SOURCE: Sun Healthcare Group, Inc.

Sun Healthcare Group, Inc.

October 29, 2012 16:30 ET

Sun Healthcare Group, Inc. Reports 2012 Third-Quarter Operating Results; Normalized EPS from Continuing Operations of $0.17

IRVINE, CA--(Marketwire - Oct 29, 2012) - Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced its operating results for the third quarter ended Sept. 30, 2012.

Highlights of continuing operations:

  • consolidated revenues were $460.5 million for the quarter;
  • consolidated normalized adjusted EBITDAR was $57.9 million for the quarter representing a normalized adjusted EBITDAR margin of 12.6 percent; and
  • normalized earnings per share was $0.17 for the quarter.

Transaction Update
The closing date for the Company's pending transaction with Genesis HealthCare LLC has not yet been finalized but is expected to occur in December 2012, subject to receipt of a few remaining regulatory approvals and the satisfaction of customary closing conditions. In connection with the pending transaction, the Company incurred $2.9 million of transaction costs through the nine months ended Sept. 30, 2012, which were primarily comprised of legal fees and financial advisory fees. The Company will not hold a quarterly conference call to discuss its third-quarter results.

Commenting on the expected completion of the transaction, William A. Mathies, Sun's chairman and chief executive officer, stated, "I am extremely proud of our thousands of caregivers and employees, who have maintained their focus on providing high-quality care for our patients and residents throughout the transaction process while continuing to execute toward our operational goals for this year. As we enter into our merger with Genesis HealthCare, I'm confident that we bring skills, dedication, and capabilities that will contribute to the success of the combined company."

Segment Updates
Sun's inpatient services business produced revenue in the third quarter totaling $409.8 million, down $8.3 million, or 2.0 percent, from the third quarter of 2011. The decrease in year-over-year revenues resulted principally from the reduction in Medicare rates as mandated by the CMS Final Rule and implemented in the prior year on Oct. 1, 2011. Inpatient services adjusted EBITDAR for the quarter was $66.3 million, down $8.4 million, or 11.2 percent, from the prior year third quarter, and adjusted EBITDAR margin for the quarter was 16.2 percent, down 170 basis points from the prior year third quarter.

Sun's hospice division, SolAmor, is included in Sun's inpatient services business segment and produced revenue in the third quarter of $15.7 million, up $0.8 million, or 5.6 percent, from the third quarter of 2011. SolAmor's adjusted EBITDAR was $3.9 million in the third quarter and adjusted EBITDAR margin was 24.6 percent.

Sun's rehabilitation therapy services business, SunDance, reported third-quarter revenues of $60.9 million, adjusted EBITDAR of $4.5 million and an adjusted EBITDAR margin of 7.4 percent, up 310 basis points year over year.

Sun's medical staffing services business, CareerStaff, reported third-quarter revenues of $22.1 million, up 1.7 percent year over year, adjusted EBITDAR of $1.6 million and an adjusted EBITDAR margin of 7.2 percent. 

Cash Flow
At Sept. 30, 2012, Sun had $63.8 million in cash and cash equivalents and $88.9 million of long-term debt. During the third quarter, Sun generated cash flow from operations of $26.4 million and used net cash of $5.9 million for capital investments. 

About Sun Healthcare Group, Inc.
Sun Healthcare Group, Inc. (NASDAQ: SUNH) is a healthcare services company, serving principally the senior population, with consolidated annual revenues in excess of $1.9 billion and approximately 28,000 employees in 46 states. Sun's services are provided through its subsidiaries: as of Sept. 30, 2012, SunBridge Healthcare and its subsidiaries' continuing operations include 158 skilled nursing centers, 13 combined skilled nursing, assisted and independent living centers, 10 assisted living centers, two independent living centers and seven mental health centers with an aggregate of 21,324 licensed beds in 23 states; SunDance Rehabilitation provides rehabilitation therapy services to affiliated and non-affiliated centers in 36 states; CareerStaff Unlimited provides medical staffing services in 40 states; and SolAmor Hospice provides hospice services in 11 states. For more information, go to www.sunh.com.

Forward-looking Statements
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," "may" and similar expressions. Forward-looking statements in this release include the Company's expectations regarding the closing of the transaction with Genesis Healthcare. Factors that could cause actual results to differ are identified in filings made by the Company with the Securities and Exchange Commission and include changes in Medicare and Medicaid reimbursements, including with respect to the CMS Final Rule, and the Company's ability to mitigate the impact of such changes; the impact that healthcare reform legislation will have on the Company's business; the ability to maintain the occupancy rates and payor mix at the Company's healthcare centers; potential liability for losses not covered by, or in excess of, insurance; the effects of government regulations and investigations; the ability of the Company to collect its accounts receivable on a timely basis; the amount of the Company's indebtedness; covenants in debt agreements and leases that may restrict the Company's activities, including the Company's ability to make acquisitions and incur more indebtedness on favorable terms; the impact of the economic downturn on the business; increasing labor costs and the shortage of qualified healthcare personnel; the Company's ability to receive increases in reimbursement rates from government payors to cover increased costs; delays in or failure to satisfy required conditions to the closing of the proposed merger with Genesis Healthcare, including the receipt of required regulatory approvals with respect to the transaction; failure to consummate or delay in consummating the transaction for other reasons; and disruption from the transaction making it more difficult to maintain relationships with customers and employees. More information on factors that could affect the Company's business and financial results are included in Sun's filings made with the Securities and Exchange Commission, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, copies of which are available on Sun's web site, www.sunh.com. There may be additional risks of which the Company is presently unaware or that it currently deems immaterial.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company's control. Sun cautions investors that any forward-looking statements made by Sun are not guarantees of future performance and are only made as of the date of this release. 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, adjusted EBITDA, adjusted EBITDAR and free cash flow, as used in this press release and in the accompanying tables, which are non-GAAP financial measures, are each reconciled to their respective GAAP-recognized financial measures in the accompanying tables.

   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
KEY INCOME STATEMENT FIGURES  
CONSOLIDATED  
(in thousands, except per share data)  
             
    For the     For the  
    Three Months Ended     Three Months Ended  
    September 30, 2012     September 30, 2011  
                 
                 
Revenue   $ 460,470     $ 468,676  
                 
Center rent expense     36,647       35,952  
                 
Depreciation and amortization     8,654       8,163  
                 
Interest expense, net     4,458       4,834  
                 
Pre-tax income     6,921       (305,172 )
                 
Income tax expense     2,932       2,203  
                 
Income (loss) from continuing operations     3,989       (307,375 )
                 
Loss from discontinued operations     (2,702 )     (2,031 )
                 
Net income (loss)   $ 1,287     $ (309,406 )
                 
                 
Diluted (loss) income per share   $ 0.05     $ (11.81 )
                 
                 
                 
Adjusted EBITDAR   $ 56,869     $ 64,103  
Margin - Adjusted EBITDAR     12.4 %     13.7 %
                 
Adjusted EBITDAR normalized   $ 57,902     $ 64,103  
Margin - Adjusted EBITDAR normalized     12.6 %     13.7 %
                 
                 
                 
                 
Adjusted EBITDA   $ 20,222     $ 28,151  
Margin - Adjusted EBITDA     4.4 %     6.0 %
                 
Adjusted EBITDA normalized   $ 21,255     $ 28,151  
Margin - Adjusted EBITDA normalized     4.6 %     6.0 %
                 
                 
                 
                 
Pre-tax income continuing operations - normalized   $ 7,954     $ 14,345  
                 
Income tax expense - normalized   $ 3,335     $ 4,951  
                 
Income from continuing operations - normalized   $ 4,619     $ 9,394  
                 
Diluted earnings per share from continuing operations - normalized   $ 0.17     $ 0.36  
                 
                 
                 
See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."  
   
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."  
   
   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
KEY INCOME STATEMENT FIGURES  
CONSOLIDATED  
(in thousands, except per share data)  
             
    For the     For the  
    Nine Months Ended     Nine Months Ended  
    September 30, 2012     September 30, 2011  
                 
                 
Revenue   $ 1,376,105     $ 1,405,558  
                 
Center rent expense     109,546       107,394  
                 
Depreciation and amortization     25,588       23,241  
                 
Interest expense, net     13,297       14,688  
                 
Pre-tax income     14,842       (269,596 )
                 
Income tax expense     6,021       16,715  
                 
Income (loss) from continuing operations     8,821       (286,311 )
                 
Loss from discontinued operations     (8,301 )     (5,036 )
                 
Net income (loss)   $ 520     $ (291,347 )
                 
                 
Diluted (loss) income per share   $ 0.02     $ (11.19 )
                 
                 
                 
Adjusted EBITDAR   $ 163,462     $ 196,355  
Margin - Adjusted EBITDAR     11.9 %     14.0 %
                 
Adjusted EBITDAR normalized   $ 166,333     $ 196,355  
Margin - Adjusted EBITDAR normalized     12.1 %     14.0 %
                 
                 
                 
                 
Adjusted EBITDA   $ 53,916     $ 88,961  
Margin - Adjusted EBITDA     3.9 %     6.3 %
                 
Adjusted EBITDA normalized   $ 56,787     $ 88,961  
Margin - Adjusted EBITDA normalized     4.1 %     6.3 %
                 
                 
                 
                 
Pre-tax income continuing operations - normalized   $ 17,713     $ 49,921  
                 
Income tax expense - normalized   $ 7,141     $ 19,463  
                 
Income from continuing operations - normalized   $ 10,572     $ 30,458  
                 
Diluted earnings per share from continuing operations - normalized   $ 0.40     $ 1.17  
                 
                 
                 
See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."  
                 
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."  
   
   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
CONSOLIDATED BALANCE SHEETS  
(in thousands, except per share data)  
             
             
    September 30, 2012     December 31, 2011  
    (unaudited)     (unaudited)  
ASSETS            
                 
Current assets:                
  Cash and cash equivalents   $ 63,801     $ 57,908  
  Restricted cash     14,252       15,706  
  Accounts receivable, net     199,787       202,229  
  Prepaid expenses and other assets     27,323       29,075  
  Assets held for sale     4,946       -  
  Deferred tax assets     61,629       63,170  
                   
    Total current assets     371,738       368,088  
                 
Property and equipment, net     143,288       148,298  
Intangible assets, net     33,358       35,294  
Goodwill     34,905       34,496  
Restricted cash, non-current     354       353  
Deferred tax assets     125,409       123,974  
Other assets     40,792       45,163  
                 
    Total assets   $ 749,844     $ 755,666  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY            
                 
Current liabilities:                
  Accounts payable   $ 47,427     $ 55,888  
  Accrued compensation and benefits     58,212       61,101  
  Accrued self-insurance obligations, current portion     58,273       57,810  
  Other accrued liabilities     47,602       43,139  
  Current portion of long-term debt and capital lease obligations     944       1,017  
                   
  Total current liabilities     212,458       218,955  
                 
Accrued self-insurance obligations, net of current portion     158,224       157,267  
Long-term debt and capital lease obligations, net of current portion     87,989       88,768  
Unfavorable lease obligations, net     5,268       7,110  
Other long-term liabilities     55,500       58,110  
                 
  Total liabilities     519,439       530,210  
                 
                 
Stockholders' equity:                
                 
  Preferred stock of $.01 par value, authorized 3,333 shares, zero shares were issued and outstanding as of September 30, 2012 and December 31, 2011     -       -  
  Common stock of $.01 par value, authorized 41,667 shares, 25,538 and 25,146 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively     255       251  
  Additional paid-in capital     731,473       726,861  
  Accumulated deficit     (499,907 )     (500,427 )
  Accumulated other comprehensive loss, net     (1,416 )     (1,229 )
        230,405       225,456  
    Total liabilities and stockholders' equity   $ 749,844     $ 755,666  
                 
                 
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
CONSOLIDATED INCOME STATEMENTS  
(in thousands, except per share data)  
             
    For the     For the  
    Three Months Ended     Three Months Ended  
    September 30, 2012     September 30, 2011  
    (unaudited)     (unaudited)  
                 
Total net revenues   $ 460,470     $ 468,676  
Costs and expenses:                
  Operating salaries and benefits     259,379       263,932  
  Self-insurance for workers' compensation and general and professional liability insurance     15,237       14,545  
  Operating administrative costs     10,635       12,962  
  Other operating costs     97,619       93,705  
  Center rent expense     36,647       35,952  
  General and administrative expenses     14,447       14,825  
  Depreciation and amortization     8,654       8,163  
  Provision for losses on accounts receivable     5,250       4,604  
  Interest, net of interest income of $94 and $103, respectively     4,458       4,834  
  Transaction costs     1,034       -  
  Loss on sale of assets, net     189       809  
  Restructuring costs     -       2,426  
  Loss on asset impairment     -       317,091  
Total costs and expenses     453,549       773,848  
                 
Income (loss) before income taxes and discontinued operations     6,921       (305,172 )
Income tax expense     2,932       2,203  
Income (loss) from continuing operations     3,989       (307,375 )
                 
Loss from discontinued operations, net     (2,702 )     (2,031 )
                 
Net income (loss)   $ 1,287     $ (309,406 )
                 
                 
Basic loss per common and common equivalent share:                
  Income (loss) from continuing operations   $ 0.15     $ (11.73 )
  Loss from discontinued operations, net     (0.10 )     (0.08 )
Net income (loss)   $ 0.05     $ (11.81 )
                 
Diluted loss per common and common equivalent share:                
  Income (loss) from continuing operations   $ 0.15     $ (11.73 )
  Loss from discontinued operations, net     (0.10 )     (0.08 )
Net income (loss)   $ 0.05     $ (11.81 )
                 
Weighted average number of common and common equivalent shares outstanding:                
  Basic     27,082       26,203  
  Diluted     27,082       26,203  
                 
                 
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
CONSOLIDATED INCOME STATEMENTS  
(in thousands, except per share data)  
             
    For the     For the  
    Nine Months Ended     Nine Months Ended  
    September 30, 2012     September 30, 2011  
    (unaudited)     (unaudited)  
                 
Total net revenues   $ 1,376,105     $ 1,405,558  
Costs and expenses:                
  Operating salaries and benefits     779,976       789,874  
  Self-insurance for workers' compensation and general and professional liability insurance     43,744       43,643  
  Operating administrative costs     34,744       39,333  
  Other operating costs     289,614       276,999  
  Center rent expense     109,546       107,394  
  General and administrative expenses     46,537       45,156  
  Depreciation and amortization     25,588       23,241  
  Provision for losses on accounts receivable     15,157       14,198  
  Interest, net of interest income of $229 and $243, respectively     13,297       14,688  
  Transaction costs     2,871       -  
  Loss on sale of assets, net     189       809  
  Restructuring costs     -       2,728  
  Loss on asset impairment     -       317,091  
Total costs and expenses     1,361,263       1,675,154  
                 
Income (loss) before income taxes and discontinued operations     14,842       (269,596 )
Income tax expense     6,021       16,715  
Income (loss) from continuing operations     8,821       (286,311 )
                 
Loss from discontinued operations, net     (8,301 )     (5,036 )
                 
Net income (loss)   $ 520     $ (291,347 )
                 
                 
Basic loss per common and common equivalent share:                
  Income (loss) from continuing operations   $ 0.33     $ (11.00 )
  Loss from discontinued operations, net     (0.31 )     (0.19 )
Net income (loss)   $ 0.02     $ (11.19 )
                 
Diluted loss per common and common equivalent share:                
  Income (loss) from continuing operations   $ 0.33     $ (11.00 )
  Loss from discontinued operations, net     (0.31 )     (0.19 )
Net income (loss)   $ 0.02     $ (11.19 )
                 
Weighted average number of common and common equivalent shares outstanding:                
  Basic     26,732       26,038  
  Diluted     26,732       26,038  
                 
                 
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in thousands)  
             
    For the     For the  
    Three Months Ended     Three Months Ended  
    September 30, 2012     September 30, 2011  
    (unaudited)     (unaudited)  
                 
Cash flows from operating activities:                
  Net income (loss)   $ 1,287     $ (309,406 )
  Adjustments to reconcile net income (loss) to net cash provided by operating activities, including discontinued operations:                
    Depreciation and amortization     8,654       8,335  
    Amortization of favorable and unfavorable lease intangibles     (507 )     (492 )
    Provision for losses on accounts receivable     5,403       4,975  
    Loss on sale of assets, including discontinued operations, net     188       1,925  
    Loss on asset impairment     -       317,091  
    Stock-based compensation expense     1,233       2,359  
    Deferred taxes     386       (105 )
  Changes in operating assets and liabilities, net of acquisitions:                
    Accounts receivable     7,641       23  
    Restricted cash     78       52  
    Prepaid expenses and other assets     1,800       (1,600 )
    Accounts payable     2,756       1,595  
    Accrued compensation and benefits     (5,666 )     (11,717 )
    Accrued self-insurance obligations     3,821       3,618  
    Other accrued liabilities     (36 )     2,104  
    Other long-term liabilities     (667 )     (880 )
      Net cash provided by operating activities     26,371       17,877  
                 
Cash flows from investing activities:                
  Capital expenditures     (6,722 )     (14,190 )
  Proceeds from sale of assets     781       1,809  
    Net cash used for investing activities     (5,941 )     (12,381 )
                 
Cash flows from financing activities:                
  Principal repayments of long-term debt and capital lease obligations     (277 )     (2,806 )
    Net cash used for financing activities     (277 )     (2,806 )
                 
Net increase in cash and cash equivalents     20,153       2,690  
Cash and cash equivalents at beginning of period     43,648       88,489  
Cash and cash equivalents at end of period   $ 63,801     $ 91,179  
                 
Reconciliation of net cash provided by operating activities to free cash flow:                
                 
    Net cash provided by operating activities   $ 26,371     $ 17,877  
    Capital expenditures     (6,722 )     (14,190 )
      Free cash flow   $ 19,649     $ 3,687  
                 
                 
Free cash flow is defined as net cash flow provided by operating activities less cash used for capital expenditures.
Free cash flow is used by management to evaluate discretionary cash flow potentially available for principal repayment and other financing activities.
                 
                 
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
             
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in thousands)  
             
    For the     For the  
    Nine Months Ended     Nine Months Ended  
    September 30, 2012     September 30, 2011  
    (unaudited)     (unaudited)  
                 
Cash flows from operating activities:                
  Net income (loss)   $ 520     $ (291,347 )
  Adjustments to reconcile net income (loss) to net cash provided by operating activities, including discontinued operations:                
    Depreciation and amortization     25,740       23,879  
    Amortization of favorable and unfavorable lease intangibles     (1,527 )     (1,466 )
    Provision for losses on accounts receivable     15,866       15,479  
    Loss on sale of assets, including discontinued operations, net     257       1,925  
    Loss on asset impairment     -       317,091  
    Stock-based compensation expense     5,041       5,160  
    Deferred taxes     229       9,871  
  Changes in operating assets and liabilities, net of acquisitions:                
    Accounts receivable     (13,568 )     (12,555 )
    Restricted cash     1,453       (1,876 )
    Prepaid expenses and other assets     4,125       (1,410 )
    Accounts payable     (7,358 )     (1,906 )
    Accrued compensation and benefits     (2,889 )     (12,298 )
    Accrued self-insurance obligations     1,420       (294 )
    Other accrued liabilities     4,386       1,158  
    Other long-term liabilities     (2,920 )     (2,098 )
      Net cash provided by operating activities     30,775       49,313  
                 
Cash flows from investing activities:                
  Capital expenditures     (24,551 )     (32,346 )
  Proceeds from sale of assets     781       1,809  
  Acquisitions, net of cash acquired     (260 )     (356 )
      Net cash used for investing activities     (24,030 )     (30,893 )
                 
Cash flows from financing activities:                
  Principal repayments of long-term debt and capital lease obligations     (852 )     (8,404 )
      Net cash used for financing activities     (852 )     (8,404 )
                 
Net increase in cash and cash equivalents     5,893       10,016  
Cash and cash equivalents at beginning of period     57,908       81,163  
Cash and cash equivalents at end of period   $ 63,801     $ 91,179  
                 
Reconciliation of net cash provided by operating activities to free cash flow:                
                 
    Net cash provided by operating activities   $ 30,775     $ 49,313  
    Capital expenditures     (24,551 )     (32,346 )
      Free cash flow   $ 6,224     $ 16,967  
                 
                 
Free cash flow is defined as net cash flow provided by operating activities less cash used for capital expenditures.        
Free cash flow is used by management to evaluate discretionary cash flow potentially available for principal repayment and other financing activities.        
                 
                 
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
           
RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA and ADJUSTED EBITDAR  
(in thousands)  
           
    For the   For the  
    Three Months Ended   Three Months Ended  
    September 30, 2012   September 30, 2011  
    (unaudited)   (unaudited)  
               
Total net revenues   $ 460,470   $ 468,676  
               
Net income (loss)   $ 1,287   $ (309,406 )
               
               
  Income (loss) from continuing operations     3,989     (307,375 )
                 
  Income tax expense     2,932     2,203  
                 
  Interest, net     4,458     4,834  
                 
  Depreciation and amortization     8,654     8,163  
               
EBITDA   $ 20,033   $ (292,175 )
               
  Loss on sale of assets, net     189     809  
                 
  Restructuring costs     -     2,426  
                 
  Loss on asset impairment     -     317,091  
               
               
Adjusted EBITDA   $ 20,222   $ 28,151  
               
  Center rent expense     36,647     35,952  
               
Adjusted EBITDAR   $ 56,869   $ 64,103  
               

EBITDA is defined as earnings before loss on discontinued operations, income taxes, interest, net, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before restructuring costs. Adjusted EBITDAR is defined as Adjusted EBITDA before center rent expense. Adjusted EBITDA and Adjusted EBITDAR 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. Adjusted EBITDA and Adjusted EBITDAR are commonly used as analytical indicators within the healthcare industry and also serve as measures of leverage capacity and debt service ability. Adjusted EBITDA and Adjusted EBITDAR should not be considered as measures of financial performance under generally accepted accounting principles. As the items excluded from Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing finance performance, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as alternatives to net income, 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 Adjusted EBITDA and Adjusted EBITDAR are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations. Adjusted EBITDA and Adjusted EBITDAR as presented may not be comparable to other similarly titled measures of other companies. 

   
   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
           
RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA and ADJUSTED EBITDAR  
(in thousands)  
           
    For the   For the  
    Nine Months Ended   Nine Months Ended  
    September 30, 2012   September 30, 2011  
    (unaudited)   (unaudited)  
               
Total net revenues   $ 1,376,105   $ 1,405,558  
               
Net income (loss)   $ 520   $ (291,347 )
               
               
  Income (loss) from continuing operations     8,821     (286,311 )
                 
  Income tax expense     6,021     16,715  
                 
  Interest, net     13,297     14,688  
                 
  Depreciation and amortization     25,588     23,241  
               
EBITDA   $ 53,727   $ (231,667 )
               
  Loss on sale of assets, net     189     809  
                 
  Restructuring costs     -     2,728  
                 
  Loss on asset impairment     -     317,091  
               
Adjusted EBITDA   $ 53,916   $ 88,961  
               
  Center rent expense     109,546     107,394  
               
Adjusted EBITDAR   $ 163,462   $ 196,355  
               

EBITDA is defined as earnings before loss on discontinued operations, income taxes, interest, net, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before restructuring costs. Adjusted EBITDAR is defined as Adjusted EBITDA before center rent expense. Adjusted EBITDA and Adjusted EBITDAR 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. Adjusted EBITDA and Adjusted EBITDAR are commonly used as analytical indicators within the healthcare industry and also serve as measures of leverage capacity and debt service ability. Adjusted EBITDA and Adjusted EBITDAR should not be considered as measures of financial performance under generally accepted accounting principles. As the items excluded from Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing finance performance, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as alternatives to net income, 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. Adjusted EBITDA and Adjusted EBITDAR are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations. Adjusted EBITDA and Adjusted EBITDAR as presented may not be comparable to other similarly titled measures of other companies. 

   
   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
                                   
RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR  
($ in thousands)  
                                   
For the Three Months Ended September 30, 2012  
(unaudited)  
                       
  Inpatient Services     Rehabilitation Therapy Services     Medical Staffing Services     Other & Corp Seg     Elimination of Affiliated Revenue     Consolidated  
                                               
Nonaffiliated revenue $ 409,750     $ 29,032     $ 21,686     $ 2     $ -     $ 460,470  
Affiliated revenue   -       31,885       432       -       (32,317 )     -  
  Total revenue $ 409,750     $ 60,917     $ 22,118     $ 2     $ (32,317 )   $ 460,470  
                                               
Income (loss) from continuing operations $ 22,780     $ 4,068     $ 1,238     $ (24,097 )   $ -     $ 3,989  
                                               
Income tax expense   -       -       -       2,932       -       2,932  
                                               
Interest, net   (53 )     -       -       4,511       -       4,458  
                                               
Depreciation and amortization   7,276       267       191       920       -       8,654  
                                               
  EBITDA $ 30,003     $ 4,335     $ 1,429     $ (15,734 )   $ -     $ 20,033  
                                               
Loss on sale of assets, net   -       -       -       189       -       189  
                                               
  Adjusted EBITDA $ 30,003     $ 4,335     $ 1,429     $ (15,545 )   $ -     $ 20,222  
                                               
Center rent expense   36,323       154       170       -       -       36,647  
                                               
  Adjusted EBITDAR $ 66,326     $ 4,489     $ 1,599     $ (15,545 )   $ -     $ 56,869  
                                               
                                               
  Normalized Adjusted EBITDA $ 30,003     $ 4,335     $ 1,429     $ (14,511 )   $ -     $ 21,256  
  Normalized Adjusted EBITDAR $ 66,326     $ 4,489     $ 1,599     $ (14,511 )   $ -     $ 57,903  
                                               
                                               
Adjusted EBITDA margin   7.3 %     7.1 %     6.5 %                     4.4 %
                                               
Adjusted EBITDAR margin   16.2 %     7.4 %     7.2 %                     12.4 %
                                               
Normalized Adjusted EBITDA margin   7.3 %     7.1 %     6.5 %                     4.6 %
                                               
Normalized Adjusted EBITDAR margin   16.2 %     7.4 %     7.2 %                     12.6 %
                                               
See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."  
   
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."  
   
   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
                                   
RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR  
($ in thousands)  
                                   
For the Nine Months Ended September 30, 2012  
(unaudited)  
                       
  Inpatient Services     Rehabilitation Therapy Services     Medical Staffing Services     Other & Corp Seg     Elimination of Affiliated Revenue     Consolidated  
                                               
Nonaffiliated revenue $ 1,220,673     $ 88,858     $ 66,559     $ 15     $ -     $ 1,376,105  
Affiliated revenue   -       98,152       1,982       -       (100,134 )     -  
  Total revenue $ 1,220,673     $ 187,010     $ 68,541     $ 15     $ (100,134 )   $ 1,376,105  
                                               
Income (loss) from continuing operations $ 65,104     $ 11,381     $ 4,345     $ (72,009 )   $ -     $ 8,821  
                                               
Income tax expense   -       -       -       6,021       -       6,021  
                                               
Interest, net   (81 )     -       (3 )     13,381       -       13,297  
                                               
Depreciation and amortization   21,420       778       562       2,828       -       25,588  
                                               
  EBITDA $ 86,443     $ 12,159     $ 4,904     $ (49,779 )   $ -     $ 53,727  
                                               
                                               
Loss on sale of assets, net   -       -       -       189       -       189  
                                               
  Adjusted EBITDA $ 86,443     $ 12,159     $ 4,904     $ (49,401 )   $ -     $ 54,105  
                                               
Center rent expense   108,606       432       508       -       -       109,546  
                                               
  Adjusted EBITDAR $ 195,049     $ 12,591     $ 5,412     $ (49,401 )   $ -     $ 163,651  
                                               
                                               
  Normalized Adjusted EBITDA $ 86,443     $ 12,159     $ 4,904     $ (46,530 )   $ -     $ 56,976  
  Normalized Adjusted EBITDAR $ 195,049     $ 12,591     $ 5,412     $ (46,530 )   $ -     $ 166,522  
                                               
                                               
Adjusted EBITDA margin   7.1 %     6.5 %     7.2 %                     3.9 %
                                               
Adjusted EBITDAR margin   16.0 %     6.7 %     7.9 %                     11.9 %
                                               
Normalized Adjusted EBITDA margin   7.1 %     6.5 %     7.2 %                     4.1 %
                                               
Normalized Adjusted EBITDAR margin   16.0 %     6.7 %     7.9 %                     12.1 %
                                               
See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."  
   
See normalizing adjustments in the table "Normalizing Adjustments - Year to Date Comparison."  
                   
                   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
                                   
RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR  
($ in thousands)  
                                   
For the Three Months Ended September 30, 2011  
(unaudited)  
                       
  Inpatient Services     Rehabilitation Therapy Services     Medical Staffing Services     Other & Corp Seg     Elimination of Affiliated Revenue     Consolidated  
                                               
Nonaffiliated revenue $ 418,097     $ 29,568     $ 20,996     $ 15     $ -     $ 468,676  
Affiliated revenue   -       32,791       757       -       (33,548 )     -  
  Total revenue $ 418,097     $ 62,359     $ 21,753     $ 15     $ (33,548 )   $ 468,676  
                                               
Income (loss) from continuing operations $ (285,549 )   $ 2,296     $ 1,221     $ (25,343 )   $ -     $ (307,375 )
                                               
Income tax expense   -       -       -       2,203       -       2,203  
                                               
Interest, net   (33 )     -       -       4,867       -       4,834  
                                               
Depreciation and amortization   6,770       236       187       970       -       8,163  
                                               
  EBITDA $ (278,812 )   $ 2,532     $ 1,408     $ (17,303 )   $ -     $ (292,175 )
                                               
Loss on sale of assets, net   809       -       -       -       -       809  
                                               
Restructuring costs   -       -       -       2,426       -       2,426  
                                               
Loss on asset impairment   317,091       -       -       -       -       317,091  
                                               
  Adjusted EBITDA $ 39,088     $ 2,532     $ 1,408     $ (14,877 )   $ -     $ 28,151  
                                               
Center rent expense   35,642       140       170       -       -       35,952  
                                               
  Adjusted EBITDAR $ 74,730     $ 2,672     $ 1,578     $ (14,877 )   $ -     $ 64,103  
                                               
                                               
                                               
                                               
Adjusted EBITDA margin   9.3 %     4.1 %     6.5 %                     6.0 %
                                               
Adjusted EBITDAR margin   17.9 %     4.3 %     7.3 %                     13.7 %
                                               
                                               
See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."  
   
   
   
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES  
                                   
RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR  
($ in thousands)  
                                   
For the Nine Months Ended September 30, 2011  
(unaudited)  
                       
  Inpatient Services     Rehabilitation Therapy Services     Medical Staffing Services     Other & Corp Seg     Elimination of Affiliated Revenue     Consolidated  
                                               
Nonaffiliated revenue $ 1,250,568     $ 89,645     $ 65,309     $ 36     $ -     $ 1,405,558  
Affiliated revenue   -       98,710       2,079       -       (100,789 )     -  
  Total revenue $ 1,250,568     $ 188,355     $ 67,388     $ 36     $ (100,789 )   $ 1,405,558  
                                               
Income (loss) from continuing operations $ (217,007 )   $ 8,495     $ 4,082     $ (81,881 )   $ -     $ (286,311 )
                                               
Income tax expense   -       -       -       16,715       -       16,715  
                                               
Interest, net   (69 )     -       1       14,756       -       14,688  
                                               
Depreciation and amortization   19,331       689       561       2,660       -       23,241  
                                               
  EBITDA $ (197,745 )   $ 9,184     $ 4,644     $ (47,750 )   $ -     $ (231,667 )
                                               
Loss on sale of assets, net   809       -       -       -       -       809  
                                               
Restructuring costs   302       -       -       2,426       -       2,728  
                                               
Loss on asset impairment   317,091       -       -       -       -       317,091  
                                               
  Adjusted EBITDA $ 120,457     $ 9,184     $ 4,644     $ (45,324 )   $ -     $ 88,961  
                                               
Center rent expense   106,487       394       513       -       -       107,394  
                                               
  Adjusted EBITDAR $ 226,944     $ 9,578     $ 5,157     $ (45,324 )   $ -     $ 196,355  
                                               
                                               
                                               
                                               
Adjusted EBITDA margin   9.6 %     4.9 %     6.9 %                     6.3 %
                                               
Adjusted EBITDAR margin   18.1 %     5.1 %     7.7 %                     14.0 %
                                               
                                               
See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."  
   
   
     
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,    
    2012       2011       2012       2011    
Consolidated Company                                        
                                         
Revenues - Non-affiliated (in thousands)                                        
  Skilled Nursing and similar facilities   $ 393,560       $ 402,703       $ 1,172,804       $ 1,205,479    
  Hospice     15,719         14,885         46,491         43,647    
  Other - Inpatient Services     471         509         1,378         1,442    
  Inpatient Services     409,750         418,097         1,220,673         1,250,568    
                                           
  Rehabilitation Therapy Services     29,032         29,568         88,858         89,645    
  Medical Staffing Services     21,686         20,996         66,559         65,309    
  Other - non-core businesses     2         15         15         36    
    Total   $ 460,470       $ 468,676       $ 1,376,105       $ 1,405,558    
                                           
                                           
Revenue Mix - Non-affiliated (in thousands)                                        
  Medicare   $ 128,180   28%   $ 149,147   32%   $ 397,867   29%   $ 454,591   32%
  Medicaid     195,441   42%     184,754   39%     570,734   41%     541,977   39%
  Private and Other     106,648   24%     106,541   23%     320,285   24%     324,169   23%
  Managed Care / Insurance     24,568   5%     22,777   5%     71,311   5%     69,133   5%
  Veterans     5,633   1%     5,457   1%     15,908   1%     15,688   1%
    Total   $ 460,470   100%   $ 468,676   100%   $ 1,376,105   100%   $ 1,405,558   100%
                                         
                                         
                                         
Inpatient Services Stats                                        
                                         
  Number of centers:     190         190         190         190    
  Number of available beds:     20,774         20,803         20,774         20,803    
  Occupancy %:     87.0%         87.2%         87.1%         87.4%    
                                           
                                           
  Payor Mix % based on patient days:                                        
      Medicare - SNF Beds     13.9%         15.0%         14.6%         15.6%    
      Managed care / Ins. - SNF Beds     4.1%         3.8%         4.1%         4.0%    
        Total SNF skilled mix     18.0%         18.8%         18.7%         19.6%    
                                             
    Medicare     12.7%         13.7%         13.4%         14.3%    
    Medicaid     64.2%         62.8%         63.7%         62.3%    
    Private and Other     17.9%         18.7%         17.9%         18.5%    
    Managed Care / Insurance     3.8%         3.5%         3.7%         3.6%    
    Veterans     1.4%         1.3%         1.3%         1.3%    
                                             
  Revenue Mix % of revenues:                                        
      Medicare - SNF Beds     29.1%         33.7%         30.5%         34.6%    
      Managed care / Ins. - SNF Beds     6.3%         5.8%         6.2%         5.9%    
        Total SNF skilled mix     35.4%         39.5%         36.7%         40.5%    
                                             
    Medicare     30.2%         34.5%         31.5%         35.2%    
    Medicaid     47.7%         44.2%         46.8%         43.3%    
    Private and Other     14.8%         14.6%         14.6%         14.7%    
    Managed Care / Insurance     5.9%         5.4%         5.8%         5.5%    
    Veterans     1.4%         1.3%         1.3%         1.3%    
                                         
                                         
  Revenues PPD:                                        
    Medicare (Part A)   $ 465.80       $ 520.11       $ 463.52       $ 520.92    
    Medicare Blended Rate (Part A & B)   $ 513.99       $ 563.52       $ 509.23       $ 559.86    
    Medicaid   $ 183.16       $ 176.42       $ 180.65       $ 175.21    
    Medicaid, net of provider taxes   $ 165.95       $ 160.69       $ 163.50       $ 159.84    
    Private and Other   $ 189.42       $ 186.05       $ 189.87       $ 190.06    
    Managed Care / Insurance   $ 387.04       $ 384.33       $ 380.05       $ 377.69    
    Veterans   $ 242.67       $ 257.15       $ 246.28       $ 249.90    
                                         
                                         
Rehab contracts                                        
                                         
  Affiliated     178         178         178         178    
  Non-affiliated     338         343         338         343    
                                           
  Average Qtrly Revenue per Contract (in thousands)   $ 118       $ 120       $ 121       $ 121    
                                         
                                         
                                         
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
NORMALIZING ADJUSTMENTS - QUARTER COMPARISON
(in thousands, except per share data)
 
    AS REPORTED - 3rd QUARTER 2012
    Revenue   Adjusted EBITDAR   Adjusted EBITDA   Pre-tax   Income from Continuing Operations   Disc Ops     Net (Loss) Income
                                             
As Reported 3rd QUARTER 2012   $ 460,470   $ 56,869   $ 20,222   $ 6,921   $ 3,989   $ (2,702 )   $ 1,287
Percent of Revenue           12.4%     4.4%     1.5%     0.9%     -0.6%       0.3%
                                             
Normalizing Adjustments:                                            
                                             
  Transaction costs     -     1,033     1,033     1,033     630     -       630
                                             
Normalized As Reported - 3rd QUARTER 2012   $ 460,470   $ 57,902   $ 21,255   $ 7,954   $ 4,619   $ (2,702 )   $ 1,917
Percent of Revenue           12.6%     4.6%     1.7%     1.0%     -0.6%       0.4%
                                             
As Reported                           $ 0.15   $ (0.10 )   $ 0.05
Diluted EPS:                                            
As Normalized                           $ 0.17   $ (0.10 )   $ 0.07
                                             
                                             
  AS REPORTED - 3rd QUARTER 2011  
  Revenue   Adjusted EBITDAR   Adjusted EBITDA   Pre-tax     Income from Continuing Operations     Disc Ops     Net Income  
                                                 
As Reported - 3rd QUARTER 2011 $ 468,676   $ 64,103   $ 28,151   $ (305,172 )   $ (307,375 )   $ (2,031 )   $ (309,406 )
Percent of Revenue         13.7%     6.0%     -65.1%       -65.6%       -0.4%       -66.0%  
                                                 
Normalizing Adjustments:                                                
                                                 
  Restructuring costs   -     -     -     2,426       1,480       -       1,480  
  Impairment of assets   -     -     -     317,091       315,289       -       315,289  
                                                 
Normalized As Reported - 3rd QUARTER 2011 $ 468,676   $ 64,103   $ 28,151   $ 14,345     $ 9,394     $ (2,031 )   $ 7,363  
Percent of Revenue         13.7%     6.0%     3.1%       2.0%       -0.4%       1.6%  
                                                 
As Reported                           $ (11.73 )   $ (0.08 )   $ (11.81 )
Diluted EPS:                                                
As Normalized                           $ 0.36     $ (0.08 )   $ 0.28  
                                                 
                                                 
See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Loss to Adjusted EBITDA and Adjusted EBITDAR."
 
Normalizing adjustments are transactions or adjustments not related to ongoing operations and consist of transaction costs associated with the Company's sale to Genesis Healthcare.
 
Since normalizing adjustments are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations and interpretations, the information presented herein may not be comparable to other similarly described information of other companies.