SOURCE: Sun Healthcare Group, Inc.

October 31, 2006 22:03 ET

Sun Healthcare Group, Inc. Reports Third Quarter Earnings; Continues to Show Improvement Over Comparable Period's Financial Results and Key Operating Metrics

IRVINE, CA -- (MARKET WIRE) -- October 31, 2006 -- Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced results for the third quarter ended Sept. 30, 2006.

Consolidated Earnings

For the quarter ended Sept. 30, 2006, Sun reported total net revenues of $273.9 million and a net loss of $0.5 million or a loss of $0.02 per fully-diluted share. For the comparable quarter ended Sept. 30, 2005, total net revenues were $200.6 million, which included $0.9 million in retroactive rate increases, and net income was $7.3 million or $0.48 per fully-diluted share. The 2005 net income included a $7.7 million gain from receipt of the Omnicare holdback related to the sale of Sun's pharmaceutical operations in 2003. Net revenues for the quarter ended Sept. 30, 2006, increased $73.3 million as compared to net revenues for the quarter ended Sept. 30, 2005, primarily as a result of the Peak Medical Corporation acquisition in December 2005.

From continuing operations for the quarter ended Sept. 30, 2006, Sun reported a loss of $0.6 million or a loss of $0.02 per fully-diluted share, as compared to a loss from continuing operations of $1.7 million or a loss of $0.11 per fully-diluted share, for the same period in 2005. The 2006 third-quarter EBITDAR from continuing operations was $23.8 million, or 8.7 percent of revenues, as compared to $12.9 million, or 6.4 percent of revenues, from continuing operations for the same period in 2005, an improvement of $10.9 million. EBITDA from continuing operations for the third quarter of 2006 was $10.0 million, or 3.6 percent of revenues, as compared to $3.5 million, or 1.7 percent of revenues, for the same period in 2005, an improvement of $6.5 million.

During the quarter ended Sept. 30, 2006, Sun announced the acquisition of Preferred Hospice of Oklahoma and the pending sale of its home health services segment, SunPlus Home Health Services, and Sun substantially completed, as required by GAAP, the formal valuation of the assets acquired and liabilities assumed in connection with the acquisition of Peak in December 2005. Simultaneous with the acquisition of Preferred Hospice, the management agreement for the five hospice programs owned by Sun were terminated, resulting in a charge of $1.0 million. After the announcement of the sale of SunPlus, the home health services segment was reclassified as a discontinued operation for all periods reported, including periods in 2005.

The 2006 third-quarter loss from continuing operations of $0.6 million included the following pre-tax adjustments:

(i)     a $1.0 million cumulative charge to depreciation and amortization
        expense, related to prior periods, as a result of the finalization
        of the owned property, plant and equipment valuation related to the
        Peak acquisition;
(ii)    a $1.0 million charge as a result of the termination of a
        management fee contract associated with the acquisition of hospice
        operations during the quarter; and
(iii)   a $0.2 million charge for the retroactive wage increases related to
        prior period rate increases in California, which also impacted
        EBITDAR and EBITDA;
        offset by
(iv)    a $0.8 million credit to workers' compensation expense, related to
        prior periods, as a result of the finalization of the insurance
        reserves related to the Peak acquisition, which also impacted
        EBITDAR and EBITDA.
Excluding the adjustments discussed above, the 2006 third-quarter EBITDAR from continuing operations was $23.2 million, or 8.5 percent of revenues, as compared to $12.0 million, or 6.0 percent of revenues, in the 2005 third quarter, and the 2006 third-quarter EBITDA from continuing operations was $9.4 million, or 3.4 percent, as compared to $2.6 million, or 1.3 percent of revenues, in the 2005 third quarter.

On a pro forma basis, including the historical operating results for Peak, which was acquired in December 2005, and excluding the adjustments discussed above in the first paragraph, total net revenues from continuing operations for the third quarter of 2005 would have been $262.1 million, the loss from continuing operations would have been $0.4 million or a loss of $0.02 per fully-diluted share, EBITDAR from continuing operations would have been $21.3 million, or 8.1 percent of revenues, and EBITDA from continuing operations would have been $8.1 million, or 3.1 percent of revenues. When compared to third-quarter 2006 results from continuing operations, excluding the adjustments discussed above, revenue increased $11.9 million or 4.5 percent; EBITDAR increased $1.9 million or 8.9 percent; EBITDA increased $1.3 million or 16.2 percent; and income from continuing operations increased $0.6 million to $0.2 million or 156.3 percent.

"We continue to show comparable period margin improvement. We are well positioned for the remainder of the year," said Richard K. Matros, Sun's chairman and chief executive officer. "The purchase accounting adjustments on the Peak-owned assets further validate the long-term value created by that transaction," Matros continued.

For the nine months ended Sept. 30, 2006, Sun reported total net revenues of $818.3 million and net income of $9.1 million or $0.29 per fully-diluted share. For the comparable nine months ended Sept. 30, 2005, total net revenues were $590.7 million with net income of $13.1 million or $0.85 per fully-diluted share. Net revenues for the nine months ended Sept. 30, 2006, increased $227.6 million as compared to net revenues for the nine months ended Sept. 30, 2005, primarily as a result of the Peak acquisition.

From continuing operations for the nine months ended Sept. 30, 2006, Sun reported income of $7.2 million or $0.23 per fully-diluted share, as compared to a loss from continuing operations of $2.9 million or a loss of $0.19 per fully-diluted share, for the same period in 2005. EBITDAR from continuing operations for the nine months ended Sept. 30, 2006, was $78.4 million, or 9.6 percent of revenues, as compared to $40.6 million, or 6.9 percent of revenues, from continuing operations for the same period in 2005, an improvement of $37.8 million. EBITDA from continuing operations for the nine months ended Sept. 30, 2006, was $38.0 million, or 4.6 percent of revenues, as compared to $12.5 million, or 2.1 percent of revenues, for the same period in 2005, an improvement of $25.5 million.

During the nine months ended Sept. 30, 2006, Sun released net prior year's self-insurance obligations of $5.4 million. During the comparable nine months ended Sept. 30, 2005, Sun released net prior year's self-insurance obligations of $0.6 million and recognized revenue of $0.3 million related to prior periods for retroactive rate increases. Excluding the adjustments discussed above, EBITDAR from continuing operations for the nine months ended Sept. 30, 2006, was $72.4 million, or 8.8 percent of revenues, as compared to $40.3 million, or 6.8 percent of revenues, for the nine months ended Sept 30, 2005, and the EBITDA from continuing operations for the nine months ended Sept. 30, 2006, was $32.1 million, or 3.9 percent of revenues, as compared to $11.6 million, or 2.0 percent of revenues, for the nine months ended Sept 30, 2005.

On a pro forma basis, including the historical operating results for Peak, and excluding the adjustments discussed above, total net revenues from continuing operations for the nine months ended Sept. 30, 2005, would have been $774.6 million, income from continuing operations would have been $2.5 million or $0.10 per fully-diluted share, EBITDAR from continuing operations would have been $67.5 million, or 8.7 percent of revenues, and EBITDA from continuing operations would have been $27.7 million, or 3.6 percent of revenues. When compared to the nine-month results from continuing operations ended Sept. 30, 2006, excluding the adjustments discussed above, revenue increased $43.7 million or 5.6 percent; EBITDAR increased $4.9 million or 7.3 percent; EBITDA increased $4.4 million or 15.9 percent; and income from continuing operations increased $1.6 million to $4.2 million or 65.4 percent.

Inpatient Business

Net revenues from inpatient services operations increased $70.8 million, or 46.1 percent, to $224.3 million for the quarter ended Sept. 30, 2006, from $153.5 million for the same period in 2005. The revenue gain was primarily due to the $64.5 million of revenue attributable to Peak's operations and a $7.9 million improvement in Sun's same store inpatient operations, offset by a $1.6 million decrease due to disposed facilities. Net segment income increased $3.0 million to $11.3 million for the quarter ended Sept. 30, 2006, from $8.3 million for the quarter ended Sept. 30, 2005. Net segment EBITDAR increased $11.5 million to $32.2 million for the quarter ended Sept. 30, 2006, from $20.7 million for the same period in 2005, and net segment EBITDA increased $7.2 million to $18.8 million for the quarter ended Sept. 30, 2006, from $11.6 million for the same period in 2005. Net segment EBITDAR margin increased to 14.4 percent for the quarter ended Sept. 30, 2006, from 13.5 percent for the same period in 2005. Net segment EBITDA margin increased to 8.4 percent for the quarter ended Sept. 30, 2006, from 7.6 percent for the same period in 2005.

Substantially all of the adjustments discussed above were related to the inpatient business. Excluding such adjustments with the exception of the $1.0 million charge for the termination of the hospice management contract, the 2006 third-quarter net segment income for inpatient services from continuing operations was $11.8 million, or 5.3 percent of revenues, as compared to $7.4 million, or 4.8 percent of revenues in the third quarter of 2005; the 2006 third-quarter net segment EBITDAR for inpatient services from continuing operations was $31.7 million, or 14.1 percent of revenues, as compared to $19.8 million, or 13.0 percent of revenues, in the third quarter of 2005; and the 2006 third-quarter net segment EBITDA for inpatient services from continuing operations was $18.3 million, or 8.1 percent, as compared to $10.7 million, or 7.0 percent of revenues, in the third quarter of 2005.

On a pro forma basis with historical Peak results included for the third quarter of 2005, net revenues from inpatient services operations would have been $215.8 million and the increase in net revenues in the third quarter of 2006 would have been $8.5 million, or 3.9 percent. Excluding the $0.9 million retroactive rate increase, net revenues from inpatient services would have been $214.9 million and the increase in net revenues in the third quarter of 2006 would have been $9.4 million, or 4.3 percent. The revenue gain of $9.4 million was primarily attributable to:

(i)     a 50 basis point improvement in Medicare patient mix going from
        12.9 percent in third-quarter 2005 to 13.4 percent in third
        quarter 2006, or $2.2 million in revenues;
(ii)    a 5.9 percent increase in our LTC Part A Medicare rates from
        $324.99 in third-quarter 2005 to $344.06 in third-quarter 2006,
        or $2.8 million in revenues;
(iii)   a 3.8 percent increase in our Medicaid rates from $139.29 in third-
        quarter 2005 to $144.63 in third-quarter 2006, or $3.9 million in
        revenues; and
(iv)    an increase in revenues from commercial insurance of $1.5 million;
        offset by:
(v)     a decrease in Medicaid occupancy driven by the increase in Medicare
        mix that reduced revenues by $1.3 million; and
(vi)    a decrease in Medicare Part B revenue of $0.4 million.
On a pro forma basis, with Peak results included for the third quarter of 2005 and excluding the adjustments discussed above, net segment income in the third quarter of 2005 would have been $10.7 million, net segment EBITDAR would have been $29.9 million and net segment EBITDA would have been $17.1 million. When compared to net segment income, net segment EBITDAR and net segment EBITDA for the quarter ended Sept. 30, 2006, excluding the adjustments discussed above, with the exception of the $1.0 million charge for the termination of the hospice management contract, net segment income increased $1.1 million, or 9.6 percent; net segment EBITDAR increased $1.8 million, or 5.9 percent; and net segment EBITDA increased $1.2 million, or 7.0 percent. Pro forma net segment EBITDAR and EBITDA margins for the quarter ended Sept. 30, 2005, would have been 13.9 percent and 7.9 percent, respectively.

"Our critical operating metrics continue to show marked improvement," Matros said. "We have established a strong base with which to integrate the Harborside Healthcare acquisition that we announced on Oct.19, 2006," Matros continued.

Ancillary Business

Net revenues from Sun's ancillary business operations, which include SunDance Rehabilitation Corporation and CareerStaff Unlimited, Inc., net of affiliated revenues, increased $2.6 million, or 5.4 percent, to $49.7 million for the quarter ended Sept. 30, 2006, from $47.1 million for the same period in 2005. Net segment income increased $0.9 million, or 34.1 percent, to $3.4 million for 2006 from $2.5 million for 2005. Net segment EBITDA increased $1.1 million, or 33.6 percent, to $4.2 million for the quarter ended Sept. 30, 2006, from $3.1 million for the same period in 2005.

"Our consolidated ancillary results show improvement in key metrics in all segments for the first time, driven by the as expected improvement of our rehabilitation segment along with the continued strong performance of our staffing segment," Matros said.

Guidance Update

Sun's previously announced guidance for 2006 included the home health services segment. As a result of the pending sale of SunPlus, the home health services segment was reclassified as a discontinued operation. The following results from operations of the home health services segment for the nine months ended Sept. 30, 2006, were reclassified to discontinued operations:

--  Revenues -- $46.2 million;
--  EBITDAR -- $3.5 million;
--  EBITDA -- $2.1 million; and
--  Segment Income -- $1.4 million.
    
In addition, as a result of the completion of the purchase accounting adjustments for Peak's owned property, annualized depreciation on the purchased assets will be $3.8 million. As a result of these changes, Sun's revised guidance for 2006, excluding the home health services segment, is as follows:
--  Revenues -- $1,095.0 to $1,105.0 million;
--  EBITDAR -- $99.5 to $102.0 million (unchanged);
--  EBITDA -- $42.5 million to $45.0 million (unchanged);
--  Pre-Tax Earnings -- $11.0 million to $13.0 million; and
--  Income from Continuing Operations -- $6.9 to $7.8 million.
    
"Our third-quarter performance continues to be in line with the previously issued guidance. That said, the revised guidance shows stronger EBITDAR and EBITDA operating margins effectively resulting in raised guidance in continuing operations, despite the anticipated sale of our home health operating segment. The earnings revision was impacted by both that segment moving to discontinued operations and the change in depreciation," Matros continued.

Conference Call

Sun's senior management will hold a conference call to discuss the Company's third-quarter operating results on Wednesday, Nov. 1, 2006, at 1 p.m. EST / 10 a.m. PST. To listen to the conference call, dial (877) 516-8526 and refer to Sun Healthcare Group. A recording of the call will be available from 4 p.m. EST on Nov. 1 until midnight EST on Nov. 8 by calling (800) 642-1687 and using access code 7839652.

About Sun Healthcare Group, Inc.

Sun Healthcare Group, Inc., with executive offices located in Irvine, California, owns SunBridge Healthcare Corporation and other affiliated companies that operate long-term and postacute care facilities in many states. In addition, the Sun Healthcare Group family of companies provides therapy through SunDance Rehabilitation Corporation, medical staffing through CareerStaff Unlimited, Inc., and hospice services through Preferred Hospice.

Statements made in this release that are not historical facts are "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to, statements containing words such as "anticipate," "believe," "plan," "estimate," "expect," "hope," "intend," and similar expressions. Factors that could cause actual results to differ are identified in the public filings made by Sun with the Securities and Exchange Commission and include changes in Medicare and Medicaid reimbursements, including the impact of the Deficit Reduction Act and regulations implementing it; potential liability for losses not covered by, or in excess of, Sun's insurance; the effects of government regulations and investigations; the Company's ability to generate cash flow sufficient to operate the business; Sun's ability to identify, complete and integrate future acquisitions; including the ability to complete the Harborside acquisition and integrate to operations with those of Sun; increasing labor costs and the shortage of qualified healthcare personnel; and loss of key management personnel. More information on factors that could affect Sun's business and financial results are included in the public filings made with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, a copy of which is available on Sun's web site, www.sunh.com.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond Sun's control. The Company cautions investors that any forward-looking statements made by Sun are not guarantees of future performance. Sun disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

EBITDA and EBITDAR as used in this press release, and EBITDAM and EBITDARM as used in the accompanying tables, which are non-GAAP financial measures, are each reconciled to net income (loss) in the accompanying tables. The accompanying tables also set forth the non-GAAP pro forma information referenced in this press release for the three and nine months ended September 30, 2005.

Any documents filed by Sun with the SEC may be obtained free of charge at the SEC's web site at www.sec.gov. In addition, investors and stockholders of Sun may obtain free copies of the documents filed with the SEC by contacting Sun's investor relations department at (505) 468-2341 (TDD users, please call (505) 468-4458) or by sending a written request to Investor Relations, Sun Healthcare Group, Inc., 101 Sun Avenue N.E., Albuquerque, N.M. 87109. You may also read and copy any reports, statements and other information filed by Sun with the SEC at the SEC public reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 or visit the SEC's web site for further information on its public reference room.


                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                                CONDENSED
                        CONSOLIDATED BALANCE SHEETS
                              (in thousands)



                                                      September  December
                                                      30, 2006   31, 2005
                                                      ---------- ---------
                                                     (unaudited)
ASSETS

Current assets:
   Cash and cash equivalents                          $   16,731 $  16,641
   Restricted cash                                        29,128    25,142
   Accounts receivable, net                              117,098   123,639
   Assets held for sale                                   15,553     1,897
   Other current assets                                   11,596    13,898
                                                      ---------- ---------

   Total current assets                                  190,106   181,217

Property and equipment, net                              210,503   187,734
Restricted cash, non-current                              35,400    35,517
Goodwill                                                  62,752    81,265
Intangible assets, net                                    16,898    19,335
Other assets, net                                          6,828     7,238
                                                      ---------- ---------

      Total assets                                    $  522,487 $ 512,306
                                                      ========== =========


      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Accounts payable                                   $   42,993 $  45,115
   Accrued compensation and benefits                      38,755    42,393
   Accrued self-insurance obligations, current            41,942    37,238
   Liabilities held for sale                               3,267         -
   Other accrued liabilities                              50,787    52,401
   Capital leases, current                                 1,085    11,204
   Current portion of long-term debt:
      Company obligations                                 22,911    21,237
      Clipper partnerships                                33,684    34,415
                                                      ---------- ---------

   Total current liabilities                             235,424   244,003

Accrued self-insurance obligations, net of current        99,331   109,953
Long-term debt, net of current portion:
      Company obligations                                128,530   115,094
      Clipper partnerships                                15,623    15,829
Deferred taxes, net of current                             7,660     2,412
Other long-term liabilities                               25,937    27,910
                                                      ---------- ---------

   Total liabilities                                     512,505   515,201

Stockholders' equity (deficit)                             9,982    (2,895)
                                                      ---------- ---------
      Total liabilities and stockholders' equity
       (deficit)                                      $  522,487 $ 512,306
                                                      ========== =========


                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                               CONSOLIDATED
                         STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)


                                               For the Three  For the Three
                                                Months Ended  Months Ended
                                                September 30, September 30,
                                                     2006         2005
                                                 -----------  -----------
                                                 (unaudited)  (unaudited)

Total net revenues                               $   273,944  $   200,644
                                                 -----------  -----------
Costs and expenses:
   Operating salaries and benefits                   155,006      120,488
   Self-insurance for workers' compensation and
    general and professional liability insurance      12,513        9,409
   Operating administrative costs                      6,463        5,946
   Other operating costs                              61,071       40,562
   Facility rent expense                              13,780        9,446
   General and administrative expenses                12,580       10,825
   Depreciation                                        3,442        1,010
   Amortization                                        1,704        1,196
   Provision for losses on accounts receivable         2,557          505
   Interest, net                                       4,733        2,927
   (Gain) loss on sale of assets, net                    (87)          10
   Restructuring costs, net                                1            3
   Loss on contract termination                          975            -
                                                 -----------  -----------
Total costs and expenses                             274,738      202,327
                                                 -----------  -----------

Loss before income taxes and discontinued
 operations                                             (794)      (1,683)
Income tax (benefit) expense                            (169)          42
                                                 -----------  -----------
Loss from continuing operations                         (625)      (1,725)
                                                 -----------  -----------

Discontinued operations:
   Income from discontinued operations, net of
    related tax expense of $327 for the
    three months ended September 30, 2006               283          473
   (Loss) gain on disposal of discontinued
    operations, net of related tax benefit of
    $48 for the three months ended
    September 30, 2006                                  (180)       8,586
                                                 -----------  -----------
Income from discontinued operations, net                 103        9,059
                                                 -----------  -----------

Net (loss) income                                $      (522) $     7,334
                                                 ===========  ===========


Basic and diluted (loss) income per common and
 common equivalent share:
   Loss from continuing operations               $     (0.02) $     (0.11)
   Income from discontinued operations, net                -         0.59
                                                 -----------  -----------
Net (loss) income                                $     (0.02) $      0.48
                                                 ===========  ===========

Weighted average number of common and common
 equivalent shares outstanding:
   Basic and diluted                                  31,345       15,365



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                               CONSOLIDATED
                         STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)


                                                For the Nine  For the Nine
                                                Months Ended  Months Ended
                                                September 30, September 30,
                                                    2006          2005
                                                -----------    -----------
                                                (unaudited)    (unaudited)

Total net revenues                              $   818,305    $   590,655
                                                -----------    -----------
Costs and expenses:
   Operating salaries and benefits                  460,438        349,525
   Self-insurance for workers' compensation and
    general and professional liability insurance     31,522         25,819
   Operating administrative costs                    21,264         17,217
   Other operating costs                            183,807        122,166
   Facility rent expense                             40,360         28,101
   General and administrative expenses               36,353         33,515
   Depreciation                                       7,221          2,922
   Amortization                                       4,864          3,271
   Provision for losses on accounts receivable        6,548          1,446
   Interest, net                                     14,289          8,631
   Loss on extinguishment of debt, net                    -            408
   Loss on sale of assets, net                          156            877
   Loss on asset impairment                               -            361
   Restructuring costs, net                              (1)           112
   Loss on contract termination                         975              -
                                                -----------    -----------
Total costs and expenses                            807,796        594,371
                                                -----------    -----------

Income (loss) before income taxes and
 discontinued operations                             10,509         (3,716)
Income tax expense (benefit)                          3,353           (774)
                                                -----------    -----------
Income (loss) from continuing operations              7,156         (2,942)
                                                -----------    -----------

Discontinued operations:
   Income from discontinued operations, net of
    related tax expense of $1,627 for the nine
    months ended September 30, 2006                   2,354          6,443
   (Loss) gain on disposal of discontinued
    operations, net of related tax benefit of
    $134 for the nine months ended September
    30, 2006                                           (375)         9,594
                                                -----------    -----------
Income from discontinued operations, net              1,979         16,037
                                                -----------    -----------

Net income                                      $     9,135    $    13,095
                                                ===========    ===========


Basic and diluted income (loss) per common and
 common equivalent share:
   Income (loss) from continuing operations     $      0.23    $     (0.19)
   Income from discontinued operations, net            0.06           1.04
                                                -----------    -----------
Net income                                      $      0.29    $      0.85
                                                ===========    ===========

Weighted average number of common and common
 equivalent shares outstanding:
   Basic                                             31,252         15,343
   Diluted                                           31,338         15,343



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                                CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (in thousands)


                                               For the Three  For the Three
                                               Months Ended   Months Ended
                                               September 30,  September 30,
                                                   2006           2005
                                                -----------    -----------
                                                (unaudited)    (unaudited)

Cash flows from operating activities:
 Net (loss) income                              $      (522)   $     7,334
 Adjustments to reconcile net (loss) income to
  net cash provided by operating activities,
  including discontinued operations:
   Depreciation                                       3,582          1,138
   Amortization                                       1,796          1,324
   Amortization of favorable and unfavorable
    lease intangibles                                  (376)          (379)
   Provision for losses on accounts receivable        2,823            756
   Loss (gain) on disposal of discontinued
    operations, net                                     180         (8,586)
   (Gain) loss on sale of assets, net                   (87)            10
   Restricted stock and stock option
    compensation                                        732            431
   Other, net                                           (15)            14
   Changes in operating assets and liabilities,
    net of acquisitions                               4,787            983
                                                -----------    -----------
   Net cash provided by operating activities         12,900          3,025
                                                -----------    -----------

Cash flows from investing activities:
 Capital expenditures, net                           (5,458)        (4,082)
 Proceeds from sale of assets held for sale             942          7,692
 Insurance proceeds received                            150              -
 Acquisitions, net                                   (3,120)        (4,200)
                                                -----------    -----------
   Net cash used for investing activities            (7,486)          (590)
                                                -----------    -----------

Cash flows from financing activities:
 Net payments under Revolving Loan Agreement         (1,486)       (12,536)
 Long-term debt borrowings                                -         11,000
 Long-term debt repayments                           (2,655)        (1,712)
 Distribution of partnership equity                       -            (25)
 Principal payments under capital lease
  obligation                                           (819)             -
 Net proceeds from issuance of common stock
  from the exercise of employee stock options           320              -
                                                -----------    -----------
   Net cash used for financing activities            (4,640)        (3,273)
                                                -----------    -----------

Net increase (decrease) in cash and cash
 equivalents                                            774           (838)
Cash and cash equivalents at beginning of
 period                                              15,957         14,451
                                                -----------    -----------
Cash and cash equivalents at end of period      $    16,731    $    13,613
                                                ===========    ===========

Supplemental Disclosures:
Non-cash investing and financing activities:
  A capital lease obligation of $11,200 was converted in May, 2006 to an
   operating lease.
  A capital lease obligation of $879 was incurred in May, 2006 when we
   entered into a lease for new equipment.
  Capital lease obligations of $1,630 were incurred in September, 2006 when
   we entered into new equipment leases.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                                CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (in thousands)


                                               For the Nine   For the Nine
                                               Months Ended   Months Ended
                                               September 30,  September 30,
                                                   2006           2005
                                                -----------    -----------
                                                (unaudited)    (unaudited)

Cash flows from operating activities:
 Net income                                     $     9,135    $    13,095
 Adjustments to reconcile net income to net
  cash provided by (used for) operating
  activities, including discontinued
  operations:
   Depreciation                                       7,645          3,304
   Amortization                                       5,153          3,606
   Amortization of favorable and unfavorable
    lease intangibles                                (1,134)        (1,335)
   Provision for losses on accounts receivable        7,215          2,424
   Loss (gain) on disposal of discontinued
    operations, net                                     375         (9,594)
   Loss on sale of assets, net                          156            877
   Loss on extinguishment of debt, net                    -            408
   Loss on asset impairment                               -            361
   Restricted stock and stock option
    compensation                                      1,739            983
   Other, net                                            15             99
   Changes in operating assets and liabilities,
    net of acquisitions                             (27,008)       (29,101)
                                                -----------    -----------
   Net cash provided by (used for) operating
    activities                                        3,291        (14,873)
                                                -----------    -----------

Cash flows from investing activities:
 Capital expenditures, net                          (14,083)       (11,799)
 Proceeds from sale of assets held for sale             942          9,405
 Insurance proceeds received                            150              -
 Acquisitions, net                                   (3,356)        (5,405)
 Repayment of long-term notes receivable                  -            237
 Net proceeds from sale/leaseback                       838              -
                                                -----------    -----------
   Net cash used for investing activities           (15,509)        (7,562)
                                                -----------    -----------

Cash flows from financing activities:
 Net borrowings under Revolving Loan Agreement       24,368         20,815
 Long-term debt borrowings                           11,636         11,000
 Long-term debt repayments                          (23,219)       (18,036)
 Principal payments under capital lease
  obligation                                           (853)             -
 Distribution of partnership equity                    (123)          (327)
 Net proceeds from issuance of common stock
  from the exercise of employee stock options           499              -
                                                -----------    -----------
   Net cash provided by financing activities         12,308         13,452
                                                -----------    -----------

Net increase (decrease) in cash and cash
 equivalents                                             90         (8,983)
Cash and cash equivalents at beginning of
 period                                              16,641         22,596
                                                -----------    -----------
Cash and cash equivalents at end of period      $    16,731    $    13,613
                                                ===========    ===========

Supplemental Disclosures:
Non-cash investing and financing activities:
  A capital lease obligation of $11,200 was converted in May, 2006 to an
   operating lease.
  A capital lease obligation of $879 was incurred in May, 2006 when we
   entered into a lease for new equipment.
  Capital lease obligations of $1,630 were incurred in September, 2006 when
   we entered into new equipment leases.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

         RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M)
                              (in thousands)


                                               For the Three  For the Three
                                               Months Ended   Months Ended
                                               September 30,  September 30,
                                                   2006           2005
                                                -----------    -----------
                                                (unaudited)    (unaudited)

 Total net revenues                             $   273,944    $   200,644
                                                -----------    -----------

 Net (Loss) income                              $      (522)   $     7,334
                                                -----------    -----------

    Loss from continuing operations                    (625)        (1,725)

    Income tax (benefit) expense                       (169)            42

    (Gain) loss on sale of assets, net                  (87)            10

    Loss on contract termination                        975              -

    Restructuring costs, net                              1              3

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

 Net segment income (loss)                      $        95    $    (1,670)

    Interest, net                                     4,733          2,927

    Depreciation and amortization                     5,146          2,206
                                                -----------    -----------

 EBITDA                                         $     9,974    $     3,463

    Facility rent expense                            13,780          9,446
                                                -----------    -----------

 EBITDAR                                        $    23,754    $    12,909

    Operating administrative costs                    6,463          5,946
    General and administrative expenses              12,580         10,825
                                                -----------    -----------
 Total operating and general and admin expenses      19,043         16,771

 EBITDAM                                        $    29,017    $    20,234
 EBITDARM                                       $    42,797    $    29,680


EBITDA is defined as earnings before income (loss) on discontinued
operations, income taxes, loss (gain) on sale of assets, net, loss on
asset impairment, restructuring costs, net, loss on contract termination,
interest, net, depreciation and amortization.   EBITDAM is defined as
EBITDA before operating and general and administrative expenses.  EBITDAR
is defined as EBITDA before facility rent expense.  EBITDARM is defined as
EBITDAR before operating and general and administrative expenses.  EBITDA,
EBITDAM, EBITDAR and EBITDARM are used by management to evaluate financial
performance and resource allocation for each entity within the operating
units and for the Company as a whole.  EBITDA, EBITDAM, EBITDAR and
EBITDARM are commonly used as analytical indicators within the healthcare
industry and also serve as measures of leverage capacity and debt service
ability. EBITDA, EBITDAM, EBITDAR and EBITDARM should not be considered as
measures of financial performance under generally accepted accounting
principles.  As the items excluded from EBITDA, EBITDAM, EBITDAR and
EBITDARM are significant components in understanding and assessing
financial performance, EBITDA, EBITDAM, EBITDAR and EBITDARM should not be
considered in isolation or as alternatives to net income (loss), cash
flows generated by or used in operating, investing or financing activities
or other financial statement data presented in the consolidated financial
statements as indicators of financial performance or liquidity.  Because
EBITDA, EBITDAM, EBITDAR and EBITDARM are not measurements determined in
accordance with U.S. generally accepted accounting principles and are thus
susceptible to varying calculations, EBITDA, EBITDAM, EBITDAR and EBITDARM
as presented may not be comparable to other similarly titled measures of
other companies.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

         RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M)
                              (in thousands)


                                               For the Nine   For the Nine
                                               Months Ended   Months Ended
                                               September 30,  September 30,
                                                   2006           2005
                                                -----------    -----------
                                                (unaudited)    (unaudited)

 Total net revenues                             $   818,305    $   590,655
                                                -----------    -----------

 Net income                                     $     9,135    $    13,095
                                                -----------    -----------

    Income (loss) from continuing operations          7,156         (2,942)

    Income tax expense (benefit)                      3,353           (774)

    Loss on sale of assets, net                         156            877

    Loss on asset impairment                              -            361

    Loss on contract termination                        975              -

    Restructuring costs, net                             (1)           112
                                                -----------    -----------

 Net segment income (loss)                      $    11,639    $    (2,366)

    Interest, net                                    14,289          8,631

    Depreciation and amortization                    12,085          6,193
                                                -----------    -----------

 EBITDA                                         $    38,013    $    12,458

    Facility rent expense                            40,360         28,101
                                                -----------    -----------

 EBITDAR                                        $    78,373    $    40,559

    Operating administrative costs                   21,264         17,217
    General and administrative expenses              36,353         33,515
                                                -----------    -----------
 Total operating and general and admin expenses      57,617         50,732

 EBITDAM                                        $    95,630    $    63,190
 EBITDARM                                       $   135,990    $    91,291



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

  RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

              For the Three Months Ended September 30, 2006
                                (unaudited)



                                   Rehabilitation   Medical
                         Inpatient    Therapy       Staffing
                          Services    Services      Services
                        -----------  -----------  -----------
Nonaffiliated revenue   $   224,250  $    24,608  $    21,305
Affiliated revenue                1        9,725          322
                        -----------  -----------  -----------
  Total revenue             224,251       34,333       21,627

Net segment income
 (loss)                 $    11,325  $     1,691  $     1,731
Interest, net                 3,270           (1)          39
Depreciation and
 amortization                 4,249           95          190
                        -----------  -----------  -----------

  EBITDA                $    18,844  $     1,785  $     1,960
Facility rent expense        13,405          103          191
                        -----------  -----------  -----------

  EBITDAR               $    32,249  $     1,888  $     2,151
Operating and general
 and administrative
 expenses                     4,600        1,204          572
                        -----------  -----------  -----------

   EBITDAM              $    23,444  $     2,989  $     2,532
   EBITDARM             $    36,849  $     3,092  $     2,723


        EBITDA margin           8.4%         5.2%         9.1%
       EBITDAM margin          10.5%         8.7%        11.7%
       EBITDAR margin          14.4%         5.5%         9.9%
      EBITDARM margin          16.4%         9.0%        12.6%



                                                  Elimination
                        Laboratory                    of
                        & Radiology    Other &    Affiliated
                          Services     Corp Seg     Revenue    Consolidated
                        -----------  -----------  -----------  -----------
Nonaffiliated revenue   $     3,764  $        17  $         -  $   273,944
Affiliated revenue               56            -      (10,104)           -
                        -----------  -----------  -----------  -----------
  Total revenue               3,820           17      (10,104)     273,944

Net segment income
 (loss)                 $       (71) $   (14,581) $         -  $        95
Interest, net                    17        1,408            -        4,733
Depreciation and
 amortization                   100          512            -        5,146
                        -----------  -----------  -----------  -----------

  EBITDA                $        46  $   (12,661) $         -  $     9,974
Facility rent expense            81            -            -       13,780
                        -----------  -----------  -----------  -----------

  EBITDAR               $       127  $   (12,661) $         -  $    23,754
Operating and general
 and administrative
 expenses                        87       12,580            -       19,043
                        -----------  -----------  -----------  -----------

   EBITDAM              $       133  $       (81) $         -  $    29,017
   EBITDARM             $       214  $       (81) $         -  $    42,797


        EBITDA margin           1.2%                                   3.6%
       EBITDAM margin           3.5%                                  10.6%
       EBITDAR margin           3.3%                                   8.7%
      EBITDARM margin           5.6%                                  15.6%



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

  RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

              For the Three Months Ended September 30, 2005
                                (unaudited)



                                   Rehabilitation   Medical
                         Inpatient     Therapy      Staffing
                          Services     Services     Services
                        -----------  -----------  -----------
Nonaffiliated revenue   $   153,496  $    25,365  $    18,374
Affiliated revenue               (1)       9,355          154
                        -----------  -----------  -----------
  Total revenue             153,495       34,720       18,528

Net segment income
 (loss)                 $     8,251  $     1,323  $     1,507
Interest, net                 1,634           (5)           7
Depreciation and
 amortization                 1,726           60          113
                        -----------  -----------  -----------

  EBITDA                $    11,611  $     1,378  $     1,627
Facility rent expense         9,077          132          161
                        -----------  -----------  -----------

  EBITDAR               $    20,688  $     1,510  $     1,788
Operating and general
 and administrative
 expenses                     3,351        1,910          616
                        -----------  -----------  -----------

   EBITDAM              $    14,962  $     3,288  $     2,243
   EBITDARM             $    24,039  $     3,420  $     2,404


        EBITDA margin           7.6%         4.0%         8.8%
       EBITDAM margin           9.7%         9.5%        12.1%
       EBITDAR margin          13.5%         4.3%         9.7%
      EBITDARM margin          15.7%         9.9%        13.0%



                                                  Elimination
                        Laboratory                    of
                        & Radiology    Other &    Affiliated
                          Services     Corp Seg     Revenue    Consolidated
                        -----------  -----------  -----------  -----------
Nonaffiliated revenue   $     3,398  $        11  $         -  $   200,644
Affiliated revenue               41            -       (9,549)           -
                        -----------  -----------  -----------  -----------
  Total revenue               3,439           11       (9,549)     200,644

Net segment income
 (loss)                 $      (332) $   (12,419) $         -  $    (1,670)
Interest, net                     -        1,291            -        2,927
Depreciation and
 amortization                    76          231            -        2,206
                        -----------  -----------  -----------  -----------

  EBITDA                $      (256) $   (10,897) $         -  $     3,463
Facility rent expense            76            -            -        9,446
                        -----------  -----------  -----------  -----------

  EBITDAR               $      (180) $   (10,897) $         -  $    12,909
Operating and general
 and administrative
 expenses                        69       10,825            -       16,771
                        -----------  -----------  -----------  -----------

   EBITDAM              $      (187) $       (72) $         -  $    20,234
   EBITDARM             $      (111) $       (72) $         -  $    29,680


        EBITDA margin          -7.4%                                   1.7%
       EBITDAM margin          -5.4%                                  10.1%
       EBITDAR margin          -5.2%                                   6.4%
      EBITDARM margin          -3.2%                                  14.8%



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

  RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

               For the Nine Months Ended September 30, 2006
                                (unaudited)



                                   Rehabilitation   Medical
                         Inpatient    Therapy       Staffing
                          Services    Services      Services
                        -----------  -----------  -----------
Nonaffiliated revenue   $   666,799  $    76,266  $    64,047
Affiliated revenue                -       28,723          752
                        -----------  -----------  -----------
  Total revenue             666,799      104,989       64,799

Net segment income
 (loss)                 $    45,470  $     3,533  $     4,530
Interest, net                10,337           (9)         113
Depreciation and
 amortization                 9,645          283          564
                        -----------  -----------  -----------

  EBITDA                $    65,452  $     3,807  $     5,207
Facility rent expense        39,212          302          611
                        -----------  -----------  -----------

  EBITDAR               $   104,664  $     4,109  $     5,818
Operating and general
 and administrative
 expenses                    13,772        5,035        2,201
                        -----------  -----------  -----------

   EBITDAM              $    79,224  $     8,842  $     7,408
   EBITDARM             $   118,436  $     9,144  $     8,019


        EBITDA margin           9.8%         3.6%         8.0%
       EBITDAM margin          11.9%         8.4%        11.4%
       EBITDAR margin          15.7%         3.9%         9.0%
      EBITDARM margin          17.8%         8.7%        12.4%



                                                  Elimination
                        Laboratory                    of
                        & Radiology    Other &    Affiliated
                          Services     Corp Seg     Revenue    Consolidated
                        -----------  -----------  -----------  -----------
Nonaffiliated revenue   $    11,171  $        22  $         -  $   818,305
Affiliated revenue              165            -      (29,640)           -
                        -----------  -----------  -----------  -----------
  Total revenue              11,336           22      (29,640)     818,305

Net segment income
 (loss)                 $      (188) $   (41,706) $         -  $    11,639
Interest, net                    41        3,807            -       14,289
Depreciation and
 amortization                   279        1,314            -       12,085
                        -----------  -----------  -----------  -----------

  EBITDA                $       132  $   (36,585) $         -  $    38,013
Facility rent expense           235            -            -       40,360
                        -----------  -----------  -----------  -----------

  EBITDAR               $       367  $   (36,585) $         -  $    78,373
Operating and general
 and administrative
 expenses                       256       36,353            -       57,617
                        -----------  -----------  -----------  -----------

   EBITDAM              $       388  $      (232) $         -  $    95,630
   EBITDARM             $       623  $      (232) $         -  $   135,990


        EBITDA margin           1.2%                                   4.6%
       EBITDAM margin           3.4%                                  11.7%
       EBITDAR margin           3.2%                                   9.6%
      EBITDARM margin           5.5%                                  16.6%



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

  RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

               For the Nine Months Ended September 30, 2005
                                (unaudited)



                                   Rehabilitation   Medical
                         Inpatient    Therapy       Staffing
                          Services    Services      Services
                        -----------  -----------  -----------
Nonaffiliated revenue   $   454,478  $    75,358  $    50,010
Affiliated revenue                -       27,490          516
                        -----------  -----------  -----------
  Total revenue             454,478      102,848       50,526

Net segment income
 (loss)                 $    26,635  $     5,449  $     3,957
Interest, net                 5,116          (14)           9
Depreciation and
 amortization                 4,798          188          230
                        -----------  -----------  -----------

  EBITDA                $    36,549  $     5,623  $     4,196
Facility rent expense        26,985          387          502
                        -----------  -----------  -----------

  EBITDAR               $    63,534  $     6,010  $     4,698
Operating and general
 and administrative
 expenses                     9,817        5,607        1,694
                        -----------  -----------  -----------

   EBITDAM              $    46,366  $    11,230  $     5,890
   EBITDARM             $    73,351  $    11,617  $     6,392


        EBITDA margin           8.0%         5.5%         8.3%
       EBITDAM margin          10.2%        10.9%        11.7%
       EBITDAR margin          14.0%         5.8%         9.3%
      EBITDARM margin          16.1%        11.3%        12.7%



                                                  Elimination
                        Laboratory                    of
                        & Radiology    Other &    Affiliated
                          Services     Corp Seg     Revenue    Consolidated
                        -----------  -----------  -----------  -----------
Nonaffiliated revenue   $    10,791  $        18  $         -  $   590,655
Affiliated revenue              130            -      (28,136)           -
                        -----------  -----------  -----------  -----------
  Total revenue              10,921           18      (28,136)     590,655

Net segment income
 (loss)                 $      (459) $   (37,948) $         -  $    (2,366)
Interest, net                     -        3,520            -        8,631
Depreciation and
 amortization                   296          681            -        6,193
                        -----------  -----------  -----------  -----------

  EBITDA                $      (163) $   (33,747) $         -  $    12,458
Facility rent expense           227            -            -       28,101
                        -----------  -----------  -----------  -----------

  EBITDAR               $        64  $   (33,747) $         -  $    40,559
Operating and general
 and administrative
 expenses                        99       33,515            -       50,732
                        -----------  -----------  -----------  -----------

   EBITDAM              $       (64) $      (232) $         -  $    63,190
   EBITDARM             $       163  $      (232) $         -  $    91,291


        EBITDA margin          -1.5%                                   2.1%
       EBITDAM margin          -0.6%                                  10.7%
       EBITDAR margin           0.6%                                   6.9%
      EBITDARM margin           1.5%                                  15.5%



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

    RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA AND EBITDAR
                          INPATIENT SERVICES ONLY
                             ($ in thousands)

              For the Three Months Ended September 30, 2006
                                (unaudited)


                                           Inpatient  Inpatient
                                           Services   Services
                                Inpatient  w/o Peak     before
                                Services       -      Clipper &
                                w/o Peak   Overhead     Peak
                                ---------  ---------  ---------

Non affiliated revenues         $ 159,746  $       -  $ 159,746
                                ---------  ---------  ---------

Net segment income (loss)       $  12,472  $  (3,914) $   8,558
Interest, net                         795          -        795
Depreciation and amortization       1,694          -      1,694
  EBITDA                        $  14,961  $  (3,914) $  11,047

Facility rent expense              10,145          -     10,145
                                ---------  ---------  ---------

  EBITDAR                       $  25,106  $  (3,914) $  21,192
                                =========  =========  =========

     EBITDA margin                    9.4%                  6.9%
     EBITDAR margin                  15.7%                 13.3%



                                           Inpatient
                                           Services                Total
                                            before              Inpatient
                               Clipper (1)   Peak       Peak     Services
                                ---------  ---------  ---------  ---------

Non affiliated revenues         $       -  $ 159,746  $  64,504  $ 224,250
                                ---------  ---------  ---------  ---------

Net segment income (loss)       $    (469) $   8,089  $   3,236  $  11,325
Interest, net                         973      1,768      1,502      3,270
Depreciation and amortization         351      2,045      2,204      4,249
  EBITDA                        $     855  $  11,902  $   6,942  $  18,844

Facility rent expense                (882)     9,263      4,142     13,405
                                ---------  ---------  ---------  ---------

  EBITDAR                       $     (27) $  21,165  $  11,084  $  32,249
                                =========  =========  =========  =========

     EBITDA margin                               7.5%      10.8%       8.4%
     EBITDAR margin                             13.2%      17.2%      14.4%


(1) Clipper represents our interest of less than 12 percent in nine
    entities that are consolidated pursuant to the Financial Accounting
    Standard's revised Interpretation No. 46 Consolidation of Variable
    Interest Entities.  Sun began consolidating on July 1, 2004.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

    RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA AND EBITDAR
                          INPATIENT SERVICES ONLY
                             ($ in thousands)

              For the Three Months Ended September 30, 2005
                                (unaudited)


                                Inpatient  Inpatient
                                Services   Services                Total
                     Inpatient      -        before              Inpatient
                     Services   Overhead    Clipper  Clipper (1) Services
                     ---------  ---------  ---------  ---------  ---------

Non affiliated
 revenues            $ 153,496  $       -  $ 153,496  $       -  $ 153,496
                     ---------  ---------  ---------  ---------  ---------

Net segment income
 (loss)              $  12,317  $  (3,385) $   8,932  $    (681) $   8,251
Interest, net              632          -        632      1,002      1,634
Depreciation and
 amortization            1,415          -      1,415        311      1,726
  EBITDA             $  14,364  $  (3,385) $  10,979  $     632  $  11,611

Facility rent
 expense                 9,966          -      9,966       (889)     9,077
                     ---------  ---------  ---------  ---------  ---------

  EBITDAR            $  24,330  $  (3,385) $  20,945  $    (257) $  20,688
                     =========  =========  =========  =========  =========

     EBITDA margin         9.4%                  7.2%                  7.6%
     EBITDAR margin       15.9%                 13.6%                 13.5%

(1) Clipper represents our interest of less than 12 percent in nine
    entities that are consolidated pursuant to the Financial Accounting
    Standard's revised Interpretation No. 46 Consolidation of Variable
    Interest Entities.  Sun began consolidating on July 1, 2004.


                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

    RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA AND EBITDAR
                          INPATIENT SERVICES ONLY
                             ($ in thousands)

               For the Nine Months Ended September 30, 2006
                                (unaudited)


                                           Inpatient  Inpatient
                                           Services   Services
                                Inpatient  w/o Peak     before
                                Services       -      Clipper &
                                w/o Peak   Overhead     Peak
                                ---------  ---------  ---------

Total revenues                  $ 476,344  $       -  $ 476,344
                                ---------  ---------  ---------

Net segment income (loss)       $  45,031  $ (11,595) $  33,436
Interest, net                       2,368          -      2,368
Depreciation and amortization       4,928          -      4,928
  EBITDA                        $  52,327  $ (11,595) $  40,732

Facility rent expense              30,355          -     30,355
                                ---------  ---------  ---------

  EBITDAR                       $  82,682  $ (11,595) $  71,087
                                =========  =========  =========

     EBITDA margin                   11.0%                  8.6%
     EBITDAR margin                  17.4%                 14.9%



                                           Inpatient
                                           Services                Total
                                            before              Inpatient
                               Clipper (1)   Peak       Peak     Services
                                ---------  ---------  ---------  ---------

Total revenues                  $       -  $ 476,344  $ 190,455  $ 666,799
                                ---------  ---------  ---------  ---------

Net segment income (loss)       $  (1,382) $  32,054  $  13,416  $  45,470
Interest, net                       2,934      5,302      5,035     10,337
Depreciation and amortization       1,013      5,941      3,704      9,645
  EBITDA                        $   2,565  $  43,297  $  22,155  $  65,452

Facility rent expense              (2,635)    27,720     11,492     39,212
                                ---------  ---------  ---------  ---------

  EBITDAR                       $     (70) $  71,017  $  33,647  $ 104,664
                                =========  =========  =========  =========

     EBITDA margin                               9.1%      11.6%       9.8%
     EBITDAR margin                             14.9%      17.7%      15.7%


(1) Clipper represents our interest of less than 12 percent in nine
    entities that are consolidated pursuant to the Financial Accounting
    Standard's revised Interpretation No. 46 Consolidation of Variable
    Interest Entities.  Sun began consolidating on July 1, 2004.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

    RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA AND EBITDAR
                          INPATIENT SERVICES ONLY
                             ($ in thousands)

               For the Nine Months Ended September 30, 2005
                                (unaudited)


                                Inpatient  Inpatient
                                Services   Services                Total
                     Inpatient      -        before              Inpatient
                     Services   Overhead    Clipper  Clipper (1)  Services
                     ---------  ---------  ---------  ---------  ---------

Total revenues       $ 454,478  $       -  $ 454,478  $       -  $ 454,478
                     ---------  ---------  ---------  ---------  ---------

Net segment income
 (loss)              $  38,411  $  (9,904) $  28,507  $  (1,872) $  26,635
Interest, net            2,065          -      2,065      3,051      5,116
Depreciation and
 amortization            3,849          -      3,849        949      4,798
  EBITDA             $  44,325  $  (9,904) $  34,421  $   2,128  $  36,549

Facility rent
 expense                29,622          -     29,622     (2,637)    26,985
                     ---------  ---------  ---------  ---------  ---------

  EBITDAR            $  73,947  $  (9,904) $  64,043  $    (509) $  63,534
                     =========  =========  =========  =========  =========

EBITDA margin              9.8%                  7.6%                  8.0%
EBITDAR margin            16.3%                 14.1%                 14.0%



(1) Clipper represents our interest of less than 12 percent in nine
    entities that are consolidated pursuant to the Financial
    Accounting Standard's revised Interpretation No. 46 Consolidation of
    Variable Interest Entities.  Sun began consolidating on July 1, 2004.



               Sun Healthcare Group, Inc. and Subsidiaries
                      Selected Operating Statistics
                          Continuing Operations


                                   For the                 For the
                              Three Months Ended      Nine Months Ended
                                September 30,           September 30,
                            ----------------------  ----------------------
                               2006        2005        2006        2005
                            ----------  ----------  ----------  ----------
Number of available beds:
  Long Term Care                15,712       9,960      15,712       9,960
  Hospitals                        192         192         192         192


Number of facilities:
  Long Term Care                   152          99         152          99
  Hospitals                          3           3           3           3


Occupancy %:
  Long Term Care                  87.7%       90.9%       88.1%       90.7%
  Hospitals                       52.2%       54.9%       55.1%       59.2%
  Inpatient Services              87.3%       90.2%       87.7%       90.1%


Payor Mix % based on
 patient days - LTC:
  Medicare                        13.0%       12.7%       13.5%       13.1%
  Medicaid                        61.4%       63.9%       61.1%       63.4%
  Private and other               22.9%       21.0%       22.5%       21.0%
  Commercial Insurance &
   Veterans                        2.7%        2.4%        2.9%        2.5%


Payor Mix % based on
 patient days - Hospitals:
  Medicare                        70.3%       70.4%       70.2%       71.1%
  Medicaid                         5.9%       10.1%        7.5%        9.5%
  Private and other                0.2%        0.0%        0.2%        0.2%
  Commercial Insurance &
   Veterans                       23.6%       19.5%       22.1%       19.2%


Payor Mix % based on
 patient days - Inpatient
 Services:
  Medicare                        13.4%       13.3%       14.0%       13.8%
  Medicaid                        61.0%       63.5%       60.7%       62.9%
  Private and other               22.7%       20.7%       22.3%       20.6%
  Commercial Insurance &
   Veterans                        2.9%        2.5%        3.0%        2.7%


Revenue Mix % of revenues -
 LTC:
  Medicare                        27.5%       26.3%       28.1%       27.0%
  Medicaid                        49.8%       51.8%       49.1%       50.6%
  Private and other               18.6%       18.5%       18.7%       18.8%
  Commercial Insurance &
   Veterans                        4.1%        3.4%        4.1%        3.6%


Revenue Mix % of revenues -
 Hospitals:
  Medicare                        72.7%       72.9%       72.7%       74.3%
  Medicaid                         4.8%        8.4%        6.0%        8.0%
  Private and other                0.6%        0.6%        0.6%        0.8%
  Commercial Insurance &
   Veterans                       21.9%       18.1%       20.7%       16.9%


Revenue Mix % of revenues -
 Inpatient Services:
  Medicare                        30.2%       29.8%       30.9%       30.8%
  Medicaid                        47.2%       48.6%       46.4%       47.3%
  Private and other               17.7%       17.3%       17.8%       17.4%
  Commercial Insurance &
   Veterans                        4.9%        4.3%        4.9%        4.5%


Revenues PPD - LTC:
  Medicare (Part A)         $   344.06  $   321.61  $   339.23  $   322.50
  Medicaid                  $   144.12  $   140.05  $   142.09  $   137.40
  Private and other         $   140.17  $   147.30  $   141.28  $   148.11
  Commercial Insurance &
   Veterans                 $   263.30  $   246.77  $   248.95  $   242.66


Revenues PPD - Hospitals:
  Medicare (Part A)         $ 1,156.18  $ 1,051.86  $ 1,189.03  $ 1,052.53
  Medicaid                  $   894.09  $   827.67  $   897.62  $   818.40
  Private and other         $ 1,180.42  $        -  $ 1,432.04  $ 1,593.69
  Commercial Insurance &
   Veterans                 $ 1,067.09  $   985.44  $ 1,114.66  $   923.40


Revenues PPD - Inpatient
 Services:
  Medicare (Part A)         $   384.30  $   366.22  $   379.76  $   369.27
  Medicaid                  $   144.63  $   140.68  $   142.66  $   138.18
  Private and other         $   140.25  $   147.36  $   141.28  $   148.04
  Commercial Insurance &
   Veterans                 $   313.72  $   312.23  $   299.94  $   303.52


Revenues - Non-affiliated
 (in thousands):
 Inpatient Services:
  Medicare                  $   67,657  $   45,680  $  206,211  $  139,827
  Medicaid                     105,766      74,652     309,541     215,053
  Private and other             50,827      33,164     151,047      99,598
                            ----------  ----------  ----------  ----------
   Subtotal                    224,250     153,496     666,799     454,478

  Rehabilitation Therapy
   Services                     24,608      25,365      76,266      75,358
  Medical Staffing Services     21,305      18,374      64,047      50,010
  Laboratory & Radiology
   Services                      3,764       3,398      11,171      10,791
                            ----------  ----------  ----------  ----------
   Subtotal                     49,677      47,137     151,484     136,159
                            ----------  ----------  ----------  ----------

  Other - non-core
   businesses                       17          11          22          18
                            ----------  ----------  ----------  ----------
    Total                   $  273,944  $  200,644  $  818,305  $  590,655
                            ==========  ==========  ==========  ==========


Rehab contracts:
 Affiliated - continuing            88          92          88          92
 Non-affiliated                    298         319         298         319

DSO (Days Sales
 Outstanding):
 Inpatient Services - LTC           36          29          36          29
 Inpatient Services -
  Hospitals                         64          58          64          58
 Rehabilitation Therapy
  Services                          91         101          91         101
 Medical Staffing Services          55          68          55          68
 Laboratory & Radiology
  Services                          68          74          68          74



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
                               CONSOLIDATED
                         STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)

                                                              PRO FORMA
                                              AS REPORTED     WITH PEAK
                                                For the         For the
                                             Three Months    Three Months
                                                Ended           Ended
                                            September 30,   September 30,
                                                 2006            2005
                                            --------------  ---------------
                                              (unaudited)     (unaudited)

Total net revenues                          $      273,944  $       262,988
                                            --------------  ---------------
Costs and expenses:
 Operating salaries and benefits                   155,006          149,638
 Self-insurance for workers' compensation
  and general and professional liability
  insurance                                         12,513           12,632
 Operating administrative costs                      6,463            7,476
 Other operating costs                              61,071           58,052
 Facility rent expense                              13,780           13,193
 General and administrative expenses                12,580           11,627
 Depreciation                                        3,442            1,952
 Amortization                                        1,704            1,357
 Provision for losses on accounts
  receivable                                         2,557            1,397
 Interest, net                                       4,733            5,108
 (Gain) loss on sale of assets, net                    (87)              10
 Restructuring costs, net                                1                4
 Loss on contract termination                          975                -
                                            --------------  ---------------
Total costs and expenses                           274,738          262,446
                                            --------------  ---------------

(Loss) income before income taxes and
 discontinued operations                              (794)             542
Income tax (benefit) expense                          (169)              49
                                            --------------  ---------------
(Loss) income from continuing operations              (625)             493
                                            --------------  ---------------

Discontinued operations:
 Income from discontinued operations, net
  of related tax expense of $327 for the
  three months ended September 30, 2006                283              450
 (Loss) gain on disposal of discontinued
  operations, net of related tax benefit
  of $48 for the three months ended
  September 30, 2006                                  (180)           8,586
                                            --------------  ---------------
Income from discontinued operations, net               103            9,036
                                            --------------  ---------------

Net (loss) income                           $         (522) $         9,529
                                            ==============  ===============


Basic and diluted (loss) income per common
 and common equivalent share:
 (Loss) income from continuing operations   $        (0.02) $          0.02
 Income from discontinued operations, net                -             0.37
                                            --------------  ---------------
Net (loss) income                           $        (0.02) $          0.39
                                            ==============  ===============

Weighted average number of common and
 common equivalent shares outstanding:
  Basic                                             31,345           24,237
  Diluted                                           31,345           24,291




                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
                               CONSOLIDATED
                         STATEMENTS OF OPERATIONS
                  (in thousands, except per share data)

                                                              PRO FORMA
                                              AS REPORTED     WITH PEAK
                                                For the         For the
                                              Nine Months     Nine Months
                                                Ended           Ended
                                            September 30,   September 30,
                                                 2006            2005
                                            --------------  --------------
                                              (unaudited)     (unaudited)

Total net revenues                          $      818,305  $      774,873
                                            --------------  --------------
Costs and expenses:
 Operating salaries and benefits                   460,438         435,955
 Self-insurance for workers' compensation
  and general and professional liability
  insurance                                         31,522          34,647
 Operating administrative costs                     21,264          22,143
 Other operating costs                             183,807         174,859
 Facility rent expense                              40,360          39,254
 General and administrative expenses                36,353          35,811
 Depreciation                                        7,221           5,745
 Amortization                                        4,864           3,733
 Provision for losses on accounts
  receivable                                         6,548           3,282
 Interest, net                                      14,289          15,083
 Loss on extinguishment of debt, net                     -             408
 Loss on sale of assets, net                           156             877
 Loss on asset impairment                                -             361
 Restructuring costs, net                               (1)            112
 Loss on contract termination                          975               -
                                            --------------  --------------
Total costs and expenses                           807,796         772,270
                                            --------------  --------------

Income before income taxes and discontinued
 operations                                         10,509           2,603
Income tax expense (benefit)                         3,353            (767)
                                            --------------  --------------
Income from continuing operations                    7,156           3,370
                                            --------------  --------------

Discontinued operations:
 Income from discontinued operations, net
  of related tax expense of $1,627 for
  the nine months ended
  September 30, 2006                                 2,354           6,266
 (Loss) gain on disposal of discontinued
  operations, net of related tax benefit
  of $134 for the nine months ended
  September 30, 2006                                  (375)          9,594
                                            --------------  --------------
Income from discontinued operations, net             1,979          15,860
                                            --------------  --------------

Net income                                  $        9,135  $       19,230
                                            ==============  ==============


Basic and diluted income per common and
 common equivalent share:
  Income from continuing operations         $         0.23  $         0.14
  Income from discontinued operations, net            0.06            0.65
                                            --------------  --------------
Net income                                  $         0.29  $         0.79
                                            ==============  ==============

Weighted average number of common and
 common equivalent shares outstanding:
  Basic                                             31,252          24,215
  Diluted                                           31,338          24,271



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
         RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M)
                              (in thousands)

                                                              PRO FORMA
                                              AS REPORTED     WITH PEAK
                                                For the         For the
                                             Three Months    Three Months
                                                Ended           Ended
                                            September 30,   September 30,
                                                 2006            2005
                                            --------------  ---------------
                                              (unaudited)     (unaudited)

 Total net revenues                         $      273,944  $       262,988
                                            --------------  ---------------

 Net (loss) income                          $         (522) $         9,529
                                            --------------  ---------------

  (Loss) income from continuing operations            (625)             493

  Income tax (benefit) expense                        (169)              49

  (Gain) loss on sale of assets, net                   (87)              10

  Loss on contract termination                         975                -

  Restructuring costs, net                               1                4

 Net segment income                         $           95  $           556

  Interest, net                                      4,733            5,108

  Depreciation and amortization                      5,146            3,309
                                            --------------  ---------------

 EBITDA                                     $        9,974  $         8,973

  Facility rent expense                             13,780           13,193
                                            --------------  ---------------

 EBITDAR                                    $       23,754  $        22,166

  Operating administrative costs                     6,463            7,476
  General and administrative expenses               12,580           11,627
                                            --------------  ---------------
 Total operating and general and admin
  expenses                                          19,043           19,103

 EBITDAM                                    $       29,017  $        28,076
 EBITDARM                                   $       42,797  $        41,269


See definitions of EBITDA,  EBITDAR,  EBITDAM and EBITDARM on
Reconciliation of Net Income to EBITDA(M) and EBITDAR(M) stated previously
in the As Reported section for the three months ended September 30.

Pro Forma amounts were derived using our historical  results as reported
combined with Peak  historical  results of operations for the three and
nine months ended  September 30, 2005. Such amounts were reclassified to
conform to our historical presentation.  Purchase accounting and related
adjustments were not considered in this Pro Forma presentation.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
         RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M)
                              (in thousands)

                                                              PRO FORMA
                                              AS REPORTED     WITH PEAK
                                                For the         For the
                                              Nine Months     Nine Months
                                                Ended           Ended
                                            September 30,   September 30,
                                                 2006            2005
                                            --------------  --------------
                                              (unaudited)     (unaudited)

 Total net revenues                         $      818,305  $      774,873
                                            --------------  --------------

 Net income                                 $        9,135  $       19,230
                                            --------------  --------------

  Income from continuing operations                  7,156           3,370

  Income tax expense (benefit)                       3,353            (767)

  Loss on sale of assets, net                          156             877

  Loss on asset impairment                               -             361

  Restructuring costs, net                              (1)            112

  Loss on contract termination                         975               -
                                            --------------  --------------

 Net segment income                         $       11,639  $        3,953

  Interest, net                                     14,289          15,083

  Depreciation and amortization                     12,085           9,478
                                            --------------  --------------

 EBITDA                                     $       38,013  $       28,514

  Facility rent expense                             40,360          39,254
                                            --------------  --------------

 EBITDAR                                    $       78,373  $       67,768

  Operating administrative costs                    21,264          22,143
  General and administrative expenses               36,353          35,811
                                            --------------  --------------
 Total operating and general and admin
  expenses                                          57,617          57,954

 EBITDAM                                    $       95,630  $       86,468
 EBITDARM                                   $      135,990  $      125,722




                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
  RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

              For the Three Months Ended September 30, 2005
                                (unaudited)



                                     Rehabilitation  Medical   Laboratory
                          Inpatient     Therapy     Staffing   & Radiology
                          Services     Services     Services     Services
                          ---------  -------------  ---------  -----------
Nonaffiliated revenue     $ 215,839  $      25,365  $  18,374  $     3,398
Affiliated revenue               (1)         9,355        154           41
                          ---------  -------------  ---------  -----------
  Total revenue             215,838         34,720     18,528        3,439

Net segment income (loss) $  11,644  $       1,323  $   1,507  $      (332)
Interest, net                 3,520             (5)         7            -
Depreciation and
 amortization                 2,799             60        113           76
                          ---------  -------------  ---------  -----------

  EBITDA                  $  17,963  $       1,378  $   1,627  $      (256)
Facility rent expense        12,824            132        161           76
                          ---------  -------------  ---------  -----------

  EBITDAR                 $  30,787  $       1,510  $   1,788  $      (180)
Operating and general
 and administrative
 expenses                     4,879          1,910        616           69
                          ---------  -------------  ---------  -----------

   EBITDAM                $  22,842  $       3,288  $   2,243  $      (187)
   EBITDARM               $  35,666  $       3,420  $   2,404  $      (111)


        EBITDA margin           8.3%           4.0%       8.8%        -7.4%
        EBITDAM margin         10.6%           9.5%      12.1%        -5.4%
        EBITDAR margin         14.3%           4.3%       9.7%        -5.2%
        EBITDARM margin        16.5%           9.9%      13.0%        -3.2%




                                     Elimination
                                         of
                           Other &   Affiliated
                          Corp Seg     Revenue    Consolidated
                          ---------  -----------  -------------
Nonaffiliated revenue     $      12  $         -  $     262,988
Affiliated revenue                -       (9,549)             -
                          ---------  -----------  -------------
  Total revenue                  12       (9,549)       262,988

Net segment income (loss) $ (13,586) $         -  $         556
Interest, net                 1,586            -          5,108
Depreciation and
 amortization                   261            -          3,309
                          ---------  -----------  -------------

  EBITDA                  $ (11,739) $         -  $       8,973
Facility rent expense             -            -         13,193
                          ---------  -----------  -------------

  EBITDAR                 $ (11,739) $         -  $      22,166
Operating and general
 and administrative
 expenses                    11,629            -         19,103
                          ---------  -----------  -------------

   EBITDAM                $    (110) $         -  $      28,076
   EBITDARM               $    (110) $         -  $      41,269


        EBITDA margin                                       3.4%
        EBITDAM margin                                     10.7%
        EBITDAR margin                                      8.4%
        EBITDARM margin                                    15.7%



              SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
  RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

               For the Nine Months Ended September 30, 2005
                                (unaudited)



                                    Rehabilitation Medical   Laboratory &
                         Inpatient    Therapy      Staffing     Radiology
                         Services     Services     Services     Services
                         ---------  -------------  ---------  ------------
Nonaffiliated revenue    $ 638,691  $      75,358  $  50,010  $     10,791
Affiliated revenue               -         27,490        516           130
                         ---------  -------------  ---------  ------------
  Total revenue            638,691        102,848     50,526        10,921

Net segment income
 (loss)                  $  36,318  $       5,449  $   3,957  $       (459)
Interest, net               10,705            (14)         9             -
Depreciation and
 amortization                7,992            188        230           296
                         ---------  -------------  ---------  ------------

  EBITDA                 $  55,015  $       5,623  $   4,196  $       (163)
Facility rent expense       38,138            387        502           227
                         ---------  -------------  ---------  ------------

  EBITDAR                $  93,153  $       6,010  $   4,698  $         64
Operating and general
 and administrative
 expenses                   14,743          5,607      1,694            99
                         ---------  -------------  ---------  ------------

   EBITDAM               $  69,758  $      11,230  $   5,890  $        (64)
   EBITDARM              $ 107,896  $      11,617  $   6,392  $        163


        EBITDA margin          8.6%           5.5%       8.3%         -1.5%
        EBITDAM margin        10.9%          10.9%      11.7%         -0.6%
        EBITDAR margin        14.6%           5.8%       9.3%          0.6%
        EBITDARM margin       16.9%          11.3%      12.7%          1.5%




                                     Elimination
                          Other &   of Affiliated
                         Corp Seg      Revenue     Consolidated
                         ---------  -------------  ------------
Nonaffiliated revenue    $      23  $           -  $    774,873
Affiliated revenue               -        (28,136)            -
                         ---------  -------------  ------------
  Total revenue                 23        (28,136)      774,873

Net segment income
 (loss)                  $ (41,312) $           -  $      3,953
Interest, net                4,383              -        15,083
Depreciation and
 amortization                  772              -         9,478
                         ---------  -------------  ------------

  EBITDA                 $ (36,157) $           -  $     28,514
Facility rent expense            -              -        39,254
                         ---------  -------------  ------------

  EBITDAR                $ (36,157) $           -  $     67,768
Operating and general
 and administrative
 expenses                   35,811              -        57,954
                         ---------  -------------  ------------

   EBITDAM               $    (346) $           -  $     86,468
   EBITDARM              $    (346) $           -  $    125,722


        EBITDA margin                                       3.7%
        EBITDAM margin                                     11.2%
        EBITDAR margin                                      8.7%
        EBITDARM margin                                    16.2%




                    SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                               PRO FORMA WITH PEAK
         RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA AND EBITDAR
                            INPATIENT SERVICES ONLY
                               ($ in thousands)

              For the Three Months Ended September 30, 2005
                                (unaudited)


                                           Inpatient  Inpatient
                                           Services   Services
                                Inpatient  w/o Peak-    before
                                Services   Overhead    Clipper &   Clipper
                                w/o Peak                Peak        (1)
                                ---------  ---------  ---------  ---------

Non affiliated revenues         $ 153,496  $       -  $ 153,496  $       -
                                ---------  ---------  ---------  ---------

Net segment income (loss)       $  12,317  $  (3,385) $   8,932  $    (681)
Interest, net                         632          -        632      1,002
Depreciation and amortization       1,415          -      1,415        311

                                ---------  ---------  ---------  ---------
  EBITDA                        $  14,364  $  (3,385) $  10,979  $     632

Facility rent expense               9,966          -      9,966       (889)
                                ---------  ---------  ---------  ---------

  EBITDAR                       $  24,330  $  (3,385) $  20,945  $    (257)
                                =========  =========  =========  =========

        EBITDA margin                 9.4%                  7.2%
        EBITDAR margin               15.9%                 13.6%


                                Inpatient
                                Services                Total
                                  before              Inpatient
                                  Peak       Peak     Services
                                ---------  ---------  ---------

Non affiliated revenues         $ 153,496  $  62,343  $ 215,839
                                ---------  ---------  ---------

Net segment income (loss)       $   8,251  $   3,393  $  11,644
Interest, net                       1,634      1,886      3,520
Depreciation and amortization       1,726      1,073      2,799

                                ---------  ---------  ---------
  EBITDA                        $  11,611  $   6,352  $  17,963

Facility rent expense               9,077      3,747     12,824
                                ---------  ---------  ---------

  EBITDAR                       $  20,688  $  10,099  $  30,787
                                =========  =========  =========

        EBITDA margin                 7.6%      10.2%       8.3%
        EBITDAR margin               13.5%      16.2%      14.3%


(1)   Clipper represents our interest of less than 12 percent in nine
      entities that are consolidated pursuant to the Financial
      Accounting Standard's revised Interpretation No. 46 Consolidation
      of Variable Interest Entities.  Sun began consolidating on
      July 1, 2004.



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                            PRO FORMA WITH PEAK
    RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA AND EBITDAR
                          INPATIENT SERVICES ONLY
                             ($ in thousands)

               For the Nine Months Ended September 30, 2005
                                (unaudited)


                                           Inpatient  Inpatient
                                           Services   Services
                                Inpatient  w/o Peak-    before
                                Services    Overhead   Clipper &   Clipper
                                w/o Peak                Peak        (1)
                                ---------  ---------  ---------  ---------

Non affiliated revenues         $ 454,478  $       -  $ 454,478  $       -
                                ---------  ---------  ---------  ---------

Net segment income (loss)       $  38,411  $  (9,904) $  28,507  $  (1,872)
Interest, net                       2,065          -      2,065      3,051
Depreciation and amortization       3,849          -      3,849        949
  EBITDA                        $  44,325  $  (9,904) $  34,421  $   2,128

Facility rent expense              29,622          -     29,622     (2,637)
                                ---------  ---------  ---------  ---------

  EBITDAR                       $  73,947  $  (9,904) $  64,043  $    (509)
                                =========  =========  =========  =========

        EBITDA margin                 9.8%                  7.6%
        EBITDAR margin               16.3%                 14.1%


                                Inpatient
                                Services                Total
                                  before              Inpatient
                                  Peak       Peak     Services
                                ---------  ---------  ---------

Non affiliated revenues         $ 454,478  $ 184,213  $ 638,691
                                ---------  ---------  ---------

Net segment income (loss)       $  26,635  $   9,683  $  36,318
Interest, net                       5,116      5,589     10,705
Depreciation and amortization       4,798      3,194      7,992
  EBITDA                        $  36,549  $  18,466  $  55,015

Facility rent expense              26,985     11,153     38,138
                                ---------  ---------  ---------

  EBITDAR                       $  63,534  $  29,619  $  93,153
                                =========  =========  =========

        EBITDA margin                 8.0%      10.0%       8.6%
        EBITDAR margin               14.0%      16.1%      14.6%


(1)   Clipper represents our interest of less than 12 percent in nine
      entities that are consolidated pursuant to the Financial Accounting
      Standard's revised Interpretation No. 46 Consolidation of Variable
      Interest Entities.  Sun began consolidating on July 1, 2004.




                Sun Healthcare Group, Inc. and Subsidiaries
                      Selected Operating Statistics
                          Continuing Operations


                                For the                   For the
                           Three Months Ended         Nine Months Ended
                              September 30,             September 30,
                                      PRO FORMA                 PRO FORMA
                        AS REPORTED   WITH PEAK   AS REPORTED   WITH PEAK
                        -----------  -----------  -----------  -----------
                            2006         2005         2006         2005
                        -----------  -----------  -----------  -----------
Number of available
 beds:
  Long Term Care             15,712       15,832       15,712       15,832
  Hospitals                     192          192          192          192


Number of facilities:
  Long Term Care                152          155          152          155
  Hospitals                       3            3            3            3


Occupancy %:
  Long Term Care               87.7%        88.1%        88.1%        87.9%
  Hospitals                    52.2%        54.9%        55.1%        59.2%
  Inpatient Services           87.3%        87.7%        87.7%        87.6%


Payor Mix % based on
 patient days - LTC:
  Medicare                     13.0%        12.5%        13.5%        12.8%
  Medicaid                     61.4%        62.0%        61.1%        61.8%
  Private and other            22.9%        22.4%        22.5%        22.2%
  Commercial Insurance
   & Veterans                   2.7%         3.1%         2.9%         3.2%


Payor Mix % based on
 patient days -
 Hospitals:
  Medicare                     70.3%        70.4%        70.2%        71.1%
  Medicaid                      5.9%        10.1%         7.5%         9.5%
  Private and other             0.2%         0.0%         0.2%         0.2%
  Commercial Insurance
   & Veterans                  23.6%        19.5%        22.1%        19.2%


Payor Mix % based on
 patient days -
 Inpatient Svcs:
  Medicare                     13.4%        12.9%        14.0%        13.3%
  Medicaid                     61.0%        61.7%        60.7%        61.4%
  Private and other            22.7%        22.2%        22.3%        22.0%
  Commercial Insurance
   & Veterans                   2.9%         3.2%         3.0%         3.3%


Revenue Mix % of
 revenues - LTC:
  Medicare                     27.5%        26.5%        28.1%        27.1%
  Medicaid                     49.8%        50.6%        49.1%        49.6%
  Private and other            18.6%        19.2%        18.7%        19.5%
  Commercial Insurance
   & Veterans                   4.1%         3.7%         4.1%         3.8%


Revenue Mix % of
 revenues - Hospitals:
  Medicare                     72.7%        72.9%        72.7%        74.3%
  Medicaid                      4.8%         8.4%         6.0%         8.0%
  Private and other             0.6%         0.6%         0.6%         0.8%
  Commercial Insurance
   & Veterans                  21.9%        18.1%        20.7%        16.9%


Revenue Mix % of
 revenues - Inpatient
 Services:
  Medicare                     30.2%        29.4%        30.9%        30.2%
  Medicaid                     47.2%        48.3%        46.4%        47.1%
  Private and other            17.7%        18.0%        17.8%        18.3%
  Commercial Insurance
   & Veterans                   4.9%         4.3%         4.9%         4.4%


Revenues PPD - LTC:
  Medicare (Part A)     $    344.06  $    324.99  $    339.23  $    323.92
  Medicaid              $    144.12  $    138.77  $    142.09  $    135.73
  Private and other     $    140.17  $    139.46  $    141.28  $    141.06
  Commercial Insurance
   & Veterans           $    263.30  $    204.09  $    248.95  $    202.04


Revenues PPD -
 Hospitals:
  Medicare (Part A)     $  1,156.18  $  1,051.86  $  1,189.03  $  1,052.53
  Medicaid              $    894.09  $    827.67  $    897.62  $    818.40
  Private and other     $  1,180.42  $         -  $  1,432.04  $  1,593.69
  Commercial Insurance
   & Veterans           $  1,067.09  $    985.44  $  1,114.66  $    923.40


Revenues PPD -
 Inpatient Services:
  Medicare (Part A)     $    384.30  $    363.51  $    379.76  $    364.93
  Medicaid              $    144.63  $    139.29  $    142.66  $    136.30
  Private and other     $    140.25  $    136.59  $    141.28  $    138.78
  Commercial Insurance
   & Veterans           $    313.72  $    242.25  $    299.94  $    238.59


Revenues -
 Non-affiliated (in
 thousands):
 Inpatient Services:
  Medicare              $    67,657  $    63,443  $   206,211  $   193,059
  Medicaid                  105,766      104,346      309,541      301,086
  Private and other          50,827       48,050      151,047      144,546
                        -----------  -----------  -----------  -----------
   Subtotal                 224,250      215,839      666,799      638,691

  Rehabilitation
   Therapy Services          24,608       25,365       76,266       75,358
  Medical Staffing
   Services                  21,305       18,374       64,047       50,010
  Laboratory &
   Radiology Services         3,764        3,398       11,171       10,791
                        -----------  -----------  -----------  -----------
   Subtotal                  49,677       47,137      151,484      136,159
                        -----------  -----------  -----------  -----------

  Other - non-core
   businesses                    17           12           22           23
                        -----------  -----------  -----------  -----------
    Total               $   273,944  $   262,988  $   818,305  $   774,873
                        ===========  ===========  ===========  ===========


Rehab contracts:
 Affiliated -
  continuing                     88           92           88           92
 Non-affiliated                 298          319          298          319

DSO (Days Sales
 Outstanding):
 Inpatient Services -
  LTC                            36           33           36           33
 Inpatient Services -
  Hospitals                      64           58           64           58
 Rehabilitation Therapy
  Services                       91          101           91          101
 Medical Staffing
  Services                       55           68           55           68
 Laboratory & Radiology
  Services                       68           74           68           74

Contact Information

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