UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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 January 8, 2001, there were 63,017,316 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 SEPTEMBER 30, 2000
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION> Page Numbers
------------
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 (unaudited).............................. 3-4
Consolidated Statements of Losses
For the three and nine months ended September 30, 2000 and 1999 (unaudited)....... 5-6
Consolidated Statements of Comprehensive Losses
For the three and nine months ended September 30, 2000 and 1999 (unaudited)....... 7
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999 (unaudited)................. 8-9
Notes to the Consolidated Financial Statements.................................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 64
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 65
Item 3. Defaults Upon Senior Securities................................................... 65
Item 6. Exhibits and Reports on Form 8-K.................................................. 65
Signatures........................................................................................... 66
</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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 49,245 $ 25,047
Accounts receivable, net of allowance for doubtful accounts of $167,906
at September 30, 2000 and $151,841 at December 31, 1999............ 171,340 254,464
Other receivables, net.................................................. 3,986 15,916
Inventory, net.......................................................... 23,132 42,983
Prepaids and other assets............................................... 10,929 15,087
----------------- ----------------
Total current assets............................................... 258,632 353,497
Property and equipment, net................................................... 262,086 446,176
Goodwill, net................................................................. 318,877 475,567
Notes receivable, net of allowances of $4,000 at September 30, 2000
and $6,556 at December 31, 1999............................................. 17,104 22,698
Assets held for sale.......................................................... 185,016 70,609
Other assets, net............................................................. 41,697 69,941
----------------- ----------------
Total assets....................................................... $ 1,083,412 $ 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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.................................................. $ 73,152 $ 44,776
Current portion of obligations under capital leases................................ 248 433
Accounts payable................................................................... 25,442 53,787
Accrued compensation and benefits.................................................. 96,717 84,117
Accrued interest................................................................... 7,968 2,972
Accrued self-insurance obligations................................................. 44,434 59,075
Other accrued liabilities.......................................................... 153,166 116,489
Income tax payables................................................................ 12,784 9,130
----------------- -----------------
Total current liabilities.......................................................... 413,911 370,779
Long-term debt, net of current portion............................................... 72,838 100,765
Obligations under capital leases, net of current portion............................. 54,921 65,675
Other long-term liabilities.......................................................... 25,506 36,794
Liabilities subject to compromise (see Note 2)....................................... 1,545,971 1,558,518
----------------- -----------------
Total liabilities.................................................................. 2,113,147 2,132,531
Commitments and contingencies........................................................
Minority interest.................................................................... 6,293 5,979
----------------- -----------------
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely 7.0% convertible junior subordinated debentures of
the Company........................................................................ 296,101 344,119
----------------- -----------------
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, 64,911,259
and 63,937,302 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively............................................... 649 639
Additional paid-in capital......................................................... 825,181 777,164
Accumulated deficit................................................................ (2,117,895) (1,785,507)
Accumulated other comprehensive loss .............................................. (12,585) (5,017)
----------------- -----------------
(1,304,650) (1,012,721)
Less:
Unearned compensation.......................................................... - (3,966)
Common stock held in treasury, at cost, 2,212,983 shares at September 30, 2000
and December 31, 1999..................................................... (27,376) (27,376)
Grantor stock trust, at market, 1,915,925 shares at September 30, 2000 and
December 31, 1999.......................................................... (103) (78)
----------------- -----------------
Total stockholders' deficit ....................................................... (1,332,129) (1,044,141)
----------------- -----------------
Total liabilities and stockholders' deficit........................................ $ 1,083,412 $ 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 SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Total net revenues........................................................ $ 609,502 $ 629,579
------------------- ------------------
Costs and expenses:
Operating costs........................................................ 555,861 654,155
Corporate general and administrative................................... 37,041 37,480
Depreciation and amortization.......................................... 11,364 19,864
Interest, net (contractual interest expense of $36,947 for the three
months ended September 30, 2000) ................................... 8,291 39,846
Provision for losses on accounts receivable............................ 7,575 58,196
Impairment loss........................................................ 11 14,855
(Gain) loss on sale of assets, net..................................... (1,068) 28,432
Financial restructuring costs.......................................... - 6,996
------------------- ------------------
Total costs and expenses before reorganization costs................... 619,075 859,824
Dividends on convertible preferred securities of subsidiary (contractual
dividends of $5,234 for the three months ended September 30, 2000)... - 6,518
------------------- ------------------
Losses before reorganization costs and income taxes....................... (9,573) (236,763)
Reorganization costs, net................................................. 125,598 -
------------------- ------------------
Losses before income taxes................................................ (135,171) (236,763)
Income taxes.............................................................. 110 93
------------------- ------------------
Net losses................................................................ $ (135,281) $ (236,856)
=================== ==================
Net losses per common and common equivalent share:
Basic.............................................................. $ (2.23) $ (3.99)
=================== ==================
Diluted............................................................ $ (2.23) $ (3.99)
=================== ==================
Weighted average number of common and common equivalent
shares outstanding:
Basic.............................................................. 60,757 59,292
=================== ==================
Diluted............................................................ 60,757 59,292
=================== ==================
</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 NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Total net revenues....................................................... $ 1,868,449 $ 1,903,525
------------------- ---------- --------
Costs and expenses:
Operating costs....................................................... 1,702,297 1,886,477
Corporate general and administrative.................................. 118,042 119,753
Depreciation and amortization......................................... 36,612 63,849
Interest, net (contractual interest expense of $109,010 for the nine
months ended September 30, 2000).................................... 25,593 116,022
Provision for losses on accounts receivable........................... 24,279 87,422
Legal and regulatory costs ........................................... 2,618 -
Impairment loss....................................................... 1,861 414,818
Financial restructuring costs ........................................ - 13,336
Corporate restructuring costs termination benefits.................... - 11,444
Loss on termination of interest rate swaps............................ - 2,488
(Gain) loss on sale of assets, net.................................... (8,397) 92,319
------------------- ------------------
Total costs, expenses and gains before reorganization costs....... 1,902,905 2,807,928
Dividends on convertible preferred securities of subsidiary (contractual
dividends of $16,224 for the nine months ended September 30, 2000)........ - 19,487
------------------- ------------------
Losses before reorganization costs, income taxes and cumulative effect of
change in accounting principle... .................................. (34,456) (923,890)
Reorganization costs, net................................................. 297,706 -
------------------- ------------------
Losses before income taxes and cumulative effect of change in
accounting principle................................................ (332,162) (923,890)
Income taxes.............................................................. 226 985
------------------- ------------------
Losses before cumulative effect of change in accounting principle......... (332,388) (924,875)
Cumulative effect of change in accounting principle....................... - 13,726
------------------- ------------------
Net losses ............................................................... $ (332,388) $ (938,601)
=================== ==================
Net losses per common and common equivalent share before
cumulative effect of change in accounting principle:
Basic.............................................................. $ (5.51) $ (15.81)
=================== ==================
Diluted............................................................ $ (5.51) $ (15.81)
=================== ==================
Net losses per common and common equivalent share:
Basic.............................................................. $ (5.51) $ (16.04)
=================== ==================
Diluted............................................................ $ (5.51) $ (16.04)
=================== ==================
Weighted average number of common and common equivalent
shares outstanding:
Basic.............................................................. 60,278 58,502
=================== ==================
Diluted............................................................ 60,278 58,502
=================== ==================
</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
SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Net losses ............................................................ $ (135,281) $ (236,856)
Foreign currency translation adjustments, net of tax................... 2 5,083
-------------------- ------------------
Comprehensive losses .................................................. $ (135,279) $ (231,773)
==================== ==================
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
Net losses ............................................................ $ (332,388) $ (938,601)
Foreign currency translation adjustments, net of tax................... (7,568) (2,567)
-------------------- ------------------
Comprehensive losses................................................... $ (339,956) $ (941,168)
==================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses............................................................ $ (332,388) $ (938,601)
-------------------- --------------------
Adjustments to reconcile net losses to net cash provided by
(used for) operating activities:
Reorganization costs, net......................................... 297,706 -
Depreciation and amortization..................................... 36,612 63,849
Provision for losses on accounts and other receivables............ 24,279 87,422
Impairment loss................................................... 1,861 414,818
Legal and regulatory costs........................................ 1,383 -
Gain (loss) on sale of assets, net................................ (8,397) 92,319
Cumulative effect of change in accounting principle............... - 13,726
Other, net........................................................ (4,585) 14,270
Changes in operating assets and liabilities:
Accounts receivable............................................... 5,582 155,445
Other current assets.............................................. 22,462 14,636
Income taxes payable.............................................. 3,146 37,225
Other current liabilities......................................... (41,278) 49,273
-------------------- --------------------
Net cash provided by operating activities before reorganization costs. 6,383 4,382
Net cash paid for reorganization costs................................ (10,930) -
-------------------- --------------------
Net cash provided by (used for) operating activities.................. (4,547) 4,382
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................. (39,234) (83,032)
Acquisitions, net of cash acquired.................................... (974) (5,731)
Proceeds from sale of assets held for sale............................ 22,079 -
Decrease in long-term notes receivable................................ 508 5,741
Proceeds from sale and leaseback of property and equipment............ - 34,938
Decrease in other assets.............................................. 1,864 -
Other assets expenditures............................................. - 2,526
-------------------- --------------------
Net cash used for investing activities............................. (15,757) (45,558)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under DIP Financing Agreement (postpetition) .......... 52,509 -
Long-term debt borrowings............................................. 8,579 125,715
Long-term debt repayments............................................. (12,871) (46,800)
Principal payments on prepetition debt authorized by Bankruptcy Court. (2,951) -
Conversion of Mediplex 6.5% Convertible Subordinated
Debentures due 2003................................................ - (6,649)
Net proceeds from issuance of common stock............................ - 810
Purchases of treasury stock........................................... - (409)
Other financing activities............................................ (16) (1,203)
-------------------- --------------------
Net cash provided by financing activities.......................... 45,250 71,464
-------------------- --------------------
Effect of exchange rate on cash and cash equivalents....................... (748) (8,820)
-------------------- --------------------
Net increase in cash and cash equivalents.................................. 24,198 21,468
Cash and cash equivalents at beginning of year............................. 25,047 27,504
-------------------- --------------------
Cash and cash equivalents at end of period................................. $ 49,245 $ 48,972
==================== ====================
</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 NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999
----------------- ------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during period for:
Interest, net of $48 and $1,933 capitalized during
the nine months ended September 30, 2000 and 1999,
respectively...................................... $ 24,795 $ 46,208
================= ==================
Income taxes $ (2,356) $ (37,845)
================= ==================
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
The Company's acquisitions during the nine months ended
September 30, 2000 and 1999 involved the following:
Fair value of assets acquired........................ $ 974 $ 6,781
Liabilities assumed. - (1,050)
----------------- ------------------
Cash payments made, net of cash received from others. $ 974 $ 5,731
================= ==================
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
SEPTEMBER 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 services. Long-term and subacute care and outpatient
therapy services are provided through Company-operated facilities. Therapy
services and pharmaceutical services are provided both in Company-operated and
in other nonaffiliated facilities located in the United States. In 1999 and
through the third quarter of 2000, the Company also provided long-term care
services in the United Kingdom, Germany, Spain and Australia. See Note 5 -
Impairment of Long-Lived Assets and Assets Held for Sale and Note 14 -
Subsequent Events.
In the opinion of the Company's management, the accompanying interim
consolidated financial statements present fairly the Company's financial
position at September 30, 2000 and December 31, 1999, the consolidated results
of its operations for the three and nine month periods ended September 30, 2000
and 1999, and the consolidated statements of cash flows for the nine month
periods ended September 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 ("FASB") 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 FASB 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 materially impact its
consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles ("GAAP")
to revenue recognition. The Company is required to adopt SAB 101 in the fourth
quarter of 2000. The Company does not believe that SAB 101 will materially
impact its consolidated financial statements.
10
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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's exclusive period in which to file a plan
of reorganization has been extended to March 9, 2001 and to solicit acceptances
of the plan has been extended to May 8, 2001.
The consolidated financial statements of the Company have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7: "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with
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. As of
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 reinstate 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 September 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 September 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>
September 30, 2000 December 31, 1999
---------------------- ---------------------
(in thousands)
-----------------------------------------------
<S> <C> <C>
Revolving Credit Facility............................................. $ 432,286 $ 427,271
Credit Facility Term Loans............................................ 358,981 358,981
Senior Subordinated Notes due 2007.................................... 250,000 250,000
Senior Subordinated Notes due 2008.................................... 150,000 150,000
Interest payable...................................................... 102,771 102,467
Convertible Subordinated Debentures due 2004.......................... 83,300 83,300
Prepetition trade and other miscellaneous claims...................... 71,019 79,948
Mortgage notes payable due at various dates through 2005.............. 50,623 51,593
Other long-term debt.................................................. 16,471 17,310
Capital leases........................................................ 12,187 19,170
Industrial Revenue Bonds.............................................. 10,790 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.......................... $ 1,545,971 $ 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 September 30, 2000 and December 31, 1999
due to the uncertainty surrounding the 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 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)
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"). The obligations of the
DIP Lenders under the DIP Financing 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.
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 Ended For the Nine Months
September 30, 2000 Ended September 30, 2000
----------------------------- -----------------------------
<S> <C> <C>
REORGANIZATION COSTS:
Professional fees........................................... $ 5,828 $ 20,191
Loss on sale of assets...................................... 123,362 283,233
Miscellaneous............................................... 87
-
Less:
Gain on sale of assets.................................... (2,764) (3,719)
Interest earned on accumulated cash....................... (828) (2,086)
----------------------------- -----------------------------
Total.................................................. $ 125,598 $ 297,706
============================= =============================
</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.
13
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 September 30, 2000 and
December 31, 1999, respectively. The one-month LIBOR was approximately 6.6% and
5.8% at September 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 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 September 30, 2000 and December 31, 1999, approximately $133.5
million and $140.5 million, respectively, was available under the DIP Financing
Agreement of which amount the Company had borrowed approximately $64.6 million
and $12.1 million as of September 30, 2000 and December 31, 1999, respectively.
In addition, letters of credit of approximately $34.1 million and $7.9 million
were outstanding under the facility as of September 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 nine months ended September 30, 2000 were approximately $74.8 million
with an effective interest rate during the nine months ended September 30, 2000
of approximately 9.4%.
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:
$6,000,000 During fiscal 2000 and for each fiscal year until maturity
Capital Expenditures on Domestic Healthcare Facilities:
$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:
September 2000 $ 26,000,000
October 26,000,000
November 26,000,000
December 26,000,000
January 2001 28,700,000
February 31,300,000
March 34,000,000
April 36,700,000
May 39,300,000
June 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 through
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 publicly filed financial statements for the year ended December 31, 1999
and the quarters ended March 31, June 30, and September 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)
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
---- ----
<S> <C> <C>
DIP Financing Agreement.......................................................... $ 64,634 $ 12,126
Senior Credit Facility:
Revolving Credit Facility..................................................... 432,286 (1) 427,271 (1)
Credit Facility Term Loans ................................................... 358,981 (1) 358,981 (1)
9.375% 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 11.75% 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............................ 58,216 (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 - 13,977
Spain..........................................................................
Mortgage notes payable in pound sterling due at various dates in 2015 and 2016,
interest at 9.5% per annum, collateralized by various facilities in the United
Kingdom........................................................................ 31,485 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.... 10,923 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. 10,606 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......................................................... 16,340 (3) 63,660 (3)
Other long-term debt............................................................. 31,670 (4) 41,604 (4)
---------------- ----------------
Total long-term debt............................................................. 1,505,984 1,502,476
Less long-term debt subject to compromise........................................ (1,359,994) (1,356,935)
Less amounts due within one year................................................. (73,152) (44,776)
---------------- ----------------
Long-term debt, net of current portion........................................... $ 72,838 $ 100,765
================ ================
</TABLE>
Long-term debt at September 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.
The Company recorded the divesting of its operations in Spain in September,
2000.
(1) Classified as liabilities subject to compromise in the Company's
consolidated balance sheets.
(2) Approximately $50,623 and $51,593 is classified as liabilities subject to
compromise in the Company's consolidated balance sheets as of September 30,
2000 and December 31, 1999, respectively.
(3) Approximately $10,790 and $10,935 is classified as liabilities subject to
compromise in the Company's consolidated balance sheets as of September 30,
2000 and December 31, 1999, respectively.
16
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) Approximately $16,471 and $17,310 is classified as liabilities subject to
compromise in the Company's consolidated balance sheets as of September 30,
2000 and December 31, 1999, respectively.
The scheduled maturities of long-term debt (not including that which is
subject to compromise) as of September 30, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000.............................................................. $ 73,152
2001.............................................................. 15,862
2002.............................................................. 25,150
2003.............................................................. 912
2004.............................................................. 5,568
Thereafter........................................................ 25,346
-----------------------
$ 145,990
=======================
</TABLE>
The Company has letters of credit outstanding under its prepetition credit
facilities and its DIP Financing Agreement. As of September 30, 2000, letters of
credit outstanding totaled approximately $49.6 million of which approximately
$15.5 million and $34.1 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) 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.
17
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following is a summary of the impairment loss by segment for the nine
months ended September 30, 2000 and September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Property
and Other
September 30, 2000: Goodwill Equipment Assets Total
-------- --------- ------ -----
<S> <C> <C> <C> <C>
Other Operations....................... $ 1,000 $ 861 $ - $ 1,861
================ =============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Property
and Other
September 30, 1999: Goodwill Equipment Assets Total
------------------- -------- --------- ------ -----
<S> <C> <C> <C> <C>
Inpatient Services...................... $ 186,559 $ 84,156 $ 19,655 $ 290,370
Rehabilitation and Respiratory Therapy
Services........................... 42,483 7,257 11 49,751
Pharmaceuticals and Medical Supply
Services........................... 23,921 2,346 - 26,267
International Operations................ 16,707 17,641 - 34,348
Other Operations........................ 6,950 4,467 2,665 14,082
---------------- --------------- -------------- --------------
$ 276,620 $ 115,867 $ 22,331 $ 414,818
================ =============== ============== ==============
</TABLE>
(B) ASSETS HELD FOR SALE
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. 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 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.
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.
18
<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 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.
With Bankruptcy Court approval, the Company divested its operations in
Spain for approximately $7.6 million in cash. The Company recorded the divesting
of its operations in Spain in September 2000, with a net loss of $15.2 million,
$9.6 million of which had been recorded through June 30, 2000. Spain's operating
results were immaterial to the Company's consolidated results. 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. See Note 14 - 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. The pharmacies were sold effective October 31, 2000 for
approximately $1.3 million. The results of operations of these two pharmacies
were 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 14 - Subsequent Events.
During the nine months ended September 30, 2000, the Company divested 26
skilled nursing facilities and one assisted living facility. The net revenues
and net operating losses for the nine months ended September 30, 2000 for these
27 facilities were approximately $30.7 million and $3.5 million, respectively.
The aggregate net loss on disposal during the nine months ended September 30,
2000 for these divestitures was approximately $11.8 million, of which
approximately $12.0 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.
The Company sold its therapy equipment manufacturing operations 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 September 30, 2000 and the losses or gains on the sale of
assets and the losses on assets held for sale for the nine months ended
September 30, 2000. The gains and losses are recorded in gain and losses on sale
of assets, net and in reorganization costs, net in the Company's consolidated
statements of losses. See Note 2 - Petitions for Reorganization under Chapter
11.
19
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Carrying
Amount Losses Gains
------ ------ -----
<S> <C> <C> <C>
International operations.................................. $ 158,018 $ 153,445 $ -
Assisted living facilities................................ 430 379 (1,531)
Inpatient facilities...................................... - 66,915 (8,239)
Other non-core businesses......... ....................... 26,568 63,139 (2,991)
------------------- ------------------ -----------------
$ 185,016 $ 283,878 $ (12,761)
=================== ================== =================
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
(A) CONSTRUCTION COMMITMENTS
The Company had construction commitments of approximately $3.0 million as
of September 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 9 - 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. The minimum cash fee is $1.3
million for the sale of the Company's European operations and $0.8 million for
the sale of the Company's Australian operations.
(7) 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
principal 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 September 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 nine months ended September 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 nine
months ended September 30, 2000, approximately $26.9 million of CTIPS were
converted into approximately 1.3 million shares of common stock with a par value
of approximately $13,000 resulting in an increase in additional paid-in capital
of approximately $26.8 million.
20
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) NET LOSSES PER SHARE
Basic net losses per share is based upon the weighted average number of
common shares outstanding during the period.
Losses per share is calculated as follows for the three and nine months
ended September 30, (in thousands except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC:
Net losses before cumulative effect of change
in accounting principle...................... $ (135,281) $ (236,856) $ (332,388) $ (924,875)
Losses per share..................................... $ (2.23) $ (3.99) $ (5.51) $ (15.81)
============= ============== ============== ===============
Net losses........................................... $ (135,281) $ (236,856) $ (332,388) $ (938,601)
Losses per share..................................... $ (2.23) $ (3.99) $ (5.51) $ (16.04)
============= ============== ============== ===============
Weighted average shares outstanding.................. 60,757 59,292 60,278 58,502
DILUTED:
Net losses before cumulative effect of change
in accounting principle...................... $ (135,281) $ (236,856) $ (332,388) $ (924,875)
Losses per share before cumulative effect of change
in accounting principle...................... $ (2.23) $ (3.99) $ (5.51) $ (15.81)
============= ============== ============== ===============
Net losses........................................... $ (135,281) $ (236,856) $ (332,388) $ (938,601)
Losses per share..................................... $ (2.23) $ (3.99) $ (5.51) $ (16.04)
============= ============== ============== ===============
Weighted average shares outstanding.................. 60,757 59,292 60,278 58,502
</TABLE>
21
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) 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 U.S. Bankruptcy Court for the District of Delaware (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 the Company's long-term care subsidiary,
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 the Company's therapy subsidiary, 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. Pursuant to an agreement among the parties, the Company has
been dismissed without prejudice in December 2000. Although the Company intends
to vigorously defend the individual defendants in this matter who are
indemnified by the Company, 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.
22
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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 have
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 and the Company
expects to enter into a global settlement of these investigations. 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. The Company is
unable to determine at this time whether 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. As of the fourth September 30,
2000, the Company has accrued approximately $3.3 million to cover professional
services related to the 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.
23
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) 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 11.75% Debentures subsequent to the acquisition. Summarized financial
information of Mediplex is provided below (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
---- ----
<S> <C> <C>
Current assets............................................................... $ 72,246 $ 78,726
Noncurrent assets............................................................ 123,038 145,922
Current liabilities.......................................................... 14,487 8,765
Noncurrent liabilities....................................................... 47,610 53,130
Due to parent................................................................ 298,175 291,150
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues................................................. $ 110,582 $ 110,203 $ 331,259 $ 334,226
Costs and expenses (1)....................................... (107,764) (150,704) (316,383) (365,959)
Cumulative effect of change in accounting principle.......... - - - (2,520)
------------ ------------- ------------ -------------
Earnings (losses) before intercompany charges and income
taxes................................................... 2,818 (40,501) 14,876 (34,253)
Intercompany charges (2) .................................... (3,382) (25,407) (51,468) (67,608)
------------ ------------- ------------ -------------
Losses before income taxes................................... (564) (65,908) (36,592) (101,861)
Income tax expense........................................... - - - (363)
------------ ------------- ------------ -------------
Net losses................................................... $ (564) $ (65,908) $ (36,592) $ (102,224)
============ ============= ============ =============
</TABLE>
(1) Costs and expenses decreased during 2000 due primarily to the reduction in
asset impairment charges from 1999 to 2000.
(2) 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 $3.4 million and $3.8
million for the three months ended September 30, 2000 and 1999,
respectively and $10.0 million and $11.2 million for the nine months ended
September 30, 2000 and 1999, respectively. Royalty fees charged to Mediplex
for the three and nine months ended September 30, 1999 for the use of Sun
trademarks were $1.7 million and $5.3 million, respectively. Sun
discontinued charging Mediplex for royalty fees as of December 31, 1999.
Sun discontinued charging Mediplex for interest as of June 30, 2000.
24
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(11) SEGMENT INFORMATION
See Overview in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(in thousands)
<TABLE>
<CAPTION>
Rehabilitation
and Pharmaceutical
Respiratory and Medical
Inpatient Therapy Supply International Other Intersegment
Services Services Services Operations Operations Corporate Eliminations Consolidated
-------- -------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Total Net Revenues....... $ 427,774 $ 48,537 $ 75,452 $ 65,291 $ 43,577 $ - $ (51,129) $ 609,502
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 411,638 43,239 71,546 63,479 42,636 19,035 (51,096) 600,477
Depreciation and
amortization........... 5,253 680 1,931 - 769 2,801 (70) 11,364
Interest, net............ 2,447 45 13 3,607 26 2,153 - 8,291
---------- ----------- ------------- ----------- ---------- ---------- ----------- ----------
Earnings (losses) before
corporate allocations.. 8,436 4,573 1,962 (1,795) 146 (23,989) 37 (10,630)
Corporate interest
allocation............. 6,387 1,748 2,928 - 1,521 (12,584) - -
Corporate management fees 10,737 1,224 1,863 382 1,076 (15,282) - -
---------- ----------- ------------- ----------- ---------- ---------- ----------- ----------
Net segment earnings
(losses)............... $(8,688) $ 1,601 $ (2,829) $(2,177) $(2,451) $ 3,877 $ 37 $ (10,630)
========== =========== ============= =========== ========== ========== =========== ==========
Intersegment revenues.... $ 150 $ 26,545 $ 21,609 $ - $ 2,825 $ - $ (51,129) $ -
Identifiable segment assets$339,111 $ 46,133 $ 50,774 $ 99,218 $ 82,674 $1,139,822 $(674,320) $1,083,412
Segment capital
expenditures, net..... $ 4,868 $ 185 $ 215 $ - $ 2,293 $ 6,291 $ - $ 13,852
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Total Net Revenues....... $426,582 $ 55,428 $ 73,268 $ 76,013 $ 51,369 $ (1,207) $ (51,874) $ 629,579
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 479,395 76,589 76,908 75,078 62,012 31,659 (51,810) 749,831
Depreciation and
amortization........... 9,678 1,538 2,129 2,681 2,145 1,847 (154) 19,864
Interest, net............ 2,242 112 20 3,051 1,420 33,001 - 39,846
Dividends on Preferred
Securities - - - - - 6,518 - 6,518
---------- ----------- ------------ ----------- ---------- ---------- ----------- -----------
Earnings (losses) before
corporate allocations.. (64,733) (22,811) (5,789) (4,797) (14,208) (74,232) 90 (186,480)
Corporate interest
allocation............. 10,279 3,438 3,159 4,771 2,537 (24,184) - -
Corporate management fees 18,210 2,246 2,992 750 1,683 (25,881) - -
Regional allocation...... 82 - - - (62) (20) - -
---------- ------------- ------------ ----------- ---------- ----------- ----------- ----------
Net segment losses....... $(93,304) $(28,495) $(11,940) $(10,318) $(18,366) $(24,147) $ 90 $(186,480)
========== ============= ============ =========== ========== =========== =========== ==========
Intersegment revenues.... $ 150 $ 30,297 $ 18,649 $ - $ 2,778 $ - $(51,874) $ -
Identifiable segment assets$371,368 $ 85,319 $ 94,601 $ 312,615 $ 211,333 $1,238,567 $(665,932) $1,647,871
Segment capital
expenditures, net...... $ 3,405 $ 2,631 $ 811 $ 998 $ 1,141 $ 5,366 $ - $ 14,352
</TABLE>
25
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Rehabilitation
and Pharmaceutical
Respiratory and Medical
Inpatient Therapy Supply International Other Intersegment
Services Services Services Operations Operations Corporate Eliminations Consolidated
-------- -------- -------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Total Net Revenues....... $1,299,764 $ 159,251 $ 224,725 $ 210,872 $ 136,491 $ 458 $ (163,112) $ 1,868,449
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 1,250,725 134,371 213,195 208,614 136,648 64,119 (163,054) 1,844,618
Depreciation and
amortization........... 16,078 2,539 4,950 2,502 3,361 7,386 (204) 36,612
Interest, net............ 7,578 150 46 9,774 1,422 6,623 - 25,593
----------- ------------- ------------ ----------- ---------- -------- ----------- -----------
Earnings (losses) before
corporate allocations.. 25,383 22,191 6,534 (10,018) (4,940) (77,670) 146 (38,374)
Corporate interest
allocation............. 18,978 7,295 8,312 7,902 5,269 (47,756) - -
Corporate management fees 32,259 3,977 5,565 1,815 3,298 (46,914) - -
----------- ------------- ------------ ----------- ---------- -------- ----------- -----------
Net segment earnings
(losses)............... $ (25,854) $ 10,919 $ (7,343) $(19,735) $(13,507) $ 17,000 $ 146 $ (38,374)
=========== ============= ============ =========== ========== ======== =========== ===========
Intersegment revenues.... $ 449 $ 87,581 $ 66,861 $ - $ 8,221 $ - $ (163,112) $ -
Identifiable segment assets$ 339,111 $ 46,133 $ 50,774 $ 99,218 $ 82,674 $1,139,822 $ (674,320) $1,083,412
Segment capital
expenditures, net...... $ 15,271 $ 186 $ 560 $ 4,590 $ 2,604 $ 16,023 $ - $ 39,234
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Total Net Revenues....... $1,282,786 $ 183,614 $ 221,880 $ 221,226 $ 171,834 $ (3,176) $ (174,639) $1,903,525
Operating expenses,
corporate general and
administrative expenses,
and provision for losses
on accounts receivable. 1,358,422 202,643 218,910 213,215 183,698 91,192 (174,428) 2,093,652
Depreciation and
amortization........... 27,567 6,066 6,313 9,912 7,100 7,045 (154) 63,849
Interest, net............ 7,077 262 62 9,898 5,101 93,622 - 116,022
Dividends on Preferred
Securities............. - - - - - 19,487 - 19,487
----------- ------------- ------------ ----------- ---------- -------- ----------- -----------
Earnings (losses) before
corporate allocations.. (110,280) (25,357) (3,405) (11,799) (24,065) (214,522) (57) (389,485)
Corporate interest
allocation............. 35,941 10,053 9,673 14,782 7,928 (78,377) - -
Corporate management fees 54,889 7,429 8,912 2,193 5,343 (78,766) - -
Regional allocation...... (412) - - - (223) 635 - -
----------- ------------- ------------- ----------- ---------- -------- ----------- ----------
Net segment losses....... $(200,698) $ (42,839) $ (21,990) $(28,774) $(37,113) $(58,014) $ (57) $(389,485)
=========== ============= ============= =========== ========== ======== =========== ==========
Intersegment revenues.... $ 449 $ 99,308 $ 60,537 $ - $ 14,345 $ - $(174,639) $ -
Identifiable segment assets$ 371,368 $ 85,319 $ 94,601 $312,615 $ 211,333 $1,238,567 $(665,932) $1,647,871
Segment capital
expenditures, net........$ 31,942 $ 5,420 $ 279 $ 5,468 $ 8,911 $ 31,012 $ - $ 83,032
</TABLE>
26
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(12) SUMMARIZED CONSOLIDATING INFORMATION
In connection with Sun's offering of the 9.5% Notes in July 1997 and the
9.375% 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 9.375%
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 9.375% 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 9.375% 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.
27
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
(IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ $27,777 $ 14,282 $ 7,186 $ - $ 49,245
Accounts receivable, net.................... - 160,875 12,722 (2,257) 171,340
Other receivables, net...................... 289,906 (185,677) (100,243) - 3,986
Inventory, net.............................. - 22,789 343 - 23,132
Prepaids and other assets................... 644 10,029 256 - 10,929
--------------- --------------- ---------------- ------------- --------------
Total current assets......................... 318,327 22,298 (79,736) (2,257) 258,632
Property and equipment, net.................... 101,339 144,854 15,893 - 262,086
Goodwill, net.................................. - 318,596 281 - 318,877
Notes receivable, net.......................... 16,250 15,604 - (14,750) 17,104
Assets held for sale........................... - 26,998 158,018 - 185,016
Other assets, net.............................. 16,612 27,291 2,794 (5,000) 41,697
Investment in subsidiaries..................... (1,927,273) - - 1,927,273 -
--------------- --------------- ---------------- ------------- --------------
Total assets................................. $ (1,474,745) $ 555,641 $ 97,250 $ 1,905,266 $ 1,083,412
=============== =============== ================ ============= ==============
Current liabilities:
Current portion of long-term debt........... $ 64,634 $ 489 $ 8,029 $ - $ 73,152
Current portion of obligations under capital
leases.................................... - 248 - - 248
Accounts payable............................ (36,542) 52,877 11,364 (2,257) 25,442
Accrued compensation and benefits........... 25,051 60,729 10,937 - 96,717
Accrued interest............................ - 7,256 712 - 7,968
Accrued self-insurance obligations.......... (10,369) 53,147 1,656 - 44,434
Other accrued liabilities................... 49,421 88,199 15,546 - 153,166
Income tax payables......................... 21,903 (9,119) - - 12,784
--------------- --------------- ---------------- ------------- --------------
Total current liabilities.................... 114,098 253,826 48,244 (2,257) 413,911
Long-term debt, net of current portion......... - 33,941 58,647 (19,750) 72,838
Obligations under capital leases, net of current
portion...................................... - (286) 55,207 - 54,921
Other long-term liabilities.................... - 24,045 1,461 - 25,506
Liabilities subject to compromise (see Note 2). 1,424,701 121,171 99 - 1,545,971
--------------- --------------- ---------------- ------------- --------------
Total liabilities............................ 1,538,799 432,697 163,658 (22,007) 2,113,147
Intercompany payables/(receivables)............ (1,977,517) 2,014,945 (37,428) - -
Commitments and contingencies.................. - - - - -
Minority interest.............................. - 6,386 (93) - 6,293
Company-obligated manditorily redeemable
convertible preferred securities of a
subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of
the Company.................................. 296,101 - - - 296,101
Total stockholders' deficit................... (1,332,128) (1,898,387) (28,887) 1,927,273 (1,332,129)
--------------- --------------- ---------------- ------------- --------------
Total liabilities and stockholders' deficit.... $ (1,474,745) $ 555,641 $ 97,250 $ 1,905,266 $ 1,083,412
=============== =============== ================ ============= ==============
</TABLE>
28
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 13,049 $ 6,693 $ 5,305 $ - $ 25,047
Accounts receivable, net.................... - 235,745 20,659 (1,940) 254,464
Other receivables, net...................... 296,034 (191,118) (89,000) - 15,916
Inventory, net.............................. - 35,333 7,650 - 42,983
Prepaids and other assets................... 1,796 8,825 4,466 - 15,087
--------------- --------------- ---------------- ------------- --------------
Total current assets......................... 310,879 95,478 (50,920) (1,940) 353,497
Property and equipment, net.................... 94,264 144,643 207,269 - 446,176
Goodwill, net.................................. - 407,093 68,474 - 475,567
Notes receivable, net.......................... 14,750 1,436 6,512 - 22,698
Assets held for sale........................... - 67,116 3,493 - 70,609
Other assets, net.............................. 37,229 25,280 7,432 - 69,941
Investment in subsidiaries..................... (1,242,314) - - 1,242,314 -
--------------- --------------- ---------------- ------------- --------------
Total assets................................. $ (785,192) $ 741,046 $ 242,260 $ 1,240,374 $ 1,438,488
=============== =============== ================ ============= ==============
Current liabilities:
Current portion of long-term debt........... $ 12,126 $ 1,225 $ 31,425 $ - $ 44,776
Current portion of obligations under capital
leases.................................... - 107 326 - 433
Accounts payable............................ 28,177 14,545 13,214 (2,149) 53,787
Accrued compensation and benefits........... 13,011 61,642 9,464 - 84,117
Accrued interest............................ - 2,034 938 - 2,972
Accrued self-insurance obligations.......... (12,703) 70,512 1,266 - 59,075
Other accrued liabilities................... 36,685 60,483 19,321 - 116,489
Income tax payables......................... 17,498 (9,271) 903 - 9,130
--------------- --------------- ---------------- ------------- --------------
Total current liabilities.................... 94,794 201,277 76,857 (2,149) 370,779
Long-term debt, net of current portion......... - 53,387 47,378 - 100,765
Obligations under capital leases, net of current
portion...................................... - 8,188 57,487 - 65,675
Other long-term liabilities.................... - 34,768 2,026 - 36,794
Liabilities subject to compromise (see Note 2). 1,427,020 131,498 - - 1,558,518
--------------- --------------- ---------------- ------------- --------------
Total liabilities............................ 1,521,814 429,118 183,748 (2,149) 2,132,531
Intercompany payables/(receivables)............ (1,606,984) 1,622,789 (16,015) 210 -
Commitments and contingencies..................
Minority interest.............................. - 5,821 158 - 5,979
Company-obligated manditorily redeemable
convertible preferred securities of a
subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of
the Company.................................. 344,119 - - - 344,119
Total stockholders' equity (deficit)........... (1,044,141) (1,316,682) 74,369 1,242,313 (1,044,141)
--------------- --------------- ---------------- ------------- --------------
Total liabilities and stockholders' equity
(deficit).................................... $ (785,192) $ 741,046 $ 242,260 $ 1,240,374 $ 1,438,488
=============== =============== ================ ============= ==============
</TABLE>
29
<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 SEPTEMBER 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......................... $ (1) $ 534,376 4 71,656 $ 3,471 $ 609,502
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs......................... - 485,468 66,922 3,471 555,861
Corporate general and administrative.... 18,620 13,000 5,421 - 37,041
Depreciation and amortization........... 2,622 8,733 9 - 11,364
Interest, net (contractual interest
expense of $57,018 for the three
months ended
September 30, 2000)................. 2,006 2,648 3,637 - 8,291
Provision for losses on accounts
receivable............................ - 7,437 138 - 7,575
Legal and regulatory costs.............. - - - - -
Impairment loss......................... - 11 - - 11
Gain on sale of assets, net............. (3) (1,065) - - (1,068)
Equity interest in losses of
subsidiaries.......................... 126,136 - - (126,136) -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses................ 149,381 516,232 76,127 (122,665) 619,075
--------------- --------------- ---------------- --------------- ---------------
Intercompany charges....................... (19,219) 18,674 545 - -
--------------- --------------- ---------------- --------------- ---------------
Losses before reorganization costs and
income taxes............................. (130,163) (530) (5,016) 126,136 (9,573)
Reorganization costs, net.................. 5,009 109,902 10,687 - 125,598
Income tax expense (benefit)............... 110 - - - 110
--------------- --------------- ---------------- --------------- ---------------
Net losses................................. $ (135,282) $ (110,432) $ (15,703) $ 126,136 $ (135,281)
=============== =============== ================ =============== ===============
</TABLE>
30
<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 SEPTEMBER 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 $ (1,206) $ 560,151 $ 68,079 $ 2,555 $ 629,579
-------------- ------------- --------------- ------------- ----------------
Costs and expenses:
Operating costs......................... 1 583,560 68,039 2,555 654,155
Provision for losses on accounts
receivable........................... 2,233 55,365 598 - 58,196
Interest, net........................... 31,875 4,569 3,402 - 39,846
Corporate general and administrative.... 28,925 6,991 1,564 - 37,480
Loss on sale of assets, net............. 2,636 25,796 - - 28,432
Depreciation and amortization........... 2,108 15,337 2,419 - 19,864
Impairment loss......................... 1,777 11,221 1,857 - 14,855
Financial restructuring costs........... 6,996 - - - 6,996
Loss on termination of interest rate - - - - -
swaps................................
Equity interest in losses of 276,435 - - (276,435) -
subsidiaries.........................
-------------- ------------- --------------- ------------- ----------------
Total costs and expenses.......... 352,986 702,839 77,879 (273,880) 859,824
-------------- ------------- --------------- ------------- ----------------
Dividends on convertible preferred
securities of subsidiary... ................ 6,518 - - - 6,518
Management fee (income) expenses........... (123,789) 124,982 (1,193) - -
-------------- ------------- --------------- ------------- ----------------
Losses before income taxes................. (236,921) (267,670) (8,607) 276,435 (236,763)
Income tax expense (benefit) .............. (65) - 158 - 93
-------------- ------------- --------------- ------------- ----------------
Net losses................................. $ (236,856) $ (267,670) $ (8,765) $ 276,435 $ (236,856)
============== ============= =============== ============= ================
</TABLE>
31
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
FOR THE NINE MONTHS ENDED SEPTEMBER 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........................ $ 458 $ 1,618,588 $ 243,429 $ 5,974 $ 1,868,449
--------------- --------------- ---------------- --------------- ---------------
Costs and expenses:
Operating costs........................ - 1,467,607 228,716 5,974 1,702,297
Corporate general and administrative... 63,466 41,566 13,010 - 118,042
Depreciation and amortization.......... 6,849 27,108 2,655 - 36,612
Interest, net (contractual interest
expense of $160,683 for the nine
months ended September 30, 2000)..... 6,212 9,133 10,248 - 25,593
Provision for losses on accounts
receivable........................... - 23,901 378 - 24,279
Legal and regulatory costs............. - 2,618 - - 2,618
Impairment loss........................ - 1,861 - - 1,861
Loss on sale of assets, net............ - - - - -
Gain on sale of assets, net............ (1,990) (6,407) - - (8,397)
Equity interest in losses of
subsidiaries......................... 446,196 - - (446,196) -
Intercompany interest expense (income) (10,062) 10,062 - - -
--------------- --------------- ---------------- --------------- ---------------
Total costs and expenses............... 510,671 1,577,449 255,007 (440,222) 1,902,905
--------------- --------------- ---------------- --------------- ---------------
Intercompany charges...................... (254,160) 251,705 2,455 - -
--------------- --------------- ---------------- --------------- ---------------
Losses before reorganization costs and (256,053) (210,566) (14,033) 446,196 (34,456)
income taxes............................
Reorganization costs, net................. 76,107 126,346 95,253 - 297,706
Income tax expense (benefit).............. 227 - (1) - 226
--------------- --------------- ---------------- --------------- ---------------
Net losses................................ $ (332,387) $ (336,912) $ (109,285) $ 446,196 $ (332,388)
=============== =============== ================ =============== ===============
</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 NINE MONTHS ENDED SEPTEMBER 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.......................... $ (3,176) $ 1,656,205 $ 247,941 $ 2,555 $ 1,903,525
-------------- ------------- --------------- ------------- ---------------
Costs and expenses:
Operating costs......................... 1 1,645,413 238,508 2,555 1,886,477
Impairment loss......................... 3,717 370,916 40,185 - 414,818
Corporate general and administrative.... 88,460 21,554 9,739 - 119,753
Interest, net........................... 90,736 14,355 10,931 - 116,022
Loss on sale of assets, net............. 5,645 68,788 17,886 - 92,319
Provision for losses on accounts
receivable........................... 2,233 84,421 768 - 87,422
Depreciation and amortization........... 6,590 46,936 10,323 - 63,849
Financial restructuring costs........... 13,026 - 310 - 13,336
Corporate restructuring costs........... 3,805 7,327 312 - 11,444
Loss on termination of interest rate 2,488 - - - 2,488
swaps................................
Intercompany interest (income) expenses. (5,031) 5,031 - - -
Equity interest in losses of subsidiary. 1,019,223 - - (1,019,223) -
-------------- ------------- --------------- ------------- ----------------
Total costs and expenses.......... 1,230,893 2,264,741 328,962 (1,016,668) 2,807,928
-------------- ------------- --------------- ------------- ----------------
Dividends on convertible preferred
securities of subsidiary.................. 19,487 - - - 19,487
Management fee (income) expenses............ (323,478) 321,720 1,758 - -
-------------- ------------- --------------- ------------- ----------------
Losses before income taxes and cumulative
effect of change in accounting principle (930,078) (930,256) (82,779) 1,019,223 (923,890)
Income tax expense (benefit) .............. 5,454 (5,038) 569 - 985
-------------- ------------- --------------- ------------- ----------------
Losses before cumulative effect of change in
accounting principle................... (935,532) (925,218) (83,348) 1,019,223 (924,875)
Cumulative effect of change in accounting
principles......... ................... 3,069 9,351 1,306 - 13,726
-------------- ------------- --------------- ------------- ----------------
Net losses................................. $ (938,601) $ (934,569) $ (84,654) $ 1,019,223 $ (938,601)
============== ============= =============== ============= ================
</TABLE>
33
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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.................................... $ (332,387) $ (336,912) $ (109,285) $ 446,196 $ (332,388)
-------------- --------------- ----------------- ---------------- --------------
Adjustments to reconcile net losses to net
cash provided by (used for) operating
activities:
Equity interest in losses of subsidiaries 446,196 - - (446,196) -
Reorganization costs, net............... 76,107 126,346 95,253 - 297,706
Depreciation and amortization........... 6,849 27,108 2,655 - 36,612
Provision for losses on accounts and - 23,901 378 - 24,279
other receivables.....................
Impairment loss......................... - 1,861 - - 1,861
Legal and regulatory costs.............. - 1,383 - - 1,383
Gain on sale of assets.................. (1,990) (6,407) - - (8,397)
Other, net.............................. (4,721) 25,179 (25,043) - (4,585)
Changes in operating assets and liabilities:
Accounts receivable........................ - 22,065 (16,483) - 5,582
Other current assets....................... 9,367 (1,549) 14,644 - 22,462
Income tax payables........................ 4,405 812 (2,071) - 3,146
Other current liabilities.................. (42,417) 12,815 (11,676) - (41,278)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities before reorganization costs...... 161,409 (103,398) (51,628) - 6,383
Net cash paid for reorganization costs........ (10,930) - - - (10,930)
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) operating
activities.................................. 150,479 (103,398) (51,628) - (4,547)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net..................... (16,023) (16,991) (6,220) - (39,234)
Acquisitions, net of cash acquired............ - (974) - - (974)
Proceeds from sale of assets held for sale.... - 246 21,833 - 22,079
Decrease in long-term notes receivable........ (1,500) 617 1,391 - 508
Increase in other assets...................... 20,064 (22,861) 4,661 - 1,864
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) investing
activities.................................. 2,541 (39,963) 21,665 - (15,757)
-------------- --------------- ----------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit
Agreement (postpetition) ................... 52,509 - - - 52,509
Long-term debt borrowings..................... - 5,016 3,563 - 8,579
Long-term debt repayments..................... - - (12,871) - (12,871)
Principal payments on prepetition debt
authorized by Bankruptcy Court.............. - (2,951) - - (2,951)
Other financing activities.................... (16) - - - (16)
Intercompany advances......................... (190,027) 150,670 39,357 - -
-------------- --------------- ----------------- ---------------- --------------
Net cash provided by (used for) financing
activities.................................. (137,534) 152,735 30,049 - 45,250
-------------- --------------- ----------------- ---------------- --------------
Effect of exchange rate on cash and cash
equivalents................................. (748) - - - (748)
-------------- --------------- ----------------- ---------------- --------------
Net increase in cash and cash equivalents..... 14,738 9,374 86 - 24,198
Cash and cash equivalents at beginning of year 13,049 6,693 5,305 - 25,047
-------------- --------------- ----------------- ---------------- --------------
Cash and cash equivalents at end of period.... $ 27,787 $ 16,067 $ 5,391 $ - $ 49,245
============== =============== ================= ================ ==============
</TABLE>
34
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 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............................. $ (938,601) $ (934,569) $ (84,654) $ 1,019,223 $ (938,601)
Adjustments to reconcile net losses to
net cash provided by (used for)
operating activities:
Impairment loss..................... 3,717 370,916 40,185 - 414,818
Cumulative effect of change in
accounting principle................ 3,069 9,351 1,306 - 13,726
Loss on sale of assets, net......... 5,645 68,788 17,886 - 92,319
Equity interest in losses of 1,019,223 - - (1,019,223) -
subsidiaries......................
Depreciation and amortization....... 6,590 46,936 10,323 - 63,849
Provision for losses on accounts
receivable........................ 2,233 84,421 768 - 87,422
Other, net.......................... 6,791 8,535 (1,056) - 14,270
Changes in operating assets and
liabilities:
Accounts receivable............... (599) 143,970 12,074 - 155,445
Other current assets.............. 50,758 (21,475) (14,647) - 14,636
Income taxes payable.............. 43,069 (11,967) 6,123 - 37,225
Other current liabilities......... (22,299) 50,245 21,327 - 49,273
-------------- ------------- --------------- ------------- ----------------
Net cash provided by (used for)
operating activities................ $ 179,596 $ (184,849) $ 9,635 $ - $ 4,382
-------------- ------------- --------------- ------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net.............. $ (29,579) $ 36,344 $ (89,797) $ - $ (83,032)
Acquisitions, net of cash acquired..... - 231,290 (237,021) - (5,731)
Proceeds from sale and leaseback of PP&E - - 34,938 - 34,938
Increase in long-term note receivable.. 6,257 179 (695) - 5,741
Other assets expenditures.............. (9,937) (294,019) 306,482 - 2,526
-------------- ------------- --------------- ------------- ----------------
Net cash provided by (used for)
investing activities................ $ (33,259) $ (26,206) $ 13,907 $ - $ (45,558)
-------------- ------------- --------------- ------------- ----------------
Cash flows from financing activities:
Long-term debt borrowings.............. $ 100,163 $ 10,552 $ 15,000 $ - $ 125,715
Long-term debt repayments.............. (8,228) (24,552) (14,020) - (46,800)
Conversion of Mediplex 6.5% Convertible
Subordinated Debentures due 2003.... - (6,649) - - (6,649)
Net proceeds from issuance of
convertible preferred securities.... 881 (881) - - -
Net proceeds from issuance of common 13,479 (18,415) 5,746 - 810
stock...............................
Purchases of treasury stock............ (409) - - - (409)
Other financing activities............. (695) (530) 22 - (1,203)
Intercompany advances.................. (183,143) 182,560 583 - -
-------------- ------------- --------------- ------------- ----------------
Net cash provided by (used for)
financing activities................ $ (77,952) $ 142,085 $ 7,331 $ - $ 71,464
-------------- ------------- --------------- ------------- ----------------
Effect of exchange rate on cash and cash
equivalents............................ $ - $ (2,007) $ (6,813) $ - $ (8,820)
-------------- ------------- --------------- ------------- ----------------
Net increase (decrease) in cash and cash
equivalents............................ $ 68,385 $ (70,977) $ 24,060 $ - $ 21,468
Cash and cash equivalents at beginning of
year................................... (9,964) 26,406 11,062 - 27,504
-------------- ------------- --------------- ------------- ----------------
Cash and cash equivalents at end of period.. $ 58,421 $ (44,571) $ 35,122 $ - $ 48,972
============== ============= =============== ============= ================
</TABLE>
35
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(13) 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 SEPTEMBER 30, 2000
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 41,925 $ 7,320 $ - $ 49,245
Accounts receivable, net.................................. 164,488 8,383 (1,531) 171,340
Other receivables, net.................................... 104,044 (100,058) - 3,986
Inventory, net............................................ 22,238 894 - 23,132
Prepaids and other assets................................. 10,557 372 - 10,929
------------- ------------ ------------- --------------
Total current assets................................... 343,252 (83,089) (1,531) 258,632
Property and equipment, net................................. 238,537 23,549 - 262,086
Goodwill, net............................................... 318,595 282 - 318,877
Notes receivable, net....................................... 17,104 - - 17,104
Assets held for sale........................................ 26,999 158,017 - 185,016
Other assets, net........................................... 37,758 3,939 - 41,697
Investment in subsidiaries.................................. (42,102) - 42,102 -
------------- ------------ ------------- --------------
Total assets........................................... $ 940,143 $ 102,698 $ 40,571 $ 1,083,412
============= ============ ============= ==============
</TABLE>
(Continued on next page.)
36
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 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........................... $ 65,041 $ 8,111 $ - $ 73,152
Current portion of obligations under capital leases......... 240 8 - 248
Accounts payable............................................ 15,191 11,782 (1,531) 25,442
Accrued compensation and benefits........................... 86,194 10,523 - 96,717
Accrued interest............................................ 6,492 1,476 - 7,968
Accrued self-insurance obligations.......................... 43,456 978 - 44,434
Other accrued liabilities................................... 138,297 14,869 - 153,166
Income tax payables......................................... 12,784 - - 12,784
------------- -------------- ------------- ---------------
Total current liabilities................................... 367,695 47,747 (1,531) 413,911
Long-term debt, net of current portion........................ 7,221 65,617 - 72,838
Obligations under capital leases, net of current portion...... (382) 55,303 - 54,921
Other long-term liabilities................................... 24,045 1,461 - 25,506
Liabilities subject to compromise (see Note 2)................ 1,545,971 - - 1,545,971
------------- -------------- ------------- ---------------
Total liabilities........................................... 1,944,550 170,128 (1,531) 2,113,147
Minority interest............................................. 3,148 3,145 - 6,293
------------- -------------- ------------- ---------------
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely 7.0%
convertible junior subordinated debentures of the Company... 296,101 - - 296,101
------------- -------------- ------------- ---------------
Intercompany payables/(receivables)........................... 28,473 (28,473) - -
------------- -------------- ------------- ---------------
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, 64,911,259 shares issued and
outstanding as of September 30, 2000...................... 649 2,569 (2,569) 649
Additional paid-in capital................................... 825,181 273,662 (273,662) 825,181
Accumulated deficit.......................................... (2,117,895) (305,748) 305,748 (2,117,895)
Accumulated other comprehensive loss......................... (12,585) (12,585) 12,585 (12,585)
------------- -------------- ------------- ---------------
Less:
Common stock held in treasury, at cost, 2,212,983
shares at September 30, 2000............................... (27,376) - - (27,376)
Grantor stock trust, at market, 1,915,925 shares at
September 30, 2000........................................ (103) - - (103)
------------- -------------- ------------- ---------------
Total stockholders' deficit ................................ (1,332,129) (42,102) 42,102 (1,332,129)
------------- -------------- ------------- ---------------
Total liabilities and stockholders' deficit................. $ 940,143 $ 102,698 $ 40,571 $ 1,083,412
============= ============== ============= ===============
</TABLE>
37
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 18,532 $ 6,515 $ - $ 25,047
Accounts receivable, net.................................. 221,800 33,692 (1,028) 254,464
Other receivables, net.................................... 104,689 (88,773) - 15,916
Inventory, net............................................ 34,485 8,498 - 42,983
Prepaids and other assets................................. 10,592 4,495 - 15,087
------------- ------------ ------------- --------------
Total current assets................................... 390,098 (35,573) (1,028) 353,497
Property and equipment, net................................. 226,357 219,819 - 446,176
Goodwill, net............................................... 407,093 68,474 - 475,567
Notes receivable, net....................................... 16,185 6,513 - 22,698
Assets held for sale........................................ 67,116 3,493 - 70,609
Other assets, net........................................... 51,664 18,277 - 69,941
Investment in subsidiaries.................................. 69,230 - (69,230) -
------------- ------------ ------------- --------------
Total assets........................................... $ 1,227,743 $ 281,003 $ (70,258) $ 1,438,488
============= ============ ============= ==============
</TABLE>
(Continued on next page.)
38
<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>
39
<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 SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total net revenues.............................................. $ 532,336 $ 78,528 $ (1,362) $ 609,502
-------------- ------------- -------------- ---------------
Costs and expenses:
Operating costs............................................... 485,065 72,158 (1,362) 555,861
Corporate general and administrative.......................... 32,029 5,012 - 37,041
Depreciation and amortization................................. 11,311 53 - 11,364
Interest, net (contractual interest expense of $57,018 for the
three months ended September 30, 2000).. ................... 4,664 3,627 - 8,291
Provision for losses on accounts receivable................... 7,520 55 - 7,575
Legal and regulatory costs.................................... - - - -
Impairment loss............................................... 11 - - 11
Gain on sale of assets, net................................... (1,068) - - (1,068)
Equity interest in losses of subsidiaries..................... 14,619 - (14,619) -
Intercompany interest expense (income) ....................... (1,322) 1,322 - -
-------------- ------------- -------------- ---------------
Total costs and expenses...................................... 552,829 82,227 (15,981) 619,075
Management fee (income) expense................................. (231) 231 - -
-------------- ------------- -------------- ---------------
Losses before reorganization costs and income taxes............. (20,262) (3,930) 14,619 (9,573)
Reorganization costs, net....................................... 114,911 10,687 - 125,598
Income taxes.................................................... 111 (1) - 110
-------------- ------------- -------------- ---------------
Net earnings (losses)........................................... $(135,284) $ (14,616) $ 14,619 $ (135,281)
============== ============= ============== ===============
</TABLE>
40
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF LOSSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Total net revenues.............................................. $ 1,622,079 $ 250,221 $ (3,851) $ 1,868,449
-------------- ------------- -------------- ---------------
Costs and expenses:
Operating costs............................................... 1,468,486 237,662 (3,851) 1,702,297
Corporate general and administrative.......................... 106,137 11,905 - 118,042
Depreciation and amortization................................. 33,790 2,822 - 36,612
Interest, net (contractual interest expense of $160,683 for the
nine months ended September 30, 2000)....................... 15,041 10,552 - 25,593
Provision for losses on accounts receivable................... 23,913 366 - 24,279
Legal and regulatory costs.................................... 2,618 - - 2,618
Impairment loss............................................... 1,861 - - 1,861
Loss on sale of assets, net................................... - - - -
Gain on sale of assets, net................................... (8,397) - - (8,397)
Equity interest in losses of subsidiaries..................... 111,638 - (111,638) -
Intercompany interest expense (income) ....................... (1,322) 1,322 - -
-------------- ------------- -------------- ---------------
Total costs and expenses...................................... 1,753,765 264,629 (115,489) 1,902,905
Management fee (income) expense................................. (1,976) 1,976 - -
-------------- ------------- -------------- ---------------
Losses before reorganization costs and income taxes............. (129,710) (16,384) 111,638 (34,456)
Reorganization costs, net....................................... 202,451 95,255 - 297,706
Income taxes.................................................... 227 (1) - 226
-------------- ------------- -------------- ---------------
Net losses.................................................... $ (332,388) $ (111,638) $ 111,638 $ (332,388)
============== ============= ============== ===============
</TABLE>
41
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILERS NON-FILERS ELIMINATION CONSOLIDATED
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net losses........................................................... $ (332,388) $ (111,637) $ 111,637 $ (332,388)
------------- --------------- ------------- -------------
Adjustments to reconcile net losses to net cash provided by (used for)
operating activities:
Equity interest in losses of subsidiaries........................... 111,637 - (111,637) -
Reorganization costs, net........................................... 202,453 95,253 - 297,706
Depreciation and amortization....................................... 33,790 2,822 - 36,612
Provision for losses on accounts and other receivables.............. 23,913 366 - 24,279
Impairment loss..................................................... 1,861 - - 1,861
Legal and regulatory costs.......................................... 1,383 - - 1,383
Gain on sale of assets, net......................................... (8,397) - - (8,397)
Other, net.......................................................... 1,671 (6,256) - (4,585)
Changes in operating assets and liabilities:
Accounts receivable............................................... 117 5,465 - 5,582
Other current assets.............................................. 4,999 17,463 - 22,462
Income taxes payable.............................................. 5,858 (2,712) - 3,146
Other current liabilities......................................... (29,071) (12,207) - (41,278)
------------- --------------- ------------- -------------
Net cash provided by (used for) operating activities before
reorganization costs ............................................... 17,826 (11,443) - 6,383
Net cash paid for reorganization costs................................ (10,930) - - (10,930)
------------- --------------- ------------- -------------
Net cash provided by (used for) operating activities.............. 6,896 (11,443) - (4,547)
-------------- --------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net............................................. (32,496) (6,738) - (39,234)
Acquisitions, net of cash acquired.................................. (974) - - (974)
Proceeds from sale of assets held for sale.......................... - 22,079 - 22,079
Decrease in long-term notes receivable.............................. (884) 1,392 - 508
Decrease (increase) in other assets................................. (8,371) 10,235 - 1,864
------------- --------------- ------------- -------------
Net cash provided by (used for) investing activities............... (42,725) 26,968 - (15,757)
------------- --------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolving Credit Agreement (postpetition) ...... 52,509 - - 52,509
Long-term debt borrowings............................................ 6,849 1,730 - 8,579
Long-term debt repayments............................................ - (12,871) - (12,871)
Principal payments on prepetition debt authorized by Bankruptcy Court (2,951) - - (2,951)
Intercompany advances................................................ 3,579 (3,579) - -
Other financing activities........................................... (16) - - (16)
------------- --------------- ------------- -------------
Net cash provided by (used for) financing activities............... 59,970 (14,720) - 45,250
------------- --------------- ------------- -------------
Effect of exchange rate on cash and cash equivalents.................... (748) - - (748)
------------- --------------- ------------- -------------
Net increase in cash and cash equivalents............................... 23,393 805 - 24,198
Cash and cash equivalents at beginning of year.......................... 18,532 6,515 - 25,047
-------------- --------------- ------------- -------------
Cash and cash equivalents at end of period.............................. $ 41,925 $ 7,320 $ - $ 49,245
============== =============== ============= ============
</TABLE>
42
<PAGE>
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(14) SUBSEQUENT EVENTS
In December 2000, the Company entered into agreements to divest its
operations in Germany for approximately $4.0 million and the United Kingdom for
an immaterial amount. There is no assurance that the Company will successfully
divest its operations in Germany or the United Kingdom. See Note 5 - Impairment
of Long-Lived Assets and Assets Held for Sale.
In December 2000, the Company entered into an agreement with Medline
Industries, Inc. ("Medline") to divest its SunChoice medical supplies
operations. In January 2001, the Company obtained Bankruptcy Court approval of
this transaction. If completed, the Company would receive $6.0 million plus a
cash payment equal to the value of SunChoice's inventory and accounts
receivable. In a separate transaction, Medline would also assume an eight-year
supply agreement that SunChoice has with SunBridge, pursuant to which Medline
would provide medical supplies to SunBridge and its affiliates and provide
SunBridge with favorable pricing. There can be no assurance that this
transaction will be completed.
As of December 29, 2000, the Company had identified 50 skilled nursing
facilities, 6 comprehensive outpatient rehabilitation facilities and a medical
office building for disposal. The Company has previously recorded losses on
certain of these assets. The aggregate net revenues and aggregate net operating
losses for the nine months ended September 30, 2000 for the 50 skilled nursing
facilities were approximately $203.0 million and $7.7 million, respectively. The
aggregate net revenues and aggregate net operating income for the nine months
ended September 30, 2000 for the 6 comprehensive outpatient rehabilitation
facilities were approximately $2.0 million and $0.3 million, respectively. The
aggregate net revenues and aggregate net operating loss for the nine months
ended September 30, 2000 for the medical office building were approximately $0.9
million and $1.1 million, respectively. Divestitures require Bankruptcy Court
approval.
43
<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. The Company also had
operations in Germany, Spain, Australia and the United Kingdom in 1999 and in
the nine months ended September 30, 2000. 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. The Company operates through four principal business segments.
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 September 30, 2000, the Company operated 320 inpatient
facilities with 36,382 licensed beds compared to 373 facilities with 41,833
licensed beds as of September 30, 1999. Included in the preceding are 50 skilled
nursing facilities with 6,465 licensed beds which 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 6 comprehensive outpatient
rehabilitation facilities and one medical office building for divestiture. See
"Note 5 - Impairment of Long-Lived Assets and Assets Held for Sale" and "Note 14
- 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 September 30, 2000, the
Company's rehabilitation and respiratory therapy services segment provided
services to 1,150 facilities in 41 states, of which 848 were operated by
nonaffiliated parties compared to 1,638 facilities in 45 states as of September
30, 1999, of which 1,248 were operated by nonaffiliated parties. During the
first quarter of 2000, the Company began pursuing the disposition of the
respiratory therapy business. The Company recorded a loss to reduce the carrying
value of its respiratory therapy business to the Company's estimate of selling
value less selling costs. See "Note 2 - Petitions for Reorganization under
Chapter 11" in the Company's consolidated financial statements.
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 1,787 long-term and subacute care
facilities, including 1,452 nonaffiliated facilities, as of September 30, 2000.
As of September 30, 1999, pharmaceutical products and services were provided to
approximately 930 facilities including 582 nonaffiliated facilities through its
38 pharmacies and pharmaceutical billing and consulting center. The Company's
medical supply subsidiary provided products to over 1,970 affiliated and
non-affiliated facilities as of September 30, 1999. The Company has entered into
an agreement to sell its medical supply operations. See "Note 14 - Subsequent
Events" in the Company's consolidated financial statements.
INTERNATIONAL OPERATIONS: During 1999 and through the third 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 1999 and
through the third quarter of 2000, this segment also provided pharmaceutical
services in Germany and Australia and medical supplies in Australia. As of
September 30, 2000, the Company operated 147 inpatient facilities with 8,326
licensed beds in the United Kingdom and 17 facilities with 1,255 licensed beds
in Germany compared to 147 facilities with 8,689 licensed beds in the United
Kingdom and 16 facilities with 1,122 licensed beds in Germany as of September
30, 1999.
44
<PAGE>
The Company divested its operations in Spain in October 2000. The Company's
operations in Australia were placed in receivorship by its secured creditors in
September 2000. The Company entered into agreements to sell its operations in
Germany and the United Kingdom in December 2000. No assurance can be given that
the Company will successfully divest its operations in Germany and the United
Kingdom. All divestitures require Bankruptcy Court approval. See "Note 5 -
Impairment of Long-Lived Assets and Assets Held for Sale" and "Note 14 -
Subsequent Events" in the Company's consolidated financial statements.
OTHER OPERATIONS
During 1999 and through the third quarter of 2000, the Company's other
operations included temporary therapy services, home health, software
development and other ancillary services. The Company divested its hospice
operations in the fourth quarter of 1999 and its assisted living operations in
the fourth quarter of 1999 and the first and second quarters of 2000. See "Note
5 - 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 586,667 temporary
therapy staffing hours and 354,427 non-therapy hours to nonaffiliates for the
nine months ended September 30, 2000 compared to 871,732 temporary therapy
staffing hours and 106,557 non-therapy hours for the nine months ended September
30, 1999.
The following table sets forth certain operating data for the Company as of
the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2000 1999 1999
---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Services:
Facilities 320 373 354
Licensed beds 36,382 41,833 39,867
Rehabilitation and Respiratory Therapy Services:
Nonaffiliated facilities served 848 1,248 1,158
Affiliated facilities served 302 390 373
------------- ------------ -----------------
Total 1,150 1,638 1,531
============= ============ =================
Pharmaceutical and Medical Supply Services:
Nonaffiliated facilities served 1,452 582 (1) 1,805
Affiliated facilities served 335 348 (1) 702
------------- ------------ -----------------
Total 1,787 930 2,507
============= ============ =================
International Operations:
Facilities
United Kingdom 147 147 145
Other foreign 22 32 33
------------- ------------ -----------------
Total 169 179 178
============= ============ =================
Licensed beds
United Kingdom 8,326 8,689 8,320
Other foreign 1,570 3,100 3,192
------------- ------------ -----------------
Total 9,896 11,789 11,512
============= ============ =================
</TABLE>
(1) Includes only pharmaceutical contracts
45
<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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Services $ 427,774 $ 426,582 $ 1,299,764 $ 1,282,786
Rehabilitation and Respiratory Therapy Services 48,537 55,428 159,251 183,614
Pharmaceutical and Medical Supply Services 75,452 73,268 224,725 221,880
International Operations 65,291 76,013 210,872 221,226
Other Operations 43,577 51,369 136,491 171,834
Corporate - (1,207) 458 (3,176)
Intersegment Eliminations (51,129) (51,874) (163,112) (174,639)
-------------- -------------- -------------- --------------
Total Net Revenues $ 609,502 $ 629,579 $ 1,868,449 $ 1,903,525
============== ============== ============== ==============
</TABLE>
The following table sets forth the amount of net segment earnings (losses)
for the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Inpatient Services $ (8,688) $ (64,733) $ (25,854) $ (110,280)
Rehabilitation and Respiratory Therapy Services 1,601 (22,811) 10,919 (25,357)
Pharmaceutical and Medical Supply Services (2,829) (5,789) (7,343) (3,405)
International Operations (2,177) (4,797) (19,735) (11,799)
Other Operations (2,451) (14,208) (13,507) (24,065)
------------- --------------- -------------- ---------------
Earnings (losses) before income taxes and corporate
allocation of interest and management fees (14,544) (112,338) (55,520) (174,906)
Corporate Expenses 3,877 (74,232) 17,000 (214,522)
Intersegment Eliminations 37 90 146 (57)
------------- --------------- -------------- ---------------
Net segment losses $ (10,630) $ (186,480) $ (38,374) $ (389,485)
============= =============== ============== ===============
</TABLE>
46
<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 the 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 SEPTEMBER 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Total net revenues 100.0% 100.0%
Costs and expenses:
Operating costs ...................................................... 91.2% 103.9%
Corporate general and administrative.................................. 6.1% 6.0%
Depreciation and amortization......................................... 1.9% 3.2%
Interest, net......................................................... 1.4% 6.3%
Provision for losses on accounts receivable........................... 1.2% 9.2%
Impairment loss....................................................... 0.0% 2.4%
(Gain) loss on sale of assets, net.................................... (0.2)% 4.5%
Financial restructuring costs......................................... 0.0% 1.1%
--------------------- --------------------
Total costs and expenses before reorganization costs............ 101.6% 136.6%
Dividends on convertible preferred securities of subsidiary..... 0.0% 1.0%
--------------------- --------------------
Losses before reorganization costs and income taxes .................. (1.6)% (37.6)%
Reorganization costs, net............................................. 20.6% 0.0%
Income taxes.......................................................... 0.0% 0.0%
--------------------- --------------------
Net losses ........................................................... (22.2)% (37.6)%
===================== ====================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Total net revenues 100.0% 100.0%
Costs and expenses:
Operating costs ...................................................... 91.1% 99.1%
Corporate general and administrative.................................. 6.3% 6.3%
Depreciation and amortization......................................... 2.0% 3.4%
Interest, net......................................................... 1.4% 6.1%
Provision for losses on accounts receivable........................... 1.3% 4.6%
Legal and regulatory costs............................................ 0.1% 0.0%
Impairment loss....................................................... 0.1% 21.8%
Financial restructuring costs......................................... 0.0% 0.7%
Corporate restructuring costs......................................... 0.0% 0.6%
Loss on termination of interest rate swaps............................ 0.0% 0.1%
(Gain) loss on sale of assets, net.................................... (0.4)% 4.8%
--------------------- --------------------
Total costs, expenses and gains before reorganization costs..... 101.9% 147.5%
Dividends on convertible preferred securities of subsidiary..... 0.0% 1.0%
--------------------- --------------------
Losses before reorganization costs, income taxes and cumulative effect
of change in accounting principle ............................. (1.9)% (48.5)%
Reorganization costs, net............................................. 15.9% 0.0%
Income taxes.......................................................... 0.0% 0.1%
--------------------- --------------------
Losses before cumulative effect of change in accounting principle .... (17.8)% (48.6)%
Cumulative effect of change in accounting principle................... 0.0% 0.7%
--------------------- --------------------
Net losses ............................................................... (17.8)% (49.3)%
===================== ====================
</TABLE>
47
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
INPATIENT SERVICES
Net revenues increased approximately $1.0 million from $426.6 million at
September 30, 1999 to $427.8 million at September 30, 2000. On a same store
basis, net revenues increased approximately $43.3 million from $377.9 million
for the three months ended September 30, 1999 to $421.2 million for the three
months ended September 30, 2000, a 11.5% increase. Net revenues for 1999 include
negative revenue adjustments of approximately $28.4 million. Excluding the
negative revenue adjustments for 1999, net revenues increased $14.9 million or
3.7%. This increase is primarily the result of improved Medicaid rates during
the third quarter of 2000.
On a same store basis, operating expenses, which include rent expense of
$44.2 million and $45.2 million for the three months ended September 30, 2000
and 1999, respectively, decreased 1.4% from $396.7 million for the three months
ended September 30, 1999 to $391.3 million for the three months ended September
30, 2000. Operating expenses as a percentage of net revenues, excluding the
negative revenue adjustments for 1999, decreased from 97.7% for the three months
ended September 30, 1999 to 92.9% for the three months ended September 30, 2000.
The decrease in operating expenses as a percentage of revenue is primarily due
to an increase in revenues combined with decreases in administrative costs
associated with the divestitures of skilled nursing facilities during 2000.
On a same store basis, corporate general and administrative expenses, which
include regional costs related to the supervision of operations, were $9.8
million and $6.4 million for the three months ended September 30, 2000 and
September 30, 1999, respectively. Excluding the effect of the negative revenue
adjustments for 1999, as a percentage of net revenues, corporate general and
administrative expenses were 2.3% and 1.6% for the three months ended September
30, 2000 and September 30, 1999, respectively. The change is primarily due to an
increase in the corporate overhead allocation partially offset by a reduction in
regional overhead to skilled nursing facility divestitures.
On a same store basis, provision for losses on accounts receivable
decreased 87.8% from $21.3 million for the three months ended September 30, 1999
to $2.6 million for the three months ended September 30, 2000. Excluding the
effect of the negative revenue adjustments for 1999, as a percentage of net
revenues, provision for losses on accounts receivable decreased from 5.2% for
the three months ended September 30, 1999 to 0.6% for the three months ended
September 30, 2000. During the third quarter of 1999, the Company increased its
reserves due to a deterioration in the aging of certain accounts receivable. An
equivalent increase was not necessary in the third quarter of 2000.
On a same store basis, depreciation and amortization decreased 40.0% from
$8.5 million for the three months ended September 30, 1999 to $5.1 million for
the three months ended September 30, 2000. Excluding the effect of the negative
revenue adjustments for 1999, as a percentage of net revenues, depreciation and
amortization expense decreased from 2.1% for the three months ended September
30, 1999 to 1.2% for the three months ended September 30, 2000. The 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 pursuant to SFAS 121.
On a same store basis, net interest expense increased 50.0% from $1.6
million for the three months ended September 30, 1999 to $2.4 million for the
three months ended September 30, 2000. Excluding the effect of the negative
revenue adjustments for 1999, as a percentage of net revenues, interest expense
increased from 0.4% for the three months ended September 30, 1999 to 0.6% for
the three months ended September 30, 2000. The increase is primarily due to
interest charges incurred related to the late filing of certain Medicare cost
reports.
48
<PAGE>
REHABILITATION AND RESPIRATORY THERAPY SERVICES
Net revenues from rehabilitation and respiratory therapy services decreased
$6.9 million, or 12.5%, from $55.4 million for the three months ended September
30, 1999 to $48.5 million for the three months ended September 30, 2000.
Revenues from services provided to affiliated facilities decreased $3.3 million,
or 10.6%, from $30.3 million for the three months ended September 30, 1999 to
$27.1 million for the three months ended September 30, 2000. Revenues from
services provided to nonaffiliated facilities decreased approximately $3.6
million, or 14.3%, from $25.1 million for the three months ended September 30,
1999 to $21.5 million for the three months ended September 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 decline in net revenues has continued,
with a significant reduction in contracts from the third quarter of 1999 to the
third quarter of 2000. Specifically, there were 1,150 affiliated and
nonaffiliated contracts as of September 30, 2000 compared to 1,638 affiliated
and nonaffiliated contracts as of September 30, 1999. During the third 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 Company's
divestitures of inpatient facilities in 1999 and 2000 contributed to the
decrease in affiliated revenues.
Operating expenses decreased $17.1 million, or 29.6%, from $57.0 million
for the three months ended September 30, 1999 to $40.1 million for the three
months ended September 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
subsidiary. Operating expenses as a percentage of net revenues decreased from
94.4% for the three months ended September 30, 1999 to 82.7% for the three
months ended September 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 continued to
dramatically reduce its cost structure during 2000 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 $7.2 million during the third quarter of
2000 from the third quarter of 1999 primarily 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 $0.7 million for
the three months ended September 30, 2000. Corporate general and administrative
expenses as a percentage of net revenues were 1.4% for the three months ended
September 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 September 30, 1999. The Company began
allocating costs directly attributable to the segment in January 2000.
Provision for losses on accounts receivable decreased $17.7 million, or
87.0%, from $19.2 million for the three months ended September 30, 1999 to $2.5
million for the three months ended September 30, 2000. As a percentage of net
revenues, provision for losses on accounts receivable decreased from 34.7% for
the three months ended September 30, 1999 to 5.2% for the three months ended
September 30, 2000. During the third quarter of 1999, the Company increased its
reserves due to the impact of PPS, which for certain nonaffiliated customers had
negatively affected cash flows adversely affecting the collectibility of amounts
due the Company. An equivalent increase in reserves for the nine months ended
September 30, 2000 was not necessary.
Depreciation and amortization decreased 53.3% from $1.5 million for the
three months ended September 30, 1999, to $0.7 million for the three months
ended September 30, 2000. As a percentage of net revenues, depreciation and
amortization expense decreased from 2.7% for the three months ended September
30, 1999 to 1.4% for the three months ended September 30, 2000, respectively.
The decrease is primarily a result of the write-downs during 1999 of goodwill
and certain other long-lived assets pursuant to 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").
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PHARMACEUTICAL AND MEDICAL SUPPLY OPERATIONS
Net revenues from pharmaceutical and medical supply services increased $2.2
million, or 3.0%, from $73.3 million for the three months ended September 30,
1999 to $75.5 million for the three months ended September 30, 2000.
Pharmaceutical services' net revenues increased approximately $1.3 million, or
2.3% from $55.7 million for the three months ended September 30, 1999 to $57.0
million for the three months ended September 30, 2000. The increase is primarily
due to an increase in the average price per prescription. Medical supply
services' net revenues from nonaffiliated parties decreased approximately $2.0
million, or 17.4%, while net revenues from affiliated parties increased
approximately $2.9 million, or 52.7%. 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.
Operating expenses decreased $1.0 million, or 1.4%, from $70.0 million for
the three months ended September 30, 1999 to $69.0 million for the three months
ended September 30, 2000. As a percentage of net revenues, operating expenses
decreased from 95.5% for the three months ended September 30, 1999 to 91.4% for
the three months ended September 30, 2000. Pharmaceutical services' operating
expenses increased approximately $0.8 million, or 1.6%. 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 8.9% from $19.0 million for the three months ended September 30, 1999
to $17.3 million for the three months ended September 30, 2000. 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 $1.3 million for
the three months ended September 30, 2000. Corporate general and administrative
expenses as a percentage of net revenues were 1.7% for the three months ended
September 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 September 30, 1999. The Company began
allocating costs directly attributable to the segment in January 2000.
Provision for losses on accounts receivable decreased 79.7% from $5.9
million for the three months ended September 30, 1999 to $1.2 million for the
three months ended September 30, 2000. As a percentage of net revenues, the
provision for losses on accounts receivable decreased from 8.0% for the three
months ended September 30, 1999 to 1.6% for the three months ended September 30,
2000. During the third quarter of 1999, the Company increased its reserves due
to a deterioration in the aging of certain accounts receivable. An equivalent
increase was not necessary in the third quarter of 2000.
Depreciation and amortization increased 5.6% from $1.8 million for the
three months ended September 30, 1999 to $1.9 million for the three months ended
September 30, 2000. As a percentage of net revenues, depreciation and
amortization expense was approximately 2.5% for the three months ended September
30, 2000 and 1999.
INTERNATIONAL OPERATIONS
Revenues from international operations decreased $10.7 million from $76.0
million for the three months ended September 30, 1999 to $65.3 million for the
three months ended September 30, 2000. The decrease was primarily due to the
fact that the Australian subsidiaries were placed in receivorship during the
second quarter of 2000 and no revenue was recorded subsequently.
Operating expenses which include rent expense of $10.6 million and $9.7
million for the three months ended September 30, 1999 and September 30, 2000,
respectively, decreased approximately 18.3% from $71.6 million for the three
months ended September 30, 1999 to $58.5 million for the three months ended
September 30, 2000. This decrease is a result of the same factors which led to a
decrease in revenue as discussed above. As a percentage of revenues, operating
expenses decreased from 94.2% for the three months ended September 30, 1999 to
89.6% for the three months ended September 30, 2000.
Corporate general and administrative expenses were $5.0 million and $3.2
million for the three months ended September 30, 2000 and September 30, 1999,
respectively. As a percentage of revenues, corporate, general and administrative
expenses were 7.7% for the three months ended September 30, 2000 and 4.2% for
the three months ended September 30, 1999.
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Depreciation and amortization for international operations was $2.7 million
for the three months ended September 30, 1999. No depreciation or amortization
was recorded during the third quarter of 2000. In accordance with 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"),
depreciation and amortization are no longer recognized after operations are
placed for sale.
Net interest expense was $3.1 million for the three months ended September
30, 1999 and $3.6 million for the three months ended September 30, 2000. Net
interest expense as a percentage of revenues increased from 4.1% for the three
months ended September 30, 1999 to 5.5% for the three months ended September 30,
2000.
OTHER NONREPORTABLE SEGMENTS AND CORPORATE GENERAL AND ADMINISTRATIVE
DEPARTMENTS
Nonreportable segments include temporary therapy and nursing staffing, home
health, assisted living, software development and other ancillary services.
Revenues from other nonreportable segments decreased 12.6% from $49.9 million
for the three months ended September 30, 1999 to $43.6 million for the three
months ended September 30, 2000. Operating expenses decreased 27.5% from $55.6
million for the three months ended September 30, 1999 to $40.3 for the three
months ended September 30, 2000. Total revenues and operating expenses for
nonreportable segments represent less than 10% of the consolidated Company's
results. Growth in revenues and operating expenses related to acquisitions in
the Company's home health, assisted living, disease state management, laboratory
and radiology subsidiaries were offset by significant declines in revenues and
operating expenses in the Company's temporary therapy staffing subsidiary which
was adversely affected by the long term care industry's transition to PPS.
Operating results were also negatively impacted by expenses related to software
development costs incurred by the Company's subsidiary, Shared Healthcare
Systems. 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 the middle of 2001.
Corporate general and administrative costs not directly attributed to
segments decreased 27.5% from $28.0 million for the three months ended September
30, 1999 to $20.3 million at September 30, 2000. As a percentage of consolidated
net revenues of $629.6 million and $609.5 million for the three months ended
September 30 1999 and 2000, respectively, corporate general and administrative
expenses not directly attributed to segments decreased from 4.4% to 3.3%.
Net interest expense not directly attributed to segments decreased 93.6% or
$32.2 million from $34.4 million for the three months ended September 30, 1999
to $2.2 million for the three months ended September 30, 2000. As a percentage
of consolidated net revenues, interest expense was 68.9% for the three months
ended September 30, 1999 and 5.0% for the three months ended September 30, 2000.
Sun discontinued charging Mediplex interest as of June 30, 2000.
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 third
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. 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 third quarter
of 2000. See "Note 7 - Convertible Trust Issued Preferred Securities" in the
Company's consolidated financial statements.
OTHER SPECIAL AND NON-RECURRING CHARGES
Financial Restructuring
During the third quarter of 1999, the Company recorded financial
restructuring costs of $7.0 million, primarily professional fees, related to the
Company's activities in preparation for its filing for protection under Chapter
11 of the U. S. Bankruptcy Code. See "Liquidity and Capital Resources".
Reorganization Costs
During the third quarter of 2000, the Company recorded net reorganization
costs of $125.6 million. See "Note 2 - Petitions for Reorganization under
Chapter 11" in the Company's consolidated financial statements.
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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
during the second quarter of 2000 related to the transfer of certain of its
facilities to new operators.
OTHER LONG-LIVED ASSETS
Gain on Sale of Assets
During the three months ended September 30, 2000, the Company recorded
gains on the sale of assets of approximately $3.8 million. Approximately $1.1
million and $2.7 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 5 - Impairment of Long-Lived Assets and Assets Held for Sale" in the
Company's consolidated financial statements.
Loss on Sale of Assets
During the third quarter of 2000, a net non-cash charge of approximately
$117.9 million was recorded to reduce the carrying amount of the medical supply
operations and certain domestic inpatient facilities which are classified as
assets held for sale in the Company's consolidated balance sheets. An additional
loss of $5.5 million related to the sale of the Spain operations was also
recorded in the third quarter of 2000. The charges are recorded in
reorganization costs, net, in the Company's consolidated statements of losses.
See "Note 5 - Impairment of Long-Lived Assets and Assets Held for Sale" and
"Note 14 - Subsequent Events" in the Company's consolidated financial
statements.
During the third quarter of 1999, the Company recorded a net non-cash
charge of approximately $28.4 million 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. See "Note 5 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 third quarter of 1999, the Company recorded an impairment loss
of $14.9 million primarily related to the goodwill associated with the Company's
therapy equipment manufacturer. In October 1999, the Company decided to close
this operation.
CONSOLIDATED RESULTS OF OPERATIONS
The net loss for the three months ended September 30, 2000 was $135.3
million compared to a net loss of $236.8 million for the three months ended
September 30, 1999. The loss before considering income taxes, gain on sale of
assets, net, impairment loss and reorganization costs was $10.6 million for the
three months ended September 30, 2000 compared to a loss of $186.5 million
before considering income taxes, financial restructuring costs, loss on sale of
assets, net and impairment loss for the three months ended September 30, 1999.
The net loss during the three months ended September 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.
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 September 30, 2000 was approximately $36.9 million. The contractual
dividends that were not paid or accrued for the three months ended September 30,
2000 were approximately $5.2 million.
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Income tax expense for the three months ended September 30, 2000 and for
the three months ended September 30, 1999 was $0.1 million. In the three months
ended September 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 the three months ended September 30, 1999 the Company
established a valuation allowance for U.K. deferred tax assets resulting from
its net operating losses which may not be realizable.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
INPATIENT SERVICES
Net revenues increased approximately $16.3 million from $1.28 billion at
September 30, 1999 to $1.30 billion at September 30, 2000. On a same store
basis, net revenues increased approximately $128.4 million from $1.12 billion
for the nine months ended September 30, 1999 to $1.25 billion for the nine
months ended September 30, 2000, a 11.5% increase. Net revenues for 1999 include
negative revenue adjustments of approximately $88.1 million. Excluding the
negative revenue adjustments for 1999, net revenues increased $40.3 or 3.3%.
This increase is primarily the result of enhanced Medicaid rates combined with
improvement of certain Medicare rates during the third quarter of 2000.
On a same store basis, operating expenses, which include rent expense of
$135.0 million and $134.3 million for the nine months ended September 30, 1999
and 2000, respectively, increased 1.8% from $1.13 billion for the nine months
ended September 30, 1999 to $1.15 billion for the nine months ended September
30, 2000. Operating expenses as a percentage of net revenues excluding the
effect the negative revenue adjustments for 1999, decreased from 93.5% for the
nine months ended September 30, 1999 to 92.5% for the nine months ended
September 30, 2000. The increase is primarily due to increased labor costs.
On a same store basis, corporate general and administrative expenses, which
include regional costs, related to the supervision of operations, were $30.1
million and $22.4 million for the nine months ended September 30, 2000 and
September 30, 1999, respectively. Excluding the negative revenue adjustments for
1999, as a percentage of net revenues, corporate general and administrative
expenses were 2.4% and 1.9% for the nine months ended September 30, 2000 and
September 30, 1999, respectively. 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 2000 and 1999.
On a same store basis, provision for losses on accounts receivable
decreased 77.9% from $31.7 million for the nine months ended September 30, 1999
to $7.0 million for the nine months ended September 30, 2000. Excluding the
negative revenue adjustments for 1999, as a percentage of net revenues,
provision for losses on accounts receivable decreased from 2.6% for the nine
months ended September 30, 1999 to 0.6% for the nine months ended September 30,
2000. During the nine months ended September 30, 1999, the Company increased its
reserve due to the increased aging of certain accounts receivable. An equivalent
increase was not necessary during the nine months ended September 30, 2000.
On a same store basis, depreciation and amortization decreased 34.0% from
$23.5 million for the nine months ended September 30, 1999 to $15.5 million for
the nine months ended September 30, 2000. Excluding the negative revenue
adjustments for 1999, as a percentage of net revenues, depreciation and
amortization expense was 1.2% and 1.9% for the nine months ended September 30,
2000 and 1999, respectively. The decrease is primarily a result of write-downs
during 1999 of goodwill and certain other long-lived assets pursuant to SFAS
121.
On a same store basis, net interest expense increased 38.8% from $4.9
million for the nine months ended September 30, 1999 to $6.8 million for the
nine months ended September 30, 2000. Excluding the negative revenue adjustments
for 1999, as a percentage of net revenues, interest expense increased from 0.4%
for the nine months ended September 30, 1999 to 0.5% for the nine months ended
September 30, 2000. The increase is primarily the result of interest incurred
related to the late filing of certain Medicare cost reports.
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REHABILITATION AND RESPIRATORY THERAPY SERVICES
Net revenues from rehabilitation and respiratory therapy services decreased
$24.4 million, or 13.3%, from $183.7 million for the nine months ended September
30, 1999 to $159.3 million for the nine months ended September 30, 2000.
Revenues from services provided to affiliated facilities decreased $11.2
million, or 11.3%, from $99.3 million for the nine months ended September 30,
1999 to $88.1 million for the nine months ended September 30, 2000. Revenues
from services provided to nonaffiliated facilities decreased approximately $13.2
million, or 15.6%, from $84.3 million for the nine months ended September 30,
1999 to $71.2 million or the nine months ended September 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 decline in net revenues has continued,
with a significant reduction in contracts from the third quarter of 1999 to the
third quarter of 2000. Specifically, there were 1,150 affiliated and
nonaffiliated contracts as of September 30, 2000 compared to 1,638 affiliated
and nonaffiliated contracts as of September 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 29.7% from $175.4 million for the nine months
ended September 30, 1999 to $123.3 million for the nine months ended September
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 - Restructuring Costs"). The Company's rehabilitation subsidiary went
through a significant restructuring in the first quarter of 1999 which continued
to dramatically reduce its cost structure during 2000 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.
Provision for losses on accounts receivable decreased 72.0% from $27.1
million for the nine months ended September 30, 1999 to $7.6 million for the
nine months ended September 30, 2000. As a percentage of net revenues, provision
for losses on accounts receivable decreased from 14.8% for the nine months ended
September 30, 1999 to 4.8% for the nine months ended September 30, 2000. During
the nine months ended September 30, 1999, the Company increased its reserves due
to the impact of PPS, which for certain nonaffiliated customers had negatively
affected cash flows adversely affecting the collectiblity of amounts due the
Company. An equivalent increase of reserves for the nine months ended September
30, 2000 was not necessary.
Depreciation and amortization decreased 59.0% from $6.1 million for the
three months ended September 30, 1999, to $2.5 million for the three months
ended September 30, 2000. The decrease is primarily a result of the write-downs
during 1999 of goodwill and certain other long-lived assets pursuant to SFAS
121. As a percentage of net revenues, depreciation and amortization expense
decreased from 3.3% for the three months ended September 30, 1999 to 1.6% for
the three months ended September 30, 2000, respectively.
PHARMACEUTICAL AND MEDICAL SUPPLY OPERATIONS
Net revenues from pharmaceutical and medical supply services increased $2.8
million, or 1.3%, from $221.9 million for the nine months ended September 30,
1999 to $224.7 million for the nine months ended September 30, 2000.
Pharmaceutical services' net revenues from nonaffiliated parties increased
approximately $3.7 million, or 3.0% while net revenues from affiliated parties
decreased approximately $1.0 million, or 2.4%. 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 $7.2
million, or 19.9% while net revenues from affiliated parties increased
approximately $7.3 million, or 40.6%. 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.
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Operating expenses increased $0.6 million from $204.5 million for the nine
months ended September 30, 1999 to $205.1 million for the nine months ended
September 30, 2000. Operating expenses as a percentage of net revenues decreased
from 92.2% for the nine months ended September 30, 1999 to 91.3% for the nine
months ended September 30, 2000. Pharmaceutical services' operating expenses
increased approximately $3.9 million, or 2.6%. The increase is primarily due to
increases in labor, benefit and insurance costs along with an increase in costs
of good sold based on an increase in sales. Medical supply services' operating
expenses decreased approximately $3.4 million, or 6.3% from $54.3 million for
the nine months ended September 30, 1999 to $50.9 million for the nine months
ended September 30, 2000. 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 $2.7 and $1.1
million for the nine months ended September 30, 2000 for pharmaceutical services
and medical supply services, respectively. Corporate general and administrative
expenses as a percentage of net revenues were 1.7% for the nine months ended
September 30, 2000. The Company did not allocate corporate general and
administrative expenses to the Pharmaceutical and Medical Supply Services
segment during the nine months ended September 30, 1999. The Company began
allocating costs directly attributable to the segment in January 2000.
Provision for losses on accounts receivable decreased $9.1 million, or
67.9%, from $13.4 million for the nine months ended September 30, 1999 to $4.3
million for the nine months ended September 30, 2000. As a percentage of net
revenues, the provision for losses on accounts receivable decreased from 6.0%
for the nine months ended September 30, 1999 to 1.9% for the nine months ended
September 30, 2000. The pharmaceutical services' provision for losses on
accounts receivable decreased approximately $7.9 million or 76.0%. During the
nine months ended September 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 nine months ended September 30, 2000. The
Medical Supply services' provision for losses on accounts receivable decreased
approximately $1.0 million, or 34.5%. During the nine months ended September 30,
1999, the Company increased its reserve due to the increased aging of certain
accounts receivable. An equivalent increase was not necessary during the nine
months ended September 30, 2000.
Depreciation and amortization decreased $0.9 million, or 15.3%, from $5.9
million for the nine months ended September 30, 1999 to $5.0 million for the
nine months ended September 30, 2000. As a percentage of net revenues,
depreciation and amortization expense decreased from 2.7% for the nine months
ended September 30, 1999 to 2.2% for the nine months ended September 30, 2000.
INTERNATIONAL OPERATIONS
Revenues from international operations decreased $10.3 million, or 4.7%,
from $221.2 million for the nine months ended September 30, 1999 to $210.9
million for the nine months ended September 30, 2000.
Operating expenses, which include rent expense of $29.6 million and $30.9
million for the nine months ended September 30, 1999 and September 30, 2000,
respectively, decreased approximately 3.2% from $203.1 million for the nine
months ended September 30, 1999 to $196.7 million for the nine months ended
September 30, 2000. As a percentage of revenues, operating expenses increased
from 91.8% for the nine months ended September 30, 1999 to 93.3% for the nine
months ended September 30, 2000.
Depreciation and amortization for international operations decreased 74.7%
from $9.9 million for the nine months ended September 30, 1999 to $2.5 million
for the nine months ended September 30, 2000. No depreciation or amortization
was recorded during the third quarter of 2000. In accordance with 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"),
depreciation and amortization are no longer recognized after operations are
placed for sale.
Net interest expense decreased 1.0% from $9.9 million for the nine months
ended September 30, 1999 to $9.8 million for the nine months ended September 30,
2000. Net interest expense as a percentage of revenues increased from 4.5% for
the nine months ended September 30, 1999 to 4.6% for the nine months ended
September 30, 2000.
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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. Revenues
from other nonreportable segments decreased 18.5% from $167.9 million for the
nine months ended September 30, 1999 to $136.9 million for the nine months ended
September 30, 2000. Operating expenses decreased 26.3% from $173.6 million for
the nine months ended September 30, 1999 to $127.9 for the nine months ended
September 30, 2000. Total revenues and operating expenses for nonreportable
segments represent less than 10% of the consolidated Company's results. Growth
in revenues and operating expenses related to acquisitions in the Company's home
health, assisted living, disease state management, laboratory and radiology
subsidiaries were offset by significant declines in revenues and operating
expenses in the Company's temporary therapy staffing subsidiary which was
adversely affected by the long term care industry's transition to PPS. Operating
results were also negatively impacted by expenses related to software
development costs incurred by the Company's subsidiary, Shared Healthcare
Systems. 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 the middle of 2001.
Corporate general and administrative costs not directly attributed to
segments decreased 21.3% from $87.3 million for the nine months ended September
30, 1999 to $68.7 million at September 30, 2000. As a percentage of consolidated
net revenues of $1.90 billion and $1.87 billion for the nine months ended
September 30, 1999 and 2000, respectively, corporate general and administrative
expenses not directly attributed to segments decreased from 4.6% to 3.7%.
Net interest expense not directly attributed to segments decreased 91.9%
from $98.6 million for the nine months ended September 30, 1999 to $8.0 million
for the nine months ended September 30, 2000. As a percentage of consolidated
net revenues, interest expense decreased from 5.2% for the nine months ended
September 30, 1999 to 0.4% for the nine months ended September 30, 2000. The
decrease was related to (i) a decrease in the Company's weighted average
interest rate resulting from the issuance of $150 million of 9 3/8% Notes in May
1998, (ii) higher interest rates and borrowing costs under the Company's Senior
Credit Facility as a result of non-compliance under certain financial covenants
under the Senior Credit Facility, and (iii) an increase in borrowings under the
Company's Senior Credit Facility principally related to various acquisitions
during 1998.
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. 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
September 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 nine months ended September 30, 2000. See "Note
7 - Convertible Trust Issued Preferred Securities" in the Company's consolidated
financial statements.
OTHER SPECIAL AND NON-RECURRING CHARGES
Financial Restructuring
During the nine months ended September 30, 1999, the Company recorded
financial restructuring costs of $13.3 million, primarily professional fees,
related to the Company's activities in response to the defaults under the Senior
Credit Facility, the 9.375% Subordinated Notes and the 9.5% Subordinated Notes
and in preparation for its filing for protection under Chapter 11 of the U.S.
Bankruptcy Code. See "Liquidity and Capital Resources".
Reorganization Costs
The Company recorded net reorganization costs of approximately $297.7
million during the nine months ended September 30, 2000. See "Note 2 - Petitions
for Reorganization under Chapter 11" in the Company's consolidated financial
statements.
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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.
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.
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. As of September 30, 2000, the Company had paid an
aggregate of approximately $2.8 million in termination benefits to employees
that had been terminated, and to lessors in lease termination costs, under the
1998 corporate restructuring plan. As of September 30, 2000 and December 31,
1999, the Company's 1998 corporate restructuring costs reserve balance relating
to employee and lease terminations was approximately $1.4 and $2.0 million,
respectively. As of 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. The Company's 1999 corporate restructuring reserve
balance was approximately $4.5 million as of September 30, 1999. As of December
31, 1999, the Company's 1999 corporate restructuring plan was complete.
OTHER LONG-LIVED ASSETS
Gain on Sale of Assets
During the nine months ended September 30, 2000, the Company recorded gains
on the sale of assets of approximately $12.8 million. Approximately $9.1 million
and $3.7 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 5 - Impairment of
Long-Lived Assets and Assets Held for Sale" in the Company's consolidated
financial statements.
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Loss on Sale of Assets
During the nine months ended September 30, 2000, the Company recorded
losses on the sale of assets of approximately $283.9 million recorded in
reorganization costs, net, in the Company's consolidated statements of losses.
See "Note 2 - Petitions for Reorganization under Chapter 11" and "Note 5 -
Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's
consolidated financial statements.
Impairment Loss
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 business unit. The assets are considered to be impaired when
the expected future cash flows of the business unit do not exceed the carrying
balances of the goodwill or other long-lived assets. In the second quarter of
1999, the Company recorded a non-cash impairment charge of $400.0 million
related to the Company's estimate of goodwill and other asset impairment. The
charge included approximately $289.2 million related to 187 of its inpatient
facilities segment, $39.5 million related to its rehabilitation and respiratory
therapy services segment, $26.2 million related to is pharmaceuticals and
medical supply services, $33.7 million related to the certain inpatient
facilities in the United Kingdom, and $0.6 million related to seven pharmacies
in its pharmaceutical and medical supply services segment in the United Kingdom
and approximately $10.8 million related to other operations.
The significant write-down of goodwill resulted from the continued adverse
impact of PPS on the level of Medicare reimbursement and the demand for the
Company's rehabilitation and respiratory therapy and pharmaceutical and medical
supply services. Additionally, certain of the United Kingdom facilities have not
achieved profitability targets established upon their acquisition.
In the third quarter of 1999, the Company recorded a non-cash impairment
charge of $14.9 million which primarily related to the goodwill associated with
the Company's therapy equipment manufacturer. In October 1999, the Company
decided to close this operation.
CONSOLIDATED RESULTS OF OPERATIONS
The net loss for the nine months ended September 30, 2000 was $332.4
million compared to net loss of $938.6 million for the nine months ended
September 30, 1999. Before considering the gain on sale of assets, the legal and
regulatory costs, the impairment loss, reorganization costs, the loss before
income taxes and cumulative effect of change in accounting principle for the
nine months ended September 30, 2000 was $38.4 million compared to a $389.5
million loss before considering income taxes and cumulative effect of change in
accounting principle, loss on the termination of interest rate swaps, the
financial restructuring costs, loss on sale of assets, net, impairment loss and
corporate restructuring costs for the nine months ended September 30, 1999. The
net loss during the nine months ended September 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.
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 nine months
ended September 30, 2000 was approximately $109.0 million. The contractual
dividends that were not paid or accrued for the nine months ended September 30,
2000 were approximately $16.2 million.
Income tax expense for the nine months ended September 30, 2000 was $0.2
million compared to $1.0 million for the nine months ended September 30, 1999.
In the nine months ended September 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.
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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 December 31, 2000, up to approximately $138.7 million was available
to the Company under the DIP Financing Agreement, of which amount the Company
had borrowed approximately $66.5 million and had issued approximately $34.7
million in letters of credit. In addition to the available funds under the DIP
Financing Agreement, the Company had cash book balances at December 31, 2000 of
approximately $27.0 million. The combination of the Company's cash balances and
available funds, less borrowings and letters of credit, under the DIP Financing
Agreement was $64.5 million and $160.8 million as of December 31, 2000 and 1999,
respectively. This decrease in liquidity is due primarily to the losses that the
Company's operations have incurred in 2000, which have been adversely affected
by the slower than expected pace of sales of non-profitable facilities in 2000.
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 amended 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 amended 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
amended DIP Financing Agreement was repaid. In such event, the Company's
liquidity would be insufficient to fund the Company's ongoing operations. See
"Note 3 - Debtor-in-Possession Financing" in the Company's consolidated
financial statements.
Under the Bankruptcy Code, actions to collect prepetition indebtedness are
enjoined. In addition, the Company may reject real estate leases, unexpired
lease obligations and other prepetition executory contracts under the Bankruptcy
Code. The Company is analyzing and reviewing its lease portfolio and expects to
terminate certain leases and/or seek rent relief for certain facilities. Parties
affected by these rejections may file claims with the Bankruptcy Court. If the
Company is able to successfully reorganize, substantially all liabilities as of
the petition date would be treated under a plan of reorganization to be voted
upon by all impaired classes of creditors and equity security holders and
approved by the Bankruptcy Court.
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's exclusive period to file a plan of reorganization has been
extended to March 9, 2001 and to solicit acceptances of the plan has been
extended to May 8, 2001.
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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 September 30, 2000 and
December 31, 1999 in the Company's consolidated balance sheets. At September 30,
2000, the Company had a working capital deficit of $155.3 million and cash and
cash equivalents of $49.2 million as compared to a working capital deficit of
$17.3 million and cash and cash equivalents of $25.0 million at December 31,
1999.
For the nine months ended September 30, 2000, net cash used for operating
activities was approximately $4.6 million compared to net cash provided by
operating activities for the nine months ended September 30, 1999 of
approximately $4.4 million. The net cash used for operating activities for the
nine months ended September 30, 2000 is primarily from the disbursement of
reorganization costs upon approval from the Bankruptcy Court.
The Company incurred approximately $13.9 million and $39.2 million in
capital expenditures during the three and nine month periods ended September 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 September 30, 2000, under various contracts of
approximately $3.0 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 nine month periods ended September 30, 2000, the
Company recorded net reorganization costs of $125.6 million and $297.7 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 will
not have a material adverse impact on the Company's financial condition and
results of operations. 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 nine month periods ended September 30, 2000 were approximately
$7.9 million and $25.1 million, respectively. Claims paid under the professional
liability for the three and nine month periods ended September 30, 2000 were
immaterial.
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During 1999 and through the third quarter of 2000, the Company also
conducted business in the United Kingdom, Spain, Australia and Germany.
International operations accounted for approximately 11.3% and 11.6% of the
Company's total net revenues during the nine months ended September 30, 2000 and
1999, respectively, and 9.2% of the Company's consolidated total assets at
September 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. During
the third quarter of 1999, the Company recorded a non-cash charge to record
additional losses on assets held for sale of $33.2 million, or $92.3 million for
the nine months ended September 30, 1999. These charges were to further reduce
the carrying value of the assets based upon ongoing negotiations and market
conditions at that time. The additional losses and loss reversals are recorded
in loss on sale of assets, net in the Company's consolidated statements of
losses. See "Note 5 - 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 began soliciting offers to
purchase its international operations. The Company recognized a loss of
approximately $153.4 million during the nine months ended September 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 nine months ended September 30, 2000, Sun divested 18 pharmacies in
the United Kingdom. The aggregate cash consideration received for these
divestitures during the nine months ended September 30, 2000 was approximately
$21.8 million. See "Note 5 - 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 $7.6 million
in cash. 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 5 - Impairment of
Long-Lived Assets and Assets Held for Sale" and "Note 14 - 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 5 - 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 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 pharmacies were sold effective October 31, 2000 for
approximately $1.3 million. See "Note 5 - 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 14 -
Subsequent Events" in the Company's consolidated financial statements. The
Company is also considering selling all, or a portion of, its corporate
headquarters buildings in Albuquerque, New Mexico. The Company is unable to
determine the amount of proceeds it could receive if such a sale were completed.
During the second quarter of 2000, the Company divested 20 skilled nursing
facilities and one assisted living facility. During the third quarter of 2000,
the Company divested 6 skilled nursing facilities. See "Note 5 - Impairment of
Long-Lived Assets and Assets Held for Sale" in the Company's consolidated
financial statements. Subsequent to September 30, 2000 and through December 29,
2000, the Company had identified 50 skilled nursing facilities, 6 comprehensive
outpatient rehabilitation facilities, a medical office building and other
non-core businesses for disposal. See "Note 14 - Subsequent Events" in the
Company"s consolidated financial statements.
In the first quarter of 2000, the Company entered into an agreement to sell
16 assisted living facilities, one of which 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. 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 was approximately $0.2 million. The aggregate
debt, capital leases and other liabilities assumed by the purchaser totaled
approximately $15.8 million. See "Note 5 - 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 September 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 U.S. Bankruptcy Court for the District of Delaware (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.
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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. Pursuant to an agreement among the parties, the Company was
dismissed without prejudice in December 2000. Although the Company intends to
vigorously defend the individual defendants in this matter who are indemnified
by the Company, 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
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.
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The DOJ and the Company have been having ongoing discussions and the
Company expects to enter into a global settlement of these investigations. 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. The Company is
unable to determine at this time whether 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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 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 publicly filed financial statements for the year ended December 31,
1999 and the quarters ended March 31, June 30, and September 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
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: January 19, 2001 By: /s/ Robert D. Woltil *
--------------------------
Robert D. Woltil
Chief Financial Officer
* Signing on the behalf of the Registrant and as principal financial officer.
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