000 and 1999,
respectively, which excludes the effect of the 1999 negative revenue adjustments
of $66.3 million, corporate general and administrative expenses not directly
attributed to segments decreased from 4.2% to 3.2%. This decrease was primarily
due to the Company increasing its allocation to the operating segments of costs
that are directly attributable to the operating segments. The increased
allocation more accurately reflects the operating costs of corporate and the
operating segments.
Net interest expense not directly attributed to segments decreased $28.0
million, or 90.0%, from $31.1 million for the three months ended June 30, 1999
to $3.1 million for the three months ended June 30, 2000. As a percentage of
consolidated net revenues, excluding the effect of the 1999 negative revenue
adjustments, interest expense decreased from 4.7% for the three months ended
June 30, 1999 to 0.5% for the three months ended June 30, 2000. Due to the
Company filing for protection under Chapter 11 and in accordance with SOP 90-7,
the Company did not pay or accrue approximately $41.9 million of interest
expense on its debt obligations and the CTIPS during the second quarter of 2000.
See "Note 2 - Petitions for Reorganization under Chapter 11 in the Company's
consolidated financial statements."
55
<PAGE>
Dividends on Convertible Preferred Stock
----------------------------------------
In May 1998, the Company issued $345.0 million of 7.0% CTIPS. Beginning
with the interest payment due on May 1, 1999, Sun exercised its right to defer
interest payments, therefore, no interest was paid on the CTIPS during the
second quarter of 1999. As interest payments are deferred, interest on the CTIPS
and the deferred interest payments continue to accrue. The Company does not
expect to make principal or interest payments on the CTIPS in the future. As of
June 30, 2000, the amount of accrued and deferred interest and penalties was
approximately $18.3 million. Due to the Company 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 second quarter of 2000. See "Note 8 -
Convertible Trust Issued Preferred Securities in the Company's consolidated
financial statements."
OTHER SPECIAL AND NON-RECURRING CHARGES
Financial Restructuring
During the second quarter of 1999, the Company recorded financial
restructuring costs of $6.0 million, primarily professional fees, related to the
Company's activities in response to the defaults under the Senior Credit
Facility, the 9.4% Subordinated Notes and the 9.5% Subordinated Notes (see
"Liquidity and Capital Resources").
Reorganization Costs, net
During the second quarter of 2000, the Company recorded net reorganization
costs of $15.5 million. See "Note 2 - Petitions for Reorganization under Chapter
11 in the Company's consolidated financial statements."
Legal and Regulatory
In August 2000, the Bankruptcy Court approved an agreement entered into
between the Company and the U.S. Departments of Justice and Health and Human
Services pursuant to which the Company paid the U.S. government approximately
$1.2 million. The payment was in consideration of the government's agreement to
allow the Company to transfer certain of its facilities to new operators without
pursuing the new operators for alleged claims against the Company for
pre-transfer conduct, and for the release and waiver of certain pre-transfer
claims against the Company related to the facilities to be transferred to new
operators. The Company recorded additional charges of approximately $1.4 million
related to the transfer of certain of its facilities to new operators.
OTHER LONG-LIVED ASSETS
Loss on Sale of Assets, net
During the second quarter of 2000, a net non-cash charge of approximately
$8.8 million was recorded to reduce the carrying amount of the 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 and actual divestitures. The charges are recorded in loss on sale
of assets, net and reorganization costs, net in the Company's consolidated
statements of losses. See "Note 6 - Impairment of Long-Lived Assets and Assets
Held for Sale and Note 15 - Subsequent Events in the Company's consolidated
financial statements."
During the second quarter of 1999, a net non-cash charge of approximately
$34.9 million was recorded due to the anticipated and or completed termination
of certain facility lease agreements and to further reduce the carrying amount
of certain assets that the Company determined were not integral to its core
business operations. In addition during the second quarter of 1999, the company
recorded a loss of approximately $16.9 million related to the sale-lease back of
11 facilities in the United Kingdom which was completed in July of 1999.
Gain on Sale of Assets
During the second quarter of 2000, the Company recorded a gain of
approximately $1.0 million on the sale of assets. The gain is recorded in
reorganization costs, net in the Company's consolidated statements of losses.
See "Note 2 - Petitions for Reorganization under Chapter 11 and Note 6 -
Impairment of Long-Lived Assets and Assets Held for Sale in the Company's
consolidated financial statements."
Impairment of Goodwill and Other Long-Lived Assets
During the second quarter of 2000, the Company recorded a non-cash
impairment charge of $1.8 million. The charge was related to the write-down of
goodwill and software in the Company's Other Operations segment. See "Note 6 -
Impairment of Long-Lived Assets and Assets Held for Sale in the Company's
consolidated financial statements."
56
<PAGE>
The Company periodically evaluates the carrying value of goodwill and any
other related long-lived assets in relation to the future projected cash flows
of the underlying inpatient facilities or business segment. The long-lived
assets are considered to be impaired when the expected future cash flows of the
inpatient facilities or other business segment do not exceed the carrying
balances of the goodwill or other long-lived assets. The Company recorded a
non-cash impairment charge of $397.4 million in 1998 due primarily to the
anticipated decrease in net revenues caused by the implementation of the
Medicare PPS reimbursement method. In the second quarter of 1999, the Company
determined that its future net revenues would be less than projected in
connection with its 1998 impairment analysis. As a result of the reduction in
projected future net revenues, the Company determined that its investment in
certain facilities and operations was impaired; a non-cash charge of
approximately $400.0 million was recorded in the second quarter of 1999 for
long-lived asset impairment. The charge included approximately $289.2 million
related to the Company's Inpatient Services segment, $39.5 million related to
its Rehabilitation and Respiratory Therapy Services segment, $26.3 million is
related to its Pharmaceutical and Medical Supply Services segment, $44.3 million
related to its International Operations segment and approximately $10.7 million
related to its Other Operations segment.
The significant write-down of goodwill and other long-lived assets resulted
from the decline in both the level of Medicare reimbursement and demand for the
Company's rehabilitation and respiratory therapy and pharmaceutical and medical
supply services due to the industry changes mandated by PPS. Additionally,
certain of the United Kingdom facilities have not achieved profitability targets
established upon their acquisition. See "Note 6 - Impairment of Long-Lived
Assets and Assets Held for Sale in the Company's consolidated financial
statements."
In the three months ended June 30, 1999, the Company increased its
valuation allowance for the deferred tax assets resulting from its net operating
losses which may not be realized as a result of the adverse effect of the new
operating environment under PPS. Also, in 1999, the Company established a
valuation allowance for U.K. deferred tax assets resulting from its net
operating losses which may not be realizable.
CONSOLIDATED RESULTS OF OPERATIONS
The net loss for the three months ended June 30, 2000 was $31.4 million
compared to a net loss of $588.6 million for the three months ended June 30,
1999. Before considering the impairment loss, the loss on sale of assets, net,
legal and regulatory costs and the reorganization costs, net, the loss before
income taxes for the three months ended June 30, 2000 was $9.8 million compared
to a $130.8 million loss before income taxes before considering the loss on sale
of assets, net, the impairment loss and the financial restructuring costs for
the three months ended June 30, 1999. In accordance with SOP 90-7, no interest
has been paid or accrued on prepetition debt, classified as liabilities subject
to compromise in the Company's consolidated balance sheets and the CTIPS since
the Filing Date. The contractual interest expense that was not paid or accrued
for the three months ended June 30, 2000 was approximately $41.9 million. The
net loss in the second 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 June 30, 2000 was
approximately $0.1 million. There was no income tax expense for the three months
ended June 30, 1999.
57
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SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 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 $82.0 million from $790.0 million for the
six months ended June 30, 1999 to $872.0 million for the six months ended June
30, 2000, a 10.4% increase. Net revenues were negatively impacted in the second
quarter of 1999 by certain changes in accounting estimates for third party
settlements. In the second quarter of 1999, the Company recorded negative
revenue adjustments totaling approximately $66.3 million. The adjustments
included $12.2 million for the projected settlement of 1998 facility costs
reports based on the Company's filing of its 1998 cost reports with its fiscal
intermediary in the second quarter and $6.7 million of revenue adjustments
related to the results of certain Medicare and Medicaid cost report audits. In
addition, the negative revenue adjustments included reserves of $47.4 million
for certain Medicare cost reimbursements, primarily requests for exceptions to
the Medicare established routine cost limitations, which have been delayed
pending review by HCFA. Historically, such reimbursement was formula based and
approval given ordinarily upon confirmation of the calculation by the Company's
Medicare fiscal intermediary. Revenue was recognized when a reasonable estimate
of the amount receivable was determined. Due to the pending review, the Company
believes it can no longer make a reasonable estimate of the amount receivable
and accordingly reserved the amount outstanding during the second quarter of
1999. On a same store basis, excluding the effect of the 1999 negative revenue
adjustments, net revenues for the six months ended June 30, 1999, increased
$15.7 million, or 1.8%, from $856.3 million to $872.1 million for the six months
ended June 30, 2000. This increase is partially the result of enhanced Medicaid
rates. In addition, certain Medicare rates showed improvement during the second
quarter, however, there was a decrease in the Medicare census.
On a same store basis, operating expenses, which include rent expense of
$96.9 million and $97.1 million for the six months ended June 30, 2000 and 1999,
respectively, increased $31.1 million, or 4.0%, from $781.1 million for the six
months ended June 30, 1999 to $812.2 million for the six months ended June 30,
2000. The increase is primarily due to increasing labor costs. On a same store
basis, operating expenses as a percentage of net revenues, excluding the effect
of the 1999 negative revenue adjustments, increased from 91.2% for the six
months ended June 30, 1999 to 93.1% for the six months ended June 30, 2000.
On a same store basis, corporate general and administrative expenses, which
include regional costs, related to the supervision of operations, increased $4.4
million, or 27.5%, from $16.0 million for the six months ended June 30, 1999 to
$20.4 million for the six months ended June 30, 2000. The increase is primarily
due to an increase in the corporate overhead allocation partially offset by a
reduction in regional overhead due to facility divestitures during 1999 and
2000. On a same store basis, as a percentage of net revenues, excluding the
effect of the 1999 negative revenue adjustments, corporate general and
administrative expenses increased from 1.9% for the six months ended June 30,
1999 to 2.3% for the six months ended June 30, 2000.
On a same store basis, the provision for losses on accounts receivable
decreased $5.3 million, or 50.0%, from $10.6 million for the six months ended
June 30, 1999 to $5.3 million for the six months ended June 30, 2000. On a same
store basis, as a percentage of net revenues, excluding the effect of the 1999
negative revenue adjustments, the provision for losses on accounts receivable
decreased from 1.2% for the six months ended June 30, 1999 to 0.6% for the six
months ended June 30, 2000. During the six months ended June 30, 1999, the
Company increased its reserves due to the increased aging of certain accounts
receivable. An equivalent increase was not necessary during the six months ended
June 30, 2000.
On a same store basis, depreciation and amortization decreased $6.0
million, or 35.7%, from $16.8 million for the six months ended June 30, 1999 to
$10.8 million for the six months ended June 30, 2000. On a same store basis, as
a percentage of net revenues, excluding the effect of the 1999 negative revenue
adjustments, depreciation and amortization expense decreased from 2.0% for the
six months ended June 30, 1999 to 1.2% for the six months ended June 30, 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-downs of
certain long-lived assets in the second and fourth quarters of 1999 and facility
divestitures during 1999. See "Note 6 - Impairment of Long-Lived Assets and
Assets Held for Sale in the Company's consolidated financial statements."
On a same store basis, net interest expense increased $1.1 million, or
27.5%, from $4.0 million for the six months ended June 30, 1999 to $5.1 million
for the six months ended June 30, 2000. The increase is partially the result of
interest incurred related to the late filing of certain Medicare cost reports.
As a percentage of net revenues, excluding the effect of the 1999 negative
revenue adjustments, interest expense increased from 0.5% for the six months
ended June 30, 1999 to 0.6% for the six months ended June 30, 2000.
58
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REHABILITATION AND RESPIRATORY THERAPY SERVICES
Net revenues from rehabilitation and respiratory therapy services decreased
$17.6 million, or 13.7%, from $128.3 million for the six months ended June 30,
1999 to $110.7 million for the six months ended June 30, 2000. Revenues from
services provided to affiliated facilities decreased $8.0 million, or 11.6%,
from $69.0 million for the six months ended June 30, 1999 to $61.0 million for
the six months ended June 30, 2000. Revenues from services provided to
nonaffiliated facilities decreased approximately $9.6 million, or 16.2%, from
$59.3 million for the six months ended June 30, 1999 to $49.7 million or the six
months ended June 30, 2000. These decreases are primarily the 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 with respiratory therapy as this service was not
covered under the ancillary component of the PPS rate structure. The net
revenues for the six months ended June 30, 1999 were significantly down from
prior periods in 1998 because PPS was fully implemented for most of the industry
during the first quarter of 1999. The decline in net revenues has continued,
with a significant reduction in contracts from the second quarter of 1999 to the
second quarter of 2000. Specifically, there were 1,195 affiliated and
nonaffiliated contracts as of June 30, 2000 compared to 1,500 affiliated and
nonaffiliated contracts as of June 30, 1999. The Company terminated certain
nonaffiliated contracts due to issues related to customers' credit worthiness.
In addition, certain nonaffiliated contracts were terminated in the ordinary
course of business. The Company's divestiture of inpatient facilities in 1999
and 2000 contributed to the decrease in affiliated revenues.
Operating expenses decreased $35.2 million, or 29.7%, from $118.4 million
for the six months ended June 30, 1999 to $83.2 million for the six months ended
June 30, 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 - Corporate Restructuring Costs"). Operating expenses as a
percentage of net revenues decreased from 92.3% for the six months ended June
30, 1999 to 75.2% for the six months ended June 30, 2000. This decrease is
attributable to reductions in 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. Equipment
rental costs decreased approximately $3.2 million in the second quarter of 2000
due to the Company shutting down its therapy equipment manufacturing operations.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, were approximately $2.8 million for
the six months ended June 30, 2000. Corporate general and administrative
expenses as a percentage of net revenues were 2.5% for the six months ended June
30, 2000. The Company did not allocate corporate general and administrative
expenses to the Rehabilitation and Respiratory Therapy Services segment during
the six months ended June 30, 1999. The Company began allocating costs directly
attributable to the segment in January 2000. This allocation will more
accurately state the operational costs of corporate and the segment.
Provision for losses on accounts receivable decreased $2.8 million, or
35.4% from $7.9 million for the six months ended June 30, 1999 to $5.1 million
for the six months ended June 30, 2000. As a percentage of net revenues,
provision for losses on accounts receivable decreased from 6.2% for the six
months ended June 30, 1999 to 4.6% for the six months ended June 30, 2000.
During the six months ended June 30, 1999, the Company increased its reserves
due to the impact of PPS, which for certain nonaffiliated customers had
negatively affected their cash flows adversely affecting the collectibility of
amounts due the Company. The Company received approximately $4.0 million related
to accounts receivable that the Company had previously fully reserved. Due in
part to this receipt, a provision for accounts receivable for the six months
ended June 30, 2000 equivalent to the provision recorded in the six months ended
June 30, 1999 was not necessary.
Depreciation and amortization decreased $2.5 million, or 56.8%, from $4.4
million for the three months ended June 30, 1999 to $1.9 million for the three
months ended June 30, 2000. As a percentage of net revenues, depreciation and
amortization expense decreased from 3.4% for the six months ended June 30, 1999
to 1.7% for the six months ended June 30, 2000, respectively. The decrease is
primarily the 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. See "Note 6 -
Impairment of Long-Lived Assets and Assets Held for Sale in the Company's
consolidated financial statements."
59
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PHARMACEUTICAL AND MEDICAL SUPPLY SERVICES
Net revenues from pharmaceutical and medical supply services increased $0.7
million, or 0.5%, from $148.6 million for the six months ended June 30, 1999 to
$149.3 million for the six months ended June 30, 2000. Pharmaceutical services'
net revenues from nonaffiliated parties increased approximately $2.5 million, or
3.0% while net revenues from affiliated parties decreased approximately $1.0
million, or 3.2%. The increase in nonaffiliated revenues was due to an increase
in the average price per prescription. The decrease in affiliated revenues was a
result of the Company divesting inpatient facilities in 1999 and 2000 partially
offset by an increase in the pricing structure related to the Company's
Inpatient Services segment. Medical supply services' net revenues from
nonaffiliated parties decreased approximately $5.1 million, or 21.4% while net
revenues from affiliated parties increased approximately $4.3 million, or 34.3%.
The Company experienced a loss in nonaffiliated contracts when sales personnel
left the Company and certain of their customers ceased doing business with the
Company. The increase in affiliated revenues is a result of an increase in sales
to the Company's Inpatient Services segment including non-recurring sales of
approximately $1.2 million in the second quarter of 2000.
Operating expenses increased $1.4 million, or 1.0%, from $134.6 million for
the six months ended June 30, 1999 to $136.0 million for the six months ended
June 30, 2000. Operating expenses as a percentage of net revenues increased 0.6%
from 90.6% for the six months ended June 30, 1999 to 91.1% for the six months
ended June 30, 2000. Pharmaceutical services' operating expenses increased
approximately $3.1 million, or 3.1%. The increase is primarily due to increases
in labor, benefit and insurance costs along with an increase in cost of goods
sold based on an increase in sales. Medical supply services' operating expenses
decreased approximately $1.7 million, or 4.6%. The decrease in cost of goods
sold is as a result of the decrease in sales.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, were approximately $1.8 and $0.7
million for the six months ended June 30, 2000 for pharmaceutical services and
medical supply services, respectively. Corporate general and administrative
expenses as a percentage of net revenues were 1.8% for the six months ended June
30, 2000. The Company did not allocate corporate general and administrative
expenses to the Pharmaceutical and Medical Supply Services segment during the
six months ended June 30, 1999. The Company began allocating costs directly
attributable to the segment in January 2000. This allocation will more
accurately state the operational costs of corporate and the segment.
Provision for losses on accounts receivable decreased $4.3 million, or
58.1%, from $7.4 million for the six months ended June 30, 1999 to $3.1 million
for the six months ended June 30, 2000. As a percentage of net revenues, the
provision for losses on accounts receivable decreased from 5.0% for the six
months ended June 30, 1999 to 2.1% for the six months ended June 30, 2000. The
pharmaceutical supply services' provision for losses on accounts receivable
decreased approximately $5.2 million or 71.9%. During the six months ended June
30, 1999, the Company increased its reserves as a result of the affect PPS had
on certain nonaffiliated customers' cash flow which impacted the collectibility
of the Company's accounts receivable. An equivalent increase was not necessary
during the six months ended June 30, 2000. The medical supply services'
provision for losses on accounts receivable increased approximately $0.9
million, or 326.5%. The increase was primarily due to a deterioration in the
aging of the Company's accounts receivable. The deterioration is in part due to
certain of the Commpany's customers filing for bankruptcy.
Depreciation and amortization decreased $1.2 million, or 28.6%, from $4.2
million for the six months ended June 30, 1999 to $3.0 million for the six
months ended June 30, 2000. As a percentage of net revenues, depreciation and
amortization expense decreased from 2.8% for the six months ended June 30, 1999
to 2.0% for the six months ended June 30, 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-downs of certain long-lived assets in the
second and fourth quarters of 1999. See "Note 6 - Impairment of Long-Lived
Assets and Assets Held for Sale in the Company's consolidated financial
statements."
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INTERNATIONAL OPERATIONS
Revenues from international operations increased $0.4 million, or 0.3%,
from $145.2 million for the six months ended June 30, 1999 to $145.6 million for
the six months ended June 30, 2000. The increase was primarily due to the
increase in occupancy for the European operations and the re-opening of the
Sydney Southwest Hospital in Australia in September 1999. These increases were
offset by the sale of 18 pharmacies in the United Kingdom during the first
quarter and beginning of the second quarter of 2000 and the general weakening of
the world currencies in relation to the United States' dollar.
Operating expenses, which include rent expense of $19.0 million and $21.2
million for the six months ended June 30, 1999 and 2000, respectively, increased
approximately $6.7 million, or 5.1%, from $131.5 million for the six months
ended June 30, 1999 to $138.2 million for the six months ended June 30, 2000. As
a percentage of net revenues, operating expenses increased from 90.6% for the
six months ended June 30, 1999 to 94.9% for the six months ended June 30, 2000.
The net increase is primarily attributable to increased leasing expense in the
United Kingdom due to a sale-leaseback transaction completed in July 1999,
increased operating expenses due to increased occupancy levels and increased
labor costs due to wage inflation and the use of temporary staffing. These
increases are partially offset by a reduction in overhead due to the sale of 18
pharmacies in the United Kingdom during the first quarter and beginning of
second quarter of 2000 and the general weakening of the world currencies in
relation to the United States' dollar.
Corporate general and administrative expenses were $6.9 million for the six
months ended June 30, 2000 and 1999. As a percentage of net revenues, corporate
general and administrative expenses decreased from 4.8% for the six months ended
June 30, 1999 to 4.7% for the six months ended June 30, 2000.
Depreciation and amortization decreased $4.7 million, or 65.3%, from $7.2
million for the six months ended June 30, 1999 to $2.5 million for the six
months ended June 30, 2000. The decrease is the 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. In addition, no depreciation or amortization was recorded for the three
months ended June 30, 2000 because the international operations were classified
as assets held for sale in the Company's consolidated balance sheets as of March
31, 2000. In accordance with FAS 121, the Company wrote down the assets held for
sale to the Company's estimate of selling value less selling costs, and
accordingly, did not record depreciation or amortization expense for the three
months ended June 30, 2000. The carrying value of the assets held for sale will
be realized as a result of disposition rather than through operations. As a
percentage of net revenues, depreciation and amortization decreased from 5.0%
for the six months ended June 30, 1999 to 1.7% for the six months ended June 30,
2000. See "Note 6 - Impairment of Long-Lived Assets and Assets Held for Sale in
the Company's consolidated financial statements."
The Company divested 18 pharmacies in the United Kingdom during the six
months ended June 30, 2000. No assurance can be given that the remaining
international operations will be sold. The Company recorded a charge of
approximately $142.7 million during the six months ended June 30, 2000 to reduce
the carrying value of its international operations to its estimate of selling
value less selling costs. The charge is recorded in reorganization costs, net in
the Company's consolidated statements of losses. See "Note 2 - Petitions for
Reorganization under Chapter 11, Note 6 - Impairment of Long-Lived Assets and
Assets Held for Sale and Note 15 - Subsequent Events in the Company's
consolidated financial statements."
The Company divested its operations in Spain for approximately $8.0 million
in October 2000. The Company's operations in Australia were placed in
receivorship by its secured creditors in September 2000. Under Australian
receivorship procedures, the assets will be sold and the proceeds used to pay
the secured creditors, and then any remaining value would be distributed to its
unsecured creditors, which includes the Company. No assurance can be given that
the Company will receive any proceeds from the sale of the Australia operations.
The Company is also seeking to divest its operations in Germany and the United
Kingdom. No assurance can be give that the Company will successfully divest its
operations in Germany and the United Kingdom. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale and Note 15 - Subsequent Events in
the Company's consolidated financial statements."
61
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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. During 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. 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 6 - Impairment
of Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements." On a same store basis, net revenues from other
nonreportable segments decreased $11.0 million, or 10.6%, from $103.9 million
for the six months ended June 30, 1999 to $92.9 million for the six months ended
June 30, 2000. Approximately $1.3 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 $3.8 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 six months ended June 30,
2000, Medicare billing services were provided only to nonaffiliated customers.
Approximately $4.3 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 and second
quarter 1999 levels. Approximately $1.6 million of the decrease was in the
Company's subsidiary that provides radiology and laboratory services. The
decrease was due to the closure of a laboratory in the second quarter of 1999
and increases in contractual allowances. Approximately $0.9 million of the
decrease was in the Company's subsidiary that develops software. These decreases
were offset by an increase of approximately $0.9 million in the Company's
subsidiary that provides orthotic products.
On a same store basis, operating expenses decreased $17.0 million, or
16.4%, from $103.7 million for the six months ended June 30, 1999 to $86.7 for
the six months ended June 30, 2000. Total net revenues and operating expenses
for nonreportable segments represent less than 10.0% of the Company's
consolidated results. Operating results were 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.
Corporate general and administrative costs not directly attributed to
segments decreased $11.8 million, or 21.0%, from $56.2 million for the six
months ended June 30, 1999 to $44.4 million for the six months ended June 30,
2000. As a percentage of consolidated net revenues of $1,258.9 million and
$1,340.2 million for the six months ended June 30 2000 and 1999, respectively,
excluding the effect of the 1999 negative revenue adjustments of $66.3 million,
on a same store basis corporate general and administrative expenses not directly
attributed to segments decreased from 4.3% to 3.5%. This decrease was primarily
due to the Company increasing its allocation to the operating segments of costs
that are directly attributable to the operating segments. The increased
allocation more accurately reflects the operational costs of corporate and the
operating segments.
Net interest expense not directly attributed to segments decreased $56.1
million, or 92.6%, from $60.6 million for the six months ended June 30, 1999 to
$4.5 million for the six months ended June 30, 2000. As a percentage of
consolidated net revenues, excluding the effect of the negative revenue
adjustments, interest expense decreased from 4.5% for the six months ended June
30, 1999 to 0.4% for the six months ended June 30, 2000. During the six months
ended June 30, 2000, the Company did not pay or accrue approximately $83.1
million of interest expense on its debt obligations and the CTIPS due to its
filing for protection under Chapter 11 and in accordance with SOP 90-7. See
"Note 2 - Petitions for Reorganization under Chapter 11 in the Company's
consolidated financial statements."
62
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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 six months ended June 30,
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 continue to accrue. The Company
does not expect to make principal or interest payments on the CTIPS in the
future. As of June 30, 2000, the amount of accrued and deferred interest and
penalties was approximately $18.3 million. Due to the Company 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 second quarter of 2000. See "Note
8 - Convertible Trust Issued Preferred Securities in the Company's consolidated
financial statements."
OTHER SPECIAL AND NON-RECURRING CHARGES
Financial Restructuring
During the second quarter of 1999, the Company recorded financial
restructuring costs of $6.0 million, primarily professional fees, related to the
Company's activities in response to the defaults under the Senior Credit
Facility, the 9.4% Subordinated Notes and the 9.5% Subordinated Notes.
Reorganization Costs, net
The Company recorded net reorganization costs of approximately $172.1
million during the six months ended June 30, 2000. See "Note 2 - Petitions for
Reorganization under Chapter 11 in the Company's consolidated financial
statements."
Corporate 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 June 30, 2000 and
December 31, 1999, the Company had paid approximately $2.5 million in
termination benefits to 1,440 employees that had been terminated under the 1998
corporate restructuring plan. As of June 30, 2000 and December 31, 1999, the
Company had paid approximately $0.3 million and $0.1 million, respectively, in
lease termination costs under the 1998 corporate restructuring plan. As of June
30, 2000 and December 31, 1999, the Company's 1998 corporate restructuring costs
reserve balance relating to employee terminations was approximately $1.2
million. As of June 30, 2000 and December 31, 1999, the Company's 1998 corporate
restructuring reserve balance relating to lease termination costs was
approximately $0.6 million and $0.8 million, respectively. Approximately $0.6
million of the 1998 corporate restructuring costs reserve balance of
approximately $1.8 million as of June 30, 2000 and approximately $2.0 million as
of 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 June 30, 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 six months ended June 30,
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.
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Legal and Regulatory
In August 2000, the Bankruptcy Court approved an agreement entered into
between the Company and the U.S. Departments of Justice and Health and Human
Services pursuant to which the Company paid the U.S. government approximately
$1.2 million. The payment was in consideration of the government's agreement to
allow the Company to transfer certain of its facilities to new operators without
pursuing the new operators for alleged claims against the Company for
pre-transfer conduct, and for the release and waiver of certain pre-transfer
claims against the Company related to the facilities to be transferred to new
operators. The Company recorded additional charges of approximately $1.4 million
related to the transfer of certain of its facilities to new operators.
Cumulative Effect of Change in Accounting Principle
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position: "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.
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."
OTHER LONG-LIVED ASSETS
Gain on Sale of Assets
During the six months ended June 30, 2000, the Company recorded gains on
the sale of assets of approximately $9.9 million. Approximately $9.0 million and
$0.9 million is recorded in gain on sale of assets and reorganization costs,
net, respectively in the Company's consolidated statements of losses. See "Note
2 - Petitions for Reorganization under Chapter 11 and Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements."
Loss on Sale of Assets, net
A net non-cash charge of approximately $161.5 million was recorded during
the six months ended June 30, 2000 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 and actual divestitures. Approximately
$159.9 million and $1.6 million of the charge is recorded in reorganization
costs, net and loss on sale of assets, net, respectively in the Company's
consolidated statements of losses. See "Note 2 - Petitions for Reorganization
under Chapter 11 and Note 6 - Impairment of Long-Lived Assets and Assets Held
for Sale in the Company's consolidated financial statements."
A non-cash charge of approximately $52.0 million was recorded during the
six months ended June 30, 1999 due to the anticipated and/or completed
termination of certain facility lease agreements and to further reduce the
carrying amount of certain assets that the Company determined were not integral
to its core business operations. In addition, the Company recorded a loss of
approximately $16.9 million related to the sale-leaseback of 11 facilities in
the United Kingdom, which was completed in July of 1999. The Company also
recorded an additional loss of approximately $2.0 million on the sale of its
Canadian operations. The Company reversed approximately $7.0 million of losses
on assets held for sale during the six months ended June 30, 1999 when the
Company decided not to dispose of certain non-core businesses previously
classified as assets held for sale at December 31, 1998. The losses and loss
reversals are recorded in loss on sale of assets, net in the Company's
consolidated statements of losses. See "Note 6 - Impairment of Long-Lived Assets
and Assets Held for Sale in the Company's consolidated financial statements."
Impairment Loss
During the second quarter of 2000, the Company recorded a non-cash
impairment charge of $1.8 million. The charge was related to the write-down of
goodwill and software in the Company's Other Operations segment. See "Note 6 -
Impairment of Long-Lived Assets and Assets Held for Sale in the Company's
consolidated financial statements."
The Company recorded a non-cash impairment charge of $400.0 million in the
second quarter of 1999. See discussion for Three Months Ended June 30, 2000
Compared to Three Months Ended June 30, 1999.
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CONSOLIDATED RESULTS OF OPERATIONS
The net loss for the six months ended June 30, 2000 was $197.1 million
compared to a net loss of $701.7 million for the six months ended June 30, 1999.
Before considering the gain on sale of assets, legal and regulatory costs,
impairment loss, loss on sale of assets, net and the reorganization costs, net,
the loss before income taxes and cumulative effect of change in accounting
principle for the six months ended June 30, 2000 was $27.7 million compared to
$203.3 million before income taxes and cumulative effect of change in accounting
principle before considering the impairment loss, the loss on sale of assets,
net, the corporate restructuring costs, the financial restructuring costs and
the loss on termination of interest rate swaps for the six months ended June 30,
1999. In accordance with SOP 90-7, no interest has been paid or accrued on
prepetition debt, classified as liabilities subject to compromise in the
Company's consolidated balance sheets and the CTIPS since the Filing Date. The
contractual interest expense that was not paid or accrued for the six months
ended June 30, 2000 was approximately $83.1 million. The net loss during the six
months ended June 30, 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 six months ended June 30, 2000 was $0.1 million
compared to $0.9 million for the six months ended June 30, 1999. In the six
months ended June 30, 1999, the Company increased its valuation allowance for
the deferred tax assets resulting from its net operating losses which may not be
realized as a result of the adverse effect of the new operating environment
under PPS. Also, in 1999 the Company established a valuation allowance for
United Kingdom deferred tax assets resulting from its net operating losses,
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 Revolving Credit Agreement was amended as of September 21, 2000 (as amended,
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.
As of September 30, 2000, up to approximately $133.5 million was available
to the Company under the DIP Financing Agreement, of which amount the Company
had borrowed approximately $64.8 million and had issued approximately $34.1
million in letters of credit. In addition to the available funds under the DIP
Financing Agreement, the Company had cash book balances at September 30, 2000 of
approximately $52.5 million. In July 2000, the Company obtained waivers on
several defaults under the DIP Financing Agreement. The waiver was subject to
the Company and the lenders entering into, and the Bankruptcy Court approving,
an amendment to the DIP Financing Agreement. The amendment was entered into in
September 2000 and approved by the Bankruptcy Court in October 2000. 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."
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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.
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. Commencing
on October 1, 2000, the parties to the agreement in principle have the right to
withdraw from such agreement. The Company is not currently aware of any
withdrawals from the agreement. The specific terms of the expired 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. 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 also would provide new long-term debt, new preferred stock and new
common stock to general unsecured creditors, and reinstated a significant
portion of Sun's secured debt. The agreement in principle provides that holders
of the Company's outstanding convertible subordinated debt, CTIPS, and common
stock would not receive any recovery in the plan of reorganization. No assurance
can be given that the parties will not withdraw from the agreement in principle
and that, if so, the Company would be able to enter into a new agreement in
principle. Further, 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 old, or a new, agreement in principle.
The Company is currently seeking Bankruptcy Court approval of an extension
of the Company's exclusive periods in which to file a plan of reorganization
from November 9, 2000 to January 8, 2001 and to solicit acceptances of the plan
from January 8, 2001 to March 9, 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
accounting principles generally accepted in the United States 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 at June 30, 2000 and December
31, 1999 in the Company's consolidated balance sheets. At June 30, 2000, the
Company had a working capital deficit of $110.7 million and cash and cash
equivalents of $55.3 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.
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For the six months ended June 30, 2000, net cash provided by operating
activities was approximately $8.4 million compared to net cash used for
operating activities for the six months ended June 30, 1999 of approximately
$9.4 million. The net cash provided by operating activities for the six months
ended June 30, 2000 is primarily from the receipt of tax refunds and additional
redemption payments from an investment. Additionally, the company had lower
working capital requirements due to the utilization of inventory and less cash
needed for insurance payments.
The Company incurred approximately $16.0 million and $25.4 million in
capital expenditures during the three and six month periods ended June 30, 2000,
respectively. Expenditures related primarily to the construction of a corporate
office building and routine capital expenditures. The Company had construction
commitments as of June 30, 2000, under various contracts of approximately $4.1
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 and six month periods ended June 30, 2000, the Company
recorded net reorganization costs of $15.5 million and $172.1 million,
respectively. 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 and six month periods ended June 30, 2000
were approximately $8.5 million and $17.1 million, respectively. Claims paid
under the professional liability for the three and six month periods ended June
30, 2000 were immaterial.
The Company also conducts business in the United Kingdom, Spain, Australia
and Germany. International operations accounted for approximately 11.6% and
11.4% of the Company's total net revenues during the six months ended June 30,
2000 and 1999, respectively, and 10.7% of the Company's consolidated total
assets at June 30, 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 recorded in the first quarter of 1999. The
Company completed the sale of its Canadian operations in the first quarter of
1999 resulting in an additional loss on the sale of approximately $2.0 million
which was recorded in the first quarter of 1999. During the second quarter of
1999, the Company recorded a non-cash charge to record losses on assets held for
sale of approximately $51.8 million. The losses include (i) approximately $34.9
million to further reduce the carrying amount of certain assisted living
facilities and certain other inpatient facilities classified as assets held for
sale based on revised estimates of selling value less selling costs and (ii)
approximately $16.9 million related to the sale of 11 long-term care facilities
in the United Kingdom which the Company leased back under 12 year leases. The
additional losses and loss reversal are recorded in loss on sale of assets, net
in the Company's consolidated statements of losses. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements."
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During the first quarter of 2000, the Company began soliciting offers to
purchase its international operations. The Company recognized a loss of
approximately $142.7 million during the six months ended June 30, 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, net in the Company's consolidated statements of losses. During the six
months ended June 30, 2000, Sun divested 18 pharmacies in the United Kingdom.
The aggregate cash consideration received for these divestitures during the six
months ended June 30, 2000 was approximately $13.6 million. The aggregate cash
received subsequent to June 30, 2000 for the sales of the pharmacies in the
United Kingdom was approximately $0.8 million. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements."
The Company divested its operations in Spain for approximately $8.0 million
in October 2000. The Company's operations in Australia were placed in
receivorship by its secured creditors in September, 2000. Under Australian
receivorship procedures, the assets will be sold and the proceeds used to pay
the secured creditors, and then any remaining value would be distributed to its
unsecured creditors, which includes the Company. No assurance can be given that
the Company will receive any proceeds from the sale of the Australia operations.
The Company is also seeking to divest its operations in Germany and the United
Kingdom. No assurance can be give that the Company will successfully divest its
operations in Germany and the United Kingdom. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale" and "Note 15 - Subsequent Events in
the Company's consolidated financial statements."
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 SunCare
respiratory therapy business to the Company's estimate of selling value less
selling costs. No purchase agreement has been entered into and the Company
cannot predict when, or if, this business will be sold. See "Note 6 - Impairment
of Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements."
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, net in the Company's consolidated
statements of losses. The Company cannot predict when, or if, these pharmacies
will be sold. See "Note 6 - Impairment of Long-Lived Assets and Assets Held for
Sale in the Company's consolidated financial statements."
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. See "Note 15 -
Subsequent Events in the Company's consolidated financial statements."
During the second quarter of 2000, the Company divested 20 skilled nursing
facilities and one assisted living facility. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale in the Company's consolidated
financial statements." As of October 10, 2000, the Company had identified 67
skilled nursing facilities, six comprehensive outpatient rehabilitation
facilities, three assisted living facilities, one medical office building and
other non-core businesses for disposal. During the second quarter of 2000, the
Company will divest six skilled nursing facilities. See "Note 15 - Subsequent
Events in the Company's consolidated financial statements."
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In the first quarter of 2000, the Company entered into an agreement to sell
16 assisted living facilities, one of which included 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 June 30, 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 involving the 16 assisted living
facilities 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. 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. The cash consideration received subsequent to
June 30, 2000 from this second quarter transaction was approximately $0.2
million. The aggregate debt, capital leases and other liabilities assumed by the
purchaser totaled approximately $15.8 million. See "Note 6 - Impairment of
Long-Lived Assets and Assets Held for Sale 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 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 June 30, 2000 and
December 31, 1999, the Company's purchase liabilities reserve balance was
approximately $12.1 million and $15.5 million, respectively.
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.
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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.
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 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.
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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.
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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. In September 2000, the DIP Lenders waived the
defaults and the Company and the DIP Lenders entered into an amendment of the
DIP Financing Agreement to modify the cumulative EBITDA covenant. In connection
with the amendment, the Company paid to the DIP Lenders a $250,000 fee to enter
into the amendment. 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 First Amendment to Revolving Credit Agreement dated as of September 21,
2000 among the Company and each of its subsidiaries which are borrowers
under the Financing Agreement, and the lenders named therein. The CIT
Group/Business Credit, Inc. as Lenders' Agent and Heller Healthcare
Finance, Inc. as Collateral Agent.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN HEALTHCARE GROUP, INC.
Date: November 1, 2000 By: /s/ Robert D. Woltil*
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Robert D. Woltil
Chief Financial Officer
* Signing on the behalf of the Registrant and as principal financial officer.
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