SOURCE: Sun Healthcare Group, Inc.

Sun Healthcare Group, Inc.

March 02, 2009 16:30 ET

Sun Healthcare Group, Inc. Reports Fourth-Quarter Earnings; Strong Results Led by Growth in Skilled Mix

IRVINE, CA--(Marketwire - March 2, 2009) - Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced results for the fourth quarter and year ended Dec. 31, 2008.

Consolidated Results - Fourth Quarter

Total net revenue for the quarter ended Dec. 31, 2008, was $467.0 million, up 5.5 percent compared to $442.5 million for the comparable period one year ago. Net income for the quarter ended Dec. 31, 2008, was $82.4 million, compared to net income of $35.4 million for the comparable 2007 period. Diluted earnings per share for the quarter ended Dec. 31, 2008, was $1.88 compared to $0.79 for the comparable period one year ago. In the quarter ended Dec. 31, 2008, the Company's results of operations reflect a $74.0 million tax benefit, which includes $70.5 million from the partial reversal of the valuation allowance on deferred tax assets plus $3.5 million of other non-recurring tax adjustments. The partial reversal in 2008 was based on the Company's history of profitability and the continuation of this profitability in the foreseeable future. Similarly, in the quarter ended Dec. 31, 2007, the Company recorded in its income statement a $26.0 million tax benefit associated with the partial reversal of the valuation allowance on deferred tax assets. Details on the normalizing adjustments are provided following the table below.

                                                   Actual Results
 (Dollars in thousands)                         Quarter Ended Dec. 31,
                                                2008             2007
                                           --------------   --------------

 Revenue                                   $      466,968   $      442,535

 Depreciation and amortization                     10,801            7,801

 Interest expense, net                             13,459           15,479

 Pre-tax income                                    16,365           13,605

 Income tax benefit                               (67,467)         (21,251)

 Income (loss) from continuing operations          83,832           34,856

 Income (loss) from discontinued
  operations                                       (1,411)             496
                                           --------------   --------------

                                           --------------   --------------
 Net income (loss)                         $       82,421   $       35,352
                                           ==============   ==============

                                           --------------   --------------
 Diluted earnings per share                $         1.88   $         0.79
                                           ==============   ==============

 EBITDAR                                   $       58,054   $       58,419
                                           ==============   ==============
    Margin - EBITDAR                                 12.4%            13.2%
                                           ==============   ==============
 EBITDAR normalized                        $       61,604   $       54,508
                                           ==============   ==============
    Margin - EBITDAR normalized                      13.2%            12.3%
                                           ==============   ==============

 EBITDA                                    $       39,725   $       40,058
                                           ==============   ==============
    Margin - EBITDA                                   8.5%             9.1%
                                           ==============   ==============
 EBITDA normalized                         $       43,275   $       36,147
                                           ==============   ==============
    Margin - EBITDA normalized                        9.3%             8.2%
                                           ==============   ==============

 Pre-tax income continuing operations -
  normalized                               $       19,015   $       12,867
                                           ==============   ==============
 Income tax expense - normalized           $        7,605   $        6,317
                                           ==============   ==============

 Income from continuing operations -
  normalized                               $       11,410   $        8,337
                                           ==============   ==============
 Diluted earnings per share - normalized   $         0.26   $         0.19
                                           ==============   ==============

 Net income - normalized                   $       10,449   $        6,489
                                           ==============   ==============
 Diluted earnings per share - normalized   $         0.24   $         0.15
                                           ==============   ==============

In addition to the tax adjustments described above, other normalizing items for the quarter ended Dec. 31, 2008, include pre-tax adjustments for $4.3 million of expense from adjustments of prior period self-insurance reserves ($0.8 million of which were related to discontinued operations) and a gain of $0.9 million related to the sale of a non-core property. Normalized results for the quarter ended Dec. 31, 2007, include pre-tax adjustments for $2.3 million of income from a settlement of a claim associated with a prior period acquisition, $3.5 million of income from adjustments of prior period self-insurance reserves ($0.9 million of which were related to discontinued operations), a $3.2 million charge associated with the refinancing of debt agreements and a charge of $1.0 million related to integration costs associated with the acquisition of Harborside Healthcare Corporation ("Harborside") in 2007.

On a normalized basis, comparing the quarter ended Dec. 31, 2008, to the same period in 2007:

-- revenue increased $24.4 million, or 5.5 percent;
-- EBITDAR increased $7.1 million, or 13.0 percent;
-- EBITDAR margin improved 90 basis points to 13.2 percent;
-- EBITDA increased $7.1 million, or 19.7 percent;
-- EBITDA margin improved 110 basis points to 9.3 percent; and
-- income from continuing operations increased by $3.1 million,
   or 36.8 percent.

Commenting on the results, Richard K. Matros, Sun's chairman and chief executive officer, stated, "We are very pleased to have produced solid results for both the quarter and the year, demonstrating in this economy that our sector is able to maintain stability and predictability. We ended our year on a strong note with $0.26 normalized EPS for the fourth quarter. The guidance we issued last month for 2009 reflects confidence in our ability to continue to move margins on a same store basis. Our first-quarter 2009 skilled mix trends are strong as we combat contraction in Medicaid rates. We will continue to focus in 2009 on margin improvement, company-wide process improvement initiatives, and activities that will result in deleveraging our balance sheet." Matros added, "I want to take this opportunity to thank the thousands of outstanding and compassionate employees working at Sun Healthcare Group. They make fulfillment of our mission possible."

Consolidated Results and Consolidated Pro Forma Results - Full Year

Total net revenue for the year ended Dec. 31, 2008, was $1,824.2 million, up 17.1 percent compared to $1,558.3 million for the comparable 2007 period. Net income for the year ended Dec. 31, 2008, was $109.3 million compared to net income of $57.5 million for 2007. Diluted earnings per share for the year ended Dec. 31, 2008, was $2.49 compared to $1.33 in 2007. The pro forma information included in the table below was prepared as if the Harborside acquisition had occurred on Jan. 1, 2007. Details on the normalizing adjustments are provided following the table below.

                                                                Pro Forma
                                                                 Results
                                         Actual Results         Year Ended
 (Dollars in thousands)                Year Ended Dec. 31,       Dec. 31,
                                       2008          2007          2007
                                  ------------  ------------  ------------

 Revenue                          $  1,824,184  $  1,558,276  $  1,719,176

 Depreciation and amortization          40,355        31,221        35,922

 Interest expense, net                  54,603        44,347        48,940

 Pre-tax income                         66,626        43,174        41,545

 Income tax (benefit)                  (47,348)      (10,914)      (11,734)

 Income from continuing
  operations                           113,974        54,088        53,279

 (Loss) income from discontinued
  operations                            (4,687)        3,422         2,365
                                  ------------  ------------  ------------

                                  ------------  ------------  ------------
 Net income                       $    109,287  $     57,510  $     55,644
                                  ============  ============  ============

                                  ------------  ------------  ------------
 Diluted earnings per share       $       2.49  $       1.33  $       1.28
                                  ============  ============  ============

 EBITDAR                          $    234,371  $    192,470  $    207,089
                                  ============  ============  ============
    Margin - EBITDAR                      12.8%         12.4%         12.0%
                                  ============  ============  ============
 EBITDAR normalized               $    236,740  $    186,091  $    207,037
                                  ============  ============  ============
    Margin - EBITDAR normalized           13.0%         11.9%         12.0%
                                  ============  ============  ============

 EBITDA                           $    160,607  $    121,938  $    129,603
                                  ============  ============  ============
    Margin - EBITDA                        8.8%          7.8%          7.5%
                                  ============  ============  ============
 EBITDA normalized                $    162,976  $    115,559  $    129,551
                                  ============  ============  ============
    Margin - EBITDA normalized             8.9%          7.4%          7.5%
                                  ============  ============  ============

 Pre-tax income continuing
  operations - normalized         $     68,095  $     40,583  $     45,281
                                  ============  ============  ============
 Income tax expense - normalized  $     27,252  $     14,218  $     15,612
                                  ============  ============  ============

 Income from continuing
  operations - normalized         $     40,843  $     26,365  $     29,669
                                  ============  ============  ============
 Diluted earnings per share -
  normalized                      $       0.93  $       0.61  $       0.68
                                  ============  ============  ============

 Net income - normalized          $     36,384  $     25,464  $     27,711
                                  ============  ============  ============
 Diluted earnings per share -
  normalized                      $       0.83  $       0.59  $       0.64
                                  ============  ============  ============

In addition to the tax adjustments described previously, other normalizing items impacting actual results for the 2008 fiscal year include pre-tax adjustments for a net $1.3 million of expense from adjustments of prior period self-insurance reserves (a net $0.4 million of which were related to discontinued operations), a gain of $0.9 million related to the sale of a non-core property and $1.5 million of integration costs associated with the Harborside acquisition. Normalized actual results for the 2007 fiscal year include pre-tax adjustments for $4.5 million of integration costs associated with the Harborside acquisition, $12.5 million of income from adjustments of prior period self-insurance reserves ($3.9 million of which were related to discontinued operations), $2.3 million of income from a settlement of a claim associated with a prior period acquisition, and $3.8 million in charges associated with the refinancing of debt agreements.

Normalized pro forma results for the 2007 fiscal year include the 2007 adjustments referred to above and also include a $5.9 million charge for losses on prior period Harborside accounts receivable and $0.5 million of costs related to Harborside investor fees and merger costs.

On a normalized pro forma basis, comparing the 2008 year to the 2007 year:

-- revenue increased $105.0 million, or 6.1 percent;
-- EBITDAR increased $29.7 million, or 14.3 percent;
-- EBITDAR margin improved 100 basis points to 13.0 percent;
-- EBITDA increased $33.4 million, or 25.8 percent;
-- EBITDA margin improved 140 basis points to 8.9 percent; and
   income from continuing operations increased by $11.2 million, or
   37.7 percent.

Inpatient Business

For its core inpatient business, comparing the quarters ended Dec. 31, 2008 and 2007 on a normalized basis and comparing the years ended Dec. 31, 2008 and 2007 on a normalized pro-forma basis (assuming the Harborside acquisition occurred on Jan. 1, 2007):

Quarter ended Dec. 31, 2008:

-- revenue increased $20.9 million, or 5.3 percent, to $414.2 million from
   $393.3 million;
-- net segment EBITDAR increased $6.0 million, or 9.1 percent, to
   $72.0 million from $66.0 million;
-- net segment EBITDAR margin for 2008 was 17.4 percent compared to
   16.8 percent in 2007;
-- net segment EBITDA increased $6.1 million, or 12.7 percent, to
   $54.0 million from $47.9 million;
-- net segment EBITDA margin for 2008 was 13.0 percent compared to
   12.2 percent in 2007;
-- rehabilitation RUGS utilization increased 310 basis points to
   88.0 percent as a percent of total Medicare days; and
-- Rehabilitation Extensive Service ("REX") Days as a percent of total
   Medicare days was 42.1 percent, up 260 basis points from the same
   period in 2007.

The revenue gain of $20.9 million in the quarter was primarily attributable to:

-- an $8.4 million increase in Medicare revenue due principally
   to Medicare part A rate growth and part B volume growth;
-- a $7.5 million increase in managed care/commercial insurance revenue
   due to a higher customer base coupled with rate growth;
-- a $2.0 million increase in Medicaid revenue resulting from a
   $5.9 million rate improvement partially offset by a $3.9 million
   impact from a decrease in customer base;
-- a $3.3 million increase in hospice revenue due to both internal growth
   and a September 2008 hospice acquisition; and
-- a $0.3 million decrease in private and other revenue due principally
   to a decline in customer base.

Year ended Dec. 31, 2008 (2007 data are pro forma):

-- revenue increased $89.9 million, or 5.9 percent, to $1,616.7 million
   from $1,526.8 million;
-- net segment EBITDAR increased $24.6 million, or 9.7 percent,
   to $278.2 million from $253.6 million;
-- net segment EBITDAR margin for 2008 was 17.2 percent compared to
   16.6 percent in 2007;
-- net segment EBITDA increased $28.6 million, or 16.1 percent,
   to $205.8 million from $177.2 million; and
-- net segment EBITDA margin for 2008 was 12.7 percent compared to
   11.6 percent in 2007.

Matros further stated, "In 2008, we revamped infrastructure and systems as they relate to quality initiatives, business development and human resources. We look forward to the benefits of these initiatives in 2009 as we continue to strengthen all operational areas of the Company. We did open an additional eight Rehab Recovery Suites® in the fourth quarter, ending the year with 47 units. We expect to have approximately 70 by the end of 2009."

Ancillary Businesses

For its ancillary businesses, comparing the quarters ended Dec. 31, 2008 and 2007 on a normalized basis and comparing the years ended Dec. 31, 2008 and 2007 on a normalized pro-forma basis (assuming the Harborside acquisition occurred on Jan. 1, 2007):

-- for the quarter, revenue increased $6.9 million, or 10.9 percent,
   to $69.8 million from $62.9 million;
-- for the quarter, EBITDA was consistent with EBITDA in the prior year
   at $5.1 million;
-- for the twelve-month period, revenue increased $30.0 million, or
   12.4 percent, to $270.9 million from $240.9 million; and
-- for the twelve-month period, EBITDA increased $2.2 million, or
   13.0 percent, to $19.5 million from $17.2 million.

Conference Call

Sun invites investors to listen to a conference call with Sun's senior management on Tuesday, March 3, 2009, at 10 a.m. Pacific / 1 p.m. Eastern, to discuss the Company's fourth-quarter and year-end earnings for 2008.

To listen to the conference call, dial (877) 723-9521 and refer to Sun Healthcare Group. A recording of the call will be available from 4 p.m. Eastern on March 3, 2009, until midnight Eastern on April 3, 2009, by calling (888) 203-1112 and using access code 7642477.

About Sun Healthcare Group, Inc.

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

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. Factors that could cause actual results to differ are identified in the public filings made by the company with the Securities and Exchange Commission and include changes in Medicare and Medicaid reimbursements; our ability to maintain the occupancy rates and payor mix at our long-term care centers; potential liability for losses not covered by, or in excess of, our insurance; the effects of government regulations and investigations; the significant amount of our indebtedness, covenants in our debt agreements that may restrict our activities and our ability to incur more indebtedness; the impact of the current economic downturn on our business; increasing labor costs and the shortage of qualified healthcare personnel; and our ability to receive increases in reimbursement rates from government payors to cover increased costs. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission, including our Annual Report on Forms 10-K and 10-K/A and Quarterly Reports on Form 10-Q, copies of which are 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 our control. We caution investors that any forward-looking statements made by Sun are not guarantees of future performance. We disclaim 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. In addition, the normalizing adjustments to EBITDA, EBITDAR, pre-tax income and income from continuing operations discussed in this press release and shown in the accompanying tables are non-GAAP adjustments.

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.

                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES


                      CONSOLIDATED BALANCE SHEETS
                   (in thousands, except share data)


                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                              (audited)        (audited)
                      ASSETS

Current assets:
  Cash and cash equivalents                $       92,153   $       55,832
  Restricted cash                                  34,676           37,365
  Accounts receivable, net                        202,138          188,882
  Prepaid expenses and other assets                21,456           13,290
  Assets held for sale                              3,654            9,924
  Deferred tax assets                              57,261           35,354
                                           --------------   --------------
    Total current assets                          411,338          340,647

Property and equipment, net                       603,645          585,972
Intangible assets, net                             54,388           57,044
Goodwill                                          326,808          324,277
Restricted cash, non-current                        3,303            3,829
Deferred tax assets                               134,807           51,892
Other assets                                        5,562           10,165
                                           --------------   --------------
      Total assets                         $    1,539,851   $    1,373,826
                                           ==============   ==============


       LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                         $       62,000   $       52,836
  Accrued compensation and benefits                60,660           61,956
  Accrued self-insurance obligations,
   current                                         45,293           48,646
  Income taxes payable                                  -            3,000
  Liabilities held for sale                             -            3,181
  Other accrued liabilities                        53,374           58,002
  Current portion of long-term debt and
   capital lease obligations                       17,865           29,305
                                           --------------   --------------
  Total current liabilities                       239,192          256,926

Accrued self-insurance obligations, net of
 current portion                                  114,557          106,534
Long-term debt and capital lease
 obligations, net of current portion              707,976          699,963
Unfavorable lease obligations, net                 15,514           18,960
Other long-term liabilities                        57,454           44,717
                                           --------------   --------------
    Total liabilities                           1,134,693        1,127,100

    Minority interest                               1,449              470

Stockholders' equity:
  Preferred stock of $.01 par value,
   authorized 10,000,000 shares, no shares
   were issued and outstanding as of
   December 31, 2008 and 2007                           -                -
  Common stock of $.01 par value,
   authorized 125,000,000 shares,
   43,544,765 and 43,016,042 shares
   issued and outstanding as of
   December 31, 2008 and 2007, respectively           435              430
  Additional paid-in capital                      650,543          600,199
  Accumulated deficit                            (242,683)        (351,970)
  Accumulated other comprehensive loss, net        (4,586)          (2,403)
                                           --------------   --------------
                                                  403,709          246,256
                                           --------------   --------------
    Total liabilities and stockholders'
     equity                                $    1,539,851   $    1,373,826
                                           ==============   ==============



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                              CONSOLIDATED
                           INCOME STATEMENTS
                  (in thousands, except per share data)


                                            For the Three    For the Three
                                            Months Ended     Months Ended
                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                             (unaudited)      (unaudited)

Total net revenues                         $      466,968   $      442,535
                                           --------------   --------------
Costs and expenses:
  Operating salaries and benefits                 262,837          251,790
  Self-insurance for workers' compensation
   and general and professional liability
   insurance                                       18,711           11,279
  Operating administrative costs                   13,498           11,599
  Other operating costs                            93,477           91,442
  Center rent expense                              18,329           18,361
  General and administrative expenses              15,774           17,826
  Depreciation and amortization                    10,801            7,801
  Provision for losses on accounts
   receivable                                       4,617              180
  Interest, net of interest income of $328
   and $330, respectively                          13,459           15,479
  Loss on extinguishment of debt, net                   -            3,173
  Gain on sale of assets, net                        (900)               -
                                           --------------   --------------
Total costs and expenses                          450,603          428,930
                                           --------------   --------------

Income before income taxes and
 discontinued operations                           16,365           13,605
Income tax benefit                                (67,467)         (21,251)
                                           --------------   --------------
Income from continuing operations                  83,832           34,856
                                           --------------   --------------

Discontinued operations:
  (Loss) income from discontinued
   operations, net of related taxes                  (933)           1,322
  Loss on disposal of discontinued
   operations, net of related taxes                  (478)            (826)
                                           --------------   --------------
(Loss) income from discontinued
 operations, net                                   (1,411)             496
                                           --------------   --------------

Net income                                 $       82,421   $       35,352
                                           ==============   ==============


Basic income per common and common
 equivalent share:
  Income from continuing operations        $         1.92   $         0.81
  (Loss) income from discontinued
   operations, net                                  (0.03)            0.01
                                           --------------   --------------
Net income                                 $         1.89   $         0.82
                                           ==============   ==============

Diluted income per common and common
 equivalent share:
  Income from continuing operations        $         1.91   $         0.78
  (Loss) income from discontinued
   operations, net                                  (0.03)            0.01
                                           --------------   --------------
Net Income                                 $         1.88   $         0.79
                                           ==============   ==============

Weighted average number of common and
 common equivalent shares outstanding:
  Basic                                            43,602           43,174
  Diluted                                          43,873           44,528



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                              CONSOLIDATED
                           INCOME STATEMENTS
                  (in thousands, except per share data)


                                              For the          For the
                                            Year Ended       Year Ended
                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                              (audited)        (audited)

Total net revenues                         $    1,824,184   $    1,558,276
                                           --------------   --------------
Costs and expenses:
  Operating salaries and benefits               1,029,279          888,370
  Self-insurance for workers' compensation
   and general and professional liability
   insurance                                       59,715           44,535
  Operating administrative costs                   51,171           39,950
  Other operating costs                           373,238          319,133
  Center rent expense                              73,764           70,532
  General and administrative expenses              62,302           64,835
  Depreciation and amortization                    40,355           31,221
  Provision for losses on accounts
   receivable                                      14,108            8,983
  Interest, net of interest income of
   $1,781 and $3,255, respectively                 54,603           44,347
  Loss on extinguishment of debt, net                   -            3,173
  (Gain) loss on sale of assets, net                 (977)              23
                                           --------------   --------------
Total costs and expenses                        1,757,558        1,515,102
                                           --------------   --------------

Income before income taxes and
 discontinued operations                           66,626           43,174
Income tax benefit                                (47,348)         (10,914)
                                           --------------   --------------
Income from continuing operations                 113,974           54,088
                                           --------------   --------------

Discontinued operations:
  (Loss) income from discontinued
   operations, net of related taxes                (1,686)           3,622
  Loss on disposal of discontinued
   operations, net of related taxes                (3,001)            (200)
                                           --------------   --------------
(Loss) income from discontinued
 operations, net                                   (4,687)           3,422
                                           --------------   --------------

Net income                                 $      109,287   $       57,510
                                           ==============   ==============


Basic income per common and common
 equivalent share:
  Income from continuing operations        $         2.63   $         1.28
  (Loss) income from discontinued
   operations, net                                  (0.11)            0.08
                                           --------------   --------------
Net income                                 $         2.52   $         1.36
                                           ==============   ==============

Diluted income per common and common
 equivalent share:
  Income from continuing operations        $         2.59   $         1.25
  (Loss) income from discontinued
   operations, net                                  (0.10)            0.08
                                           --------------   --------------
Net Income                                 $         2.49   $         1.33
                                           ==============   ==============

Weighted average number of common and
 common equivalent shares outstanding:
  Basic                                            43,331           42,350
  Diluted                                          43,963           43,390



                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                               CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (in thousands)


                                            For the Three    For the Three
                                            Months Ended     Months Ended
                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                             (unaudited)      (unaudited)

Cash flows from operating activities:
 Net income                                $       82,421   $       35,352
 Adjustments to reconcile net income to
  net cash provided by operating
  activities, including discontinued
  operations:
    Loss on extinguishment of debt                      -            3,173
    Depreciation and amortization                  10,812            7,900
    Amortization of favorable and
     unfavorable lease intangibles                   (436)            (713)
    Provision for losses on accounts
     receivable                                     5,312              565
    Loss (gain) on sale of assets,
     including discontinued operations,
     net                                             (104)             827
    Stock-based compensation expense                1,532              994
    Deferred taxes                                (64,675)         (33,582)
    Minority interest                                 160                -
    Other                                             (22)            (226)
 Changes in operating assets and
  liabilities, net of acquisitions:
    Accounts receivable                           (13,853)          (6,309)
    Restricted cash                                (1,227)           1,223
    Prepaid expenses and other assets               1,487            4,367
    Accounts payable                               11,145              (45)
    Accrued compensation and benefits              (1,238)            (424)
    Accrued self-insurance obligations              8,179           (4,198)
    Income taxes payable                           (2,782)          (3,538)
    Other accrued liabilities                     (12,879)         (13,450)
    Other long-term liabilities                     1,859           13,924
                                           --------------   --------------
     Net cash provided by operating
      activities                                   25,691            5,840
                                           --------------   --------------

Cash flows from investing activities:
 Capital expenditures                             (14,011)         (10,123)
 Purchase of leased real estate                         -          (23,242)
 Proceeds from sale of assets held for
  sale                                              4,557            1,600
 Acquisitions, net of cash acquired                (2,326)         (10,956)
                                           --------------   --------------
    Net cash used for investing activities        (11,780)         (42,721)
                                           --------------   --------------

Cash flows from financing activities:
 Long-term debt borrowings                              -           20,000
 Principal repayments of long-term debt
  and capital lease obligations                    (2,207)         (12,872)
 Distribution of partnership equity                   (65)            (146)
 Proceeds from issuance of common stock                81              678
                                           --------------   --------------
    Net cash (used for) provided by
     financing activities                          (2,191)           7,660
                                           --------------   --------------

Net increase (decrease) in cash and cash
 equivalents                                       11,720          (29,221)
Cash and cash equivalents at beginning of
 period                                            80,433           85,053
                                           --------------   --------------
Cash and cash equivalents at end of period $       92,153   $       55,832
                                           ==============   ==============


                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                               CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (in thousands)


                                           For the Twelve   For the Twelve
                                            Months Ended     Months Ended
                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                              (audited)        (audited)

Cash flows from operating activities:
 Net income                                $      109,287   $       57,510
 Adjustments to reconcile net income to
  net cash provided by operating
  activities, including discontinued
  operations:
    Loss on extinguishment of debt                      -            3,173
    Depreciation and amortization                  40,614           31,801
    Amortization of favorable and
     unfavorable lease intangibles                 (1,879)          (1,315)
    Provision for losses on accounts
     receivable                                    15,283           10,345
    Loss (gain) on sale of assets,
     including discontinued operations,
     net                                            2,151              224
    Impairment charge for discontinued
     operation                                      1,800                -
    Stock-based compensation expense                5,270            3,678
    Deferred taxes                                (51,128)         (33,582)
    Minority interest                                 979              100
    Other                                             (10)            (866)
 Changes in operating assets and
  liabilities, net of acquisitions:
    Accounts receivable                           (31,654)          (9,899)
    Restricted cash                                 3,215            2,497
    Prepaid expenses and other assets              (4,213)          16,127
    Accounts payable                                4,032          (17,266)
    Accrued compensation and benefits              (2,367)          14,486
    Accrued self-insurance obligations              4,773          (12,108)
    Income taxes payable                           (1,806)           4,779
    Other accrued liabilities                     (12,201)           3,616
    Other long-term liabilities                     5,688           10,537
                                           --------------   --------------
     Net cash provided by operating
      activities                                   87,834           83,837
                                           --------------   --------------

Cash flows from investing activities:
 Capital expenditures                             (42,543)         (33,450)
 Purchase of leased real estate                    (8,956)         (56,462)
 Proceeds from sale of assets held for
  sale                                             18,354            7,589
 Acquisitions, net of cash acquired               (11,734)        (369,194)
 Accrued acquisition costs, net                         -              740
 Insurance proceeds received for damaged
  property                                            628                -
                                           --------------   --------------
    Net cash used for investing activities        (44,251)        (450,777)
                                           --------------   --------------

Cash flows from financing activities:
 Net repayments under revolving credit
  facility                                              -           (9,994)
 Long-term debt borrowings                         20,290          347,000
 Principal repayments of long-term debt
  and capital lease obligations                   (29,627)         (54,509)
 Distribution of partnership equity                  (418)            (714)
 Proceeds from issuance of common stock             2,493            1,459
 Release of third-party collateral                      -           25,640
 Deferred financing costs                               -          (18,045)
                                           --------------   --------------
    Net cash (used for) provided by
     financing activities                          (7,262)         290,837
                                           --------------   --------------

Net increase (decrease) in cash and cash
 equivalents                                       36,321          (76,103)
Cash and cash equivalents at beginning of
 period                                            55,832          131,935
                                           --------------   --------------
Cash and cash equivalents at end of period $       92,153   $       55,832
                                           ==============   ==============



                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
                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                              (audited)        (audited)

 Total net revenues                        $      466,968   $      442,535
                                           --------------   --------------

 Net income                                $       82,421   $       35,352
                                           --------------   --------------


  Income from continuing operations                83,832           34,856

  Income tax benefit                              (67,467)         (21,251)

  Loss on extinguishment of debt, net                   -            3,173

  Gain on sale of assets, net                        (900)               -
                                           --------------   --------------

 Net segment income                        $       15,465   $       16,778

  Interest, net                                    13,459           15,479

  Depreciation and amortization                    10,801            7,801
                                           --------------   --------------

 EBITDA                                    $       39,725   $       40,058

  Center rent expense                              18,329           18,361
                                           --------------   --------------

 EBITDAR                                   $       58,054   $       58,419

  Operating administrative costs                   13,498           11,599
  General and administrative expenses              15,774           17,826
                                           --------------   --------------
 Total operating and general and admin
  expenses                                         29,272           29,425

 EBITDAM                                   $       68,997   $       69,483
 EBITDARM                                  $       87,326   $       87,844

EBITDA is defined as earnings before income (loss) on discontinued operations, income taxes, loss (gain) on sale of assets, net, 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          For the
                                            Year Ended       Year Ended
                                            December 31,     December 31,
                                                2008             2007
                                           --------------   --------------
                                              (audited)        (audited)

 Total net revenues                        $    1,824,184   $    1,558,276
                                           --------------   --------------

 Net income                                $      109,287   $       57,510
                                           --------------   --------------

  Income from continuing operations               113,974           54,088

  Income tax benefit                              (47,348)         (10,914)

  Loss on extinguishment of debt, net                   -            3,173

  (Gain) loss on sale of assets, net                 (977)              23
                                           --------------   --------------

 Net segment income                        $       65,649   $       46,370

  Interest, net                                    54,603           44,347

  Depreciation and amortization                    40,355           31,221
                                           --------------   --------------

 EBITDA                                    $      160,607   $      121,938

  Center rent expense                              73,764           70,532
                                           --------------   --------------

 EBITDAR                                   $      234,371   $      192,470

  Operating administrative costs                   51,171           39,950
  General and administrative expenses              62,302           64,835
                                           --------------   --------------
 Total operating and general and admin
  expenses                                        113,473          104,785

 EBITDAM                                   $      274,080   $      226,723
 EBITDARM                                  $      347,844   $      297,255

EBITDA is defined as earnings before income (loss) on discontinued operations, income taxes, loss (gain) on sale of assets, net, 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 SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M)
                             ($ in thousands)

               For the Three Months Ended December 31, 2008
                                (unaudited)


                           Rehabil-                    Elimination
                           itation   Medical               of
                Inpatient  Therapy   Staffing  Other & Affiliated Consoli-
                Services   Services  Services  Corp Seg  Revenue   dated
                ---------  --------  --------  --------  -------  --------
Nonaffiliated
 revenue        $ 414,180  $ 24,012  $ 28,768  $      8  $     -  $466,968
Affiliated
 revenue                -    16,543       467         -  (17,010)        -
                ---------  --------  --------  --------  -------  --------
  Total revenue   414,180    40,555    29,235         8  (17,010)  466,968

Net segment
 income (loss)  $  37,296  $  1,979  $  2,824  $(26,634) $     -  $ 15,465
Interest, net       3,540         -        (6)    9,925        -    13,459
Depreciation
 and
 amortization       9,646       137       195       823        -    10,801
                ---------  --------  --------  --------  -------  --------

  EBITDA        $  50,482  $  2,116  $  3,013  $(15,886) $     -  $ 39,725

Center rent
 expense           17,978       108       243         -        -    18,329
                ---------  --------  --------  --------  -------  --------

  EBITDAR       $  68,460  $  2,224  $  3,256  $(15,886) $     -  $ 58,054

Operating and
 general and
 administrative
 expenses          11,260     1,927       311    15,774        -    29,272
                ---------  --------  --------  --------  -------  --------

  EBITDAM       $  61,742  $  4,043  $  3,324  $   (112) $     -  $ 68,997
  EBITDARM      $  79,720  $  4,151  $  3,567  $   (112) $     -  $ 87,326


   EBITDA margin     12.2%      5.2%     10.3%                         8.5%
  EBITDAM margin     14.9%     10.0%     11.4%                        14.8%
  EBITDAR margin     16.5%      5.5%     11.1%                        12.4%
 EBITDARM margin     19.2%     10.2%     12.2%                        18.7%




                  SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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

                   For the Year Ended December 31, 2008
                                (audited)


                        Rehabil-                     Elimination
                        itation   Medical                of
            Inpatient   Therapy   Staffing   Other & Affiliated  Consoli-
            Services    Services  Services  Corp Seg   Revenue    dated
            ----------  --------  --------  ---------  -------  ----------
Nonaffiliated
 revenue    $1,616,740  $ 89,619  $117,788  $      37  $     -  $1,824,184
Affiliated
 revenue             -    60,856     2,622          -  (63,478)          -
            ----------  --------  --------  ---------  -------  ----------
  Total
   revenue   1,616,740   150,475   120,410         37  (63,478)  1,824,184

Net segment
 income
 (loss)     $  154,330  $  8,462  $  9,690  $(106,833) $     -  $   65,649
Interest,
 net            13,670        (1)      (20)    40,954        -      54,603
Deprecia-
 tion and
 amortiza-
 tion           35,958       533       806      3,058        -      40,355
            ----------  --------  --------  ---------  -------  ----------

  EBITDA    $  203,958  $  8,994  $ 10,476  $ (62,821) $     -  $  160,607

Center rent
 expense        72,394       394       976          -        -      73,764
            ----------  --------  --------  ---------  -------  ----------

  EBITDAR   $  276,352  $  9,388  $ 11,452  $ (62,821) $     -  $  234,371

Operating and
 general and
 admini-
 strative
 expenses       41,381     6,806     2,983     62,303        -     113,473
            ----------  --------  --------  ---------  -------  ----------

  EBITDAM   $  245,339  $ 15,800  $ 13,459  $    (518) $     -  $  274,080
  EBITDARM  $  317,733  $ 16,194  $ 14,435  $    (518) $     -  $  347,844


  EBITDA margin   12.6%      6.0%      8.7%                            8.8%
 EBITDAM margin   15.2%     10.5%     11.2%                           15.0%
 EBITDAR margin   17.1%      6.2%      9.5%                           12.8%
EBITDARM margin   19.7%     10.8%     12.0%                           19.1%




                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 December 31, 2007
                                (unaudited)


                           Rehabil-                    Elimination
                           itation   Medical               of
                Inpatient  Therapy   Staffing  Other & Affiliated Consoli-
                Services   Services  Services  Corp Seg  Revenue   dated
                ---------  --------  --------  --------  -------  --------
Nonaffiliated
 revenue        $ 393,255  $ 20,150  $ 29,120  $     10  $     -  $442,535
Affiliated
 revenue                -    12,964       677         -  (13,641)        -
                ---------  --------  --------  --------  -------  --------
  Total revenue   393,255    33,114    29,797        10  (13,641)  442,535

Net segment
 income (loss)  $  43,993  $  2,348  $  2,433  $(31,996) $     -  $ 16,778
Interest, net       3,402         -         3    12,074        -    15,479
Depreciation and
 amortization       5,481       146       196     1,978        -     7,801
                ---------  --------  --------  --------  -------  --------

  EBITDA        $  52,876  $  2,494  $  2,632  $(17,944) $     -  $ 40,058

Center rent
 expense           18,053        54       254         -        -    18,361
                ---------  --------  --------  --------  -------  --------

  EBITDAR       $  70,929  $  2,548  $  2,886  $(17,944) $     -  $ 58,419

Operating and
 general and
 administrative
 expenses           9,573     1,304       721    17,827        -    29,425
                ---------  --------  --------  --------  -------  --------

  EBITDAM       $  62,449  $  3,798  $  3,353  $   (117) $     -  $ 69,483
  EBITDARM      $  80,502  $  3,852  $  3,607  $   (117) $     -  $ 87,844


  EBITDA margin      13.4%      7.5%      8.8%                         9.1%
 EBITDAM margin      15.9%     11.5%     11.3%                        15.7%
 EBITDAR margin      18.0%      7.7%      9.7%                        13.2%
EBITDARM margin      20.5%     11.6%     12.1%                        19.9%




                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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

                   For the Year Ended December 31, 2007
                                (audited)


                       Rehabil-                      Elimination
                       itation   Medical                 of
           Inpatient   Therapy   Staffing   Other &  Affiliated  Consoli-
           Services    Services  Services  Corp Seg   Revenue     dated
           ----------  --------  --------  ---------  --------  ----------
Nonaffiliated
 revenue   $1,367,919  $ 82,198  $108,082  $      77  $      -  $1,558,276
Affiliated
 revenue            -    44,857     3,150          -   (48,007)          -
           ----------  --------  --------  ---------  --------  ----------
  Total
   revenue  1,367,919   127,055   111,232         77   (48,007)  1,558,276

Net segment
 income
 (loss)    $  132,429  $  7,753  $  8,221  $(102,033) $      -  $   46,370
Interest,
 Net           11,487        11        16     32,833         -      44,347
Deprecia-
 tion and
 amortiza-
 tion          25,997       528       749      3,947         -      31,221
           ----------  --------  --------  ---------  --------  ----------

  EBITDA   $  169,913  $  8,292  $  8,986  $ (65,253) $      -  $  121,938

Center rent
 expense       69,417       208       907          -         -      70,532
           ----------  --------  --------  ---------  --------  ----------

  EBITDAR  $  239,330  $  8,500  $  9,893  $ (65,253) $      -  $  192,470

Operating
 and general
 and admini-
 strative
 expenses      31,998     4,978     2,974     64,835         -     104,785
           ----------  --------  --------  ---------  --------  ----------

  EBITDAM  $  201,911  $ 13,270  $ 11,960  $    (418) $      -  $  226,723
  EBITDARM $  271,328  $ 13,478  $ 12,867  $    (418) $      -  $  297,255


  EBITDA margin  12.4%      6.5%      8.1%                             7.8%
 EBITDAM margin  14.8%     10.4%     10.8%                            14.5%
 EBITDAR margin  17.5%      6.7%      8.9%                            12.4%
EBITDARM margin  19.8%     10.6%     11.6%                            19.1%




                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

                        PRO FORMA WITH HARBORSIDE
                               CONSOLIDATED
                            INCOME STATEMENTS
                   (in thousands, except per share data)


                                                               PRO FORMA
                                                AS REPORTED      WITH
                                                               HARBORSIDE

                                                  For the       For the
                                                 Year Ended    Year Ended
                                                December 31,  December 31,
                                                    2008          2007
                                                ------------  ------------
                                                  (audited)   (unaudited)

Total net revenues                              $  1,824,184  $  1,719,176
                                                ------------  ------------
Costs and expenses:
  Operating salaries and benefits                  1,029,279       979,735
  Self-insurance for workers' compensation
   and general and professional liability
   insurance                                          59,715        48,590
  Operating administrative costs                      51,171        42,296
  Other operating costs                              373,238       354,352
  Center rent expense                                 73,764        77,486
  General and administrative expenses                 62,302        70,231
  Depreciation and amortization                       40,355        35,922
  Provision for losses on accounts receivable         14,108        16,883
  Interest, net of interest income of $1,781
   and $3,573, respectively                           54,603        48,940
  Loss on extinguishment of debt, net                      -         3,173
  (Gain) loss on sale of assets, net                    (977)           23
                                                ------------  ------------
Total costs and expenses                           1,757,558     1,677,631
                                                ------------  ------------

Income before income taxes and discontinued
 operations                                           66,626        41,545
Income tax benefit                                   (47,348)      (11,734)
                                                ------------  ------------
Income from continuing operations                    113,974        53,279
                                                ------------  ------------

Discontinued operations:
  (Loss) income from discontinued
   operations, net of related taxes                   (1,686)        2,565
  Loss on disposal of discontinued
   operations, net of related taxes                   (3,001)         (200)
                                                ------------  ------------
(Loss) income from discontinued operations, net       (4,687)        2,365
                                                ------------  ------------

Net income                                      $    109,287  $     55,644
                                                ============  ============


Basic income per common and common equivalent
 share:
  Income from continuing operations             $       2.63  $       1.26
  (Loss) income from discontinued
   operations, net                                     (0.11)         0.05
                                                ------------  ------------
Net income                                      $       2.52  $       1.31
                                                ============  ============

Diluted income per common and common equivalent
 share:
  Income from continuing operations             $       2.59  $       1.23
  (Loss) income from discontinued
   operations, net                                     (0.10)         0.05
                                                ------------  ------------
Net Income                                      $       2.49  $       1.28
                                                ============  ============

Weighted average number of common and
 common equivalent shares outstanding:
  Basic                                               43,331        42,350
  Diluted                                             43,963        43,390


Note: The pro forma table above and the pro forma table pages that follow
were prepared as if the acquisition of Harborside Healthcare Corporation,
which closed in April 2007, had occurred on January 1, 2007.




                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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


                                                               PRO FORMA
                                                AS REPORTED       WITH
                                                               HARBORSIDE

                                                  For the       For the
                                                 Year Ended    Year Ended
                                                December 31,  December 31,
                                                    2008          2007
                                                ------------  ------------
                                                  (audited)   (unaudited)

Total net revenues                              $  1,824,184  $  1,719,176
                                                ------------  ------------

Net income                                      $    109,287  $     55,644
                                                ------------  ------------

  Income from continuing operations                  113,974        53,279

  Income tax benefit                                 (47,348)      (11,734)

  Loss on extinguishment of debt, net                      -         3,173

  (Gain) loss on sale of assets, net                    (977)           23
                                                ------------  ------------

Net segment income                              $     65,649  $     44,741

  Interest, net                                       54,603        48,940

  Depreciation and amortization                       40,355        35,922
                                                ------------  ------------

EBITDA                                          $    160,607  $    129,603

  Center rent expense                                 73,764        77,486
                                                ------------  ------------

EBITDAR                                         $    234,371  $    207,089

  Operating administrative costs                      51,171        42,296
  General and administrative expenses                 62,302        70,231
                                                ------------  ------------
Total operating and general and admin expenses      113,473       112,527

EBITDAM                                         $    274,080  $    242,130
EBITDARM                                        $    347,844  $    319,616

EBITDA is defined as earnings before income (loss) on discontinued operations, income taxes, loss (gain) on sale of assets, net, 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

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

                   For the Year Ended December 31, 2007
                                (unaudited)


                       Rehabil-                      Elimination
                       itation   Medical                 of
           Inpatient   Therapy   Staffing   Other &  Affiliated  Consoli-
           Services    Services  Services  Corp Seg   Revenue     dated
           ----------  --------  --------  ---------  --------  ----------

Nonaffi-
 liated
 revenue   $1,526,858  $ 82,198  $110,725  $      77  $   (682) $1,719,176

Affiliated
 revenue            -    44,857     3,151          -   (48,008)          -
           ----------  --------  --------  ---------  --------  ----------

  Total
   revenue  1,526,858   127,055   113,876         77   (48,690)  1,719,176

Net
 segment
 income
 (loss)    $  141,359  $  7,753  $  8,156  $(113,340) $    813  $   44,741

Interest,
 net           16,363        11        15     32,537        14      48,940

Deprecia-
 tion and
 amortiza-
 tion          30,373       528       765      4,256         -      35,922
           ----------  --------  --------  ---------  --------  ----------

  EBITDA   $  188,095  $  8,292  $  8,936  $ (76,547) $    827  $  129,603

Center
 rent
 expense       76,346       208       932          -         -      77,486
           ----------  --------  --------  ---------  --------  ----------

  EBITDAR  $  264,441  $  8,500  $  9,868  $ (76,547) $    827  $  207,089

Operating
 and
 general
 and
 admini-
 strative
 expenses      34,342     4,978     2,974     70,233         -     112,527
           ----------  --------  --------  ---------  --------  ----------

  EBITDAM  $  222,437  $ 13,270  $ 11,910  $  (6,314) $    827  $  242,130
  EBITDARM $  298,783  $ 13,478  $ 12,842  $  (6,314) $    827  $  319,616


    EBITDA
     margin      12.3%      6.5%      7.8%                             7.5%
    EBITDAM
     margin      14.6%     10.4%     10.5%                            14.1%
    EBITDAR
     margin      17.3%      6.7%      8.7%                            12.0%
    EBITDARM
     margin      19.6%     10.6%     11.3%                            18.6%



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


                   For the                         For the
              Three Months Ended              Twelve Months Ended
                  December 31,                    December 31,
                                                           PRO FORMA
               AS             AS              AS              WITH
            REPORTED       REPORTED        REPORTED        HARBORSIDE
            ------------------------       ---------------------------
              2008           2007            2008             2007
Consolidated
 Company

Revenues -
 Non-affiliated
 (in thousands)
  Inpatient
   Services  414,180        393,255        1,616,740        1,526,858
  Rehabili-
   tation
   Therapy
   Services   24,012         20,150           89,619           82,198
  Medical
   Staffing
   Services   28,768         29,120          117,788          110,725
  Other -
   non-core
   businesses      8             10               37             (605)
            --------       --------       ----------       ----------
    Total   $466,968       $442,535       $1,824,184       $1,719,176
            ========       ========       ==========       ==========


Revenue Mix -
 Non-affiliated
 (in thousands)
  Medicare   136,305   29%  123,005   28%    522,555   29%    467,294   27%
  Medicaid   186,484   40%  184,454   42%    729,023   40%    722,837   42%
  Private &
   Other     116,343   25%  115,408   25%    465,771   25%    452,102   26%
  Managed
   Care /
   Insurance  23,799    5%   16,274    4%     91,691    5%     63,403    4%
  Veterans     4,037    1%    3,394    1%     15,144    1%     13,540    1%
            --------  ---  --------  ---  ----------  ---  ----------  ---
    Total   $466,968  100% $442,535  100% $1,824,184  100% $1,719,176  100%
            ========  ===  ========  ===  ==========  ===  ==========  ===

Inpatient
 Services
 Stats

Number of
 Centers         207            207              207              207
Number of
 available
 beds:        22,544         22,548           22,544           22,548
Occupancy %:    88.5%          89.6%            88.9%            89.8%

Payor Mix
 % based on
 patient
 days:
    Medicare -
     SNF Beds   15.6%          15.6%            16.1%            15.7%
    Managed
     care /
     Ins. -
     SNF
     Beds        3.9%           2.9%             3.9%             2.9%
            --------       --------       ----------       ----------
       Total
        SNF
        skilled
        mix     19.5%          18.5%            20.0%            18.6%
            --------       --------       ----------       ----------

  Medicare      14.2%          14.2%            14.7%            14.3%
  Medicaid      60.2%          60.7%            59.7%            60.8%
  Private
   and
   other        21.1%          21.6%            21.1%            21.4%
  Managed
   care /
   Insurance     3.5%           2.6%             3.5%             2.6%
  Veterans       1.0%           0.9%             1.0%             0.9%

Revenue
 Mix % of
 revenues:
    Medicare -
     SNF Beds   32.5%          31.7%            32.4%            31.1%
    Managed
     care /
     Ins. -
     SNF
     Beds        6.1%           4.4%             6.0%             4.3%
            --------       --------       ----------       ----------
       Total
        SNF
        skilled
        mix     38.6%          36.1%            38.4%            35.4%
            --------       --------       ----------       ----------

  Medicare      32.0%          30.7%            31.5%            30.1%
  Medicaid      45.0%          46.9%            45.1%            47.3%
  Private
   and
   other        16.3%          17.4%            16.9%            17.6%
  Managed
   care /
   Insurance     5.7%           4.1%             5.6%             4.1%
  Veterans       1.0%           0.9%             0.9%             0.9%


Revenues PPD:
  LTC only
   Medicare
   (Part A) $ 446.09       $ 412.64       $   424.23       $   392.77
  Medicare
   Blended
   Rate
   (Part A
   & B)     $ 482.20       $ 444.56       $   456.05       $   423.02
  Medicaid  $ 168.79       $ 163.48       $   166.62       $   160.79
  Private
   and
   other    $ 169.63       $ 165.99       $   169.87       $   164.90
  Managed
   care /
   Insur-
   ance     $ 363.95       $ 328.17       $   351.93       $   330.00
  Veterans  $ 223.76       $ 206.59       $   216.85       $   205.78



Rehab
 contracts

Affiliated       118            107              118              107
Non-affiliated   327            309              327              309




                SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

             NORMALIZING ADJUSTMENTS - 4th QUARTER COMPARISON
                  (in thousands, except per share data)


                            AS REPORTED - 4th QUARTER 2008
            --------------------------------------------------------------
                                                Income
                                                 from
                                              Continuing            Net
            Revenue EBITDAR  EBITDA   Pre-tax Operations Disc Ops  Income
            ------- -------  -------  -------  --------  -------  --------

As Reported
 4th QUARTER
 2008       466,968  58,054   39,725   16,365    83,832   (1,411)   82,421
  Percent of
   Revenue             12.4%     8.5%     3.5%     18.0%    -0.3%     17.7%
Normalizing
 Adjustments:
Benefit for
 income
 taxes            -       -        -        -   (74,012)       -   (74,012)
Gain on
 sale of
 property         -       -        -     (900)     (540)       -      (540)
Prior periods
 self-
 insurance
 costs            -   3,550    3,550    3,550     2,130      450     2,580
            ------- -------  -------  -------  --------  -------  --------
Adjusted As
 Reported -
 4th QUARTER
 2008       466,968  61,604   43,275   19,015    11,410     (961)   10,449
            ======= =======  =======  =======  ========  =======  ========
  Percent of
   Revenue             13.2%     9.3%     4.1%      2.4%    -0.2%      2.2%

Diluted EPS:
  As Reported                                  $   1.91  $ (0.03) $   1.88
  As Adjusted                                  $   0.26  $ (0.02) $   0.24



                            AS REPORTED - 4th QUARTER 2007
            --------------------------------------------------------------
                                                Income
                                                 from
                                              Continuing            Net
            Revenue EBITDAR  EBITDA   Pre-tax Operations Disc Ops  Income
            ------- -------  -------  -------  --------  -------  --------

As Reported -
 4th QUARTER
 2007       442,535  58,419   40,058   13,605    34,856      496    35,352
  Percent of
   Revenue             13.2%     9.1%     3.1%      7.9%     0.1%      8.0%
Normalizing
 Adjustments:
Benefit for
 income
 taxes            -       -        -        -   (26,040)  (1,787)  (27,827)
Debt
 refinancing
 fee              -       -        -    3,173     2,062        -     2,062
Release of
 insurance
 reserves
 related to
 prior
 periods          -  (2,642)  (2,642)  (2,642)   (1,717)    (557)   (2,274)
Prior
 acquisition
 claim
 settlement       -  (2,276)  (2,276)  (2,276)   (1,479)       -    (1,479)
Harborside
 integration
 costs            -   1,007    1,007    1,007       655        -       655
            ------- -------  -------  -------  --------  -------  --------

Adjusted As
 Reported -
 4th QUARTER
 2007       442,535  54,508   36,147   12,867     8,337   (1,848)    6,489
            ======= =======  =======  =======  ========  =======  ========
  Percent of
   Revenue             12.3%     8.2%     2.9%      1.9%    -0.4%      1.5%

Diluted EPS:
  As Reported                                  $   0.78  $  0.01  $   0.79
  As Adjusted                                  $   0.19  $ (0.04) $   0.15

See definitions of EBITDA and EBITDAR on Reconciliation of Net Income to EBITDA(M) and EBITDAR(M) stated previously in the As Reported section for the three and twelve months ended December 31.

Normalizing adjustments are transactions or adjustments not related to ongoing operations, including income from a tax benefit associated with the partial reversal of a valuation allowance on a deferred tax asset, gain on sale of a non-core property, adjustments relating to prior periods self- insurance costs, charges associated with the refinancing of certain debt agreements, income from settlement of a claim associated with a prior period acquisition, and integration costs related to the Harborside acquisition.

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

               SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

            NORMALIZING ADJUSTMENTS - YEAR TO DATE COMPARISON
                  (in thousands, except per share data)


                          AS REPORTED - TWELVE MONTHS 2008
          ----------------------------------------------------------------
                                                Income
                                                 from
                                              Continuing            Net
          Revenue   EBITDAR  EBITDA   Pre-tax Operations Disc Ops  Income
          --------- -------  -------  -------  --------  -------  --------

As Reported -
 Twelve
 Months
 2008     1,824,184 234,371  160,607   66,626   113,974   (4,687)  109,287
  Percent
   of
   Revenue             12.8%     8.8%     3.7%      6.2%    -0.3%      6.0%

Normalizing
 Adjustments:
Benefit
 for income
 taxes            -       -        -        -   (74,012)       -   (74,012)
Gain on
 sale of
 property         -       -        -     (900)     (540)       -      (540)
Release of
 insurance
 reserves
 related to
 prior
 periods          -  (2,650)  (2,650)  (2,650)   (1,590)    (222)   (1,812)
Prior
 periods
 self-
 insurance
 costs            -   3,550    3,550    3,550     2,130      450     2,580
Harborside
 integration
 costs            -   1,469    1,469    1,469       881        -       881
          --------- -------  -------  -------  --------  -------  --------

Adjusted As
 Reported -
 Twelve
 Months
 2008     1,824,184 236,740  162,976   68,095    40,843   (4,459)   36,384
          ========= =======  =======  =======  ========  =======  ========
  Percent
   of
   Revenue             13.0%     8.9%     3.7%      2.2%    -0.2%      2.0%

Diluted EPS:
  As Reported                                  $   2.59  $ (0.10) $   2.49
  As Adjusted                                  $   0.93  $ (0.10) $   0.83




                          AS REPORTED - TWELVE MONTHS 2007
          ----------------------------------------------------------------
                                                Income
                                                 from
                                              Continuing            Net
          Revenue   EBITDAR  EBITDA   Pre-tax Operations Disc Ops  Income
          --------- -------  -------  -------  --------  -------  --------

As Reported -
 Twelve
 Months
 2007     1,558,276 192,470  121,938   43,174    54,088    3,422    57,510
  Percent
   of
   Revenue             12.4%     7.8%     2.8%      3.5%     0.2%      3.7%

Normalizing
 Adjustments:
Benefit
 for income
 taxes            -       -        -        -   (26,040)  (1,787)  (27,827)
Debt
 refinancing
 fee              -       -        -    3,173     2,062        -     2,062
Write-off of
 deferred
 financing
 costs            -       -        -      615       400        -       400
Prior
 acquisition
 claim
 settlement       -  (2,276)  (2,276)  (2,276)   (1,479)       -    (1,479)
Release of
 insurance
 reserves
 related to
 prior
 periods          -  (8,598)  (8,598)  (8,598)   (5,588)  (2,536)   (8,124)
Harborside
 integration
 costs            -   4,495    4,495    4,495     2,922        -     2,922
          --------- -------  -------  -------  --------  -------  --------

Adjusted As
 Reported -
 Twelve
 Months
 2007     1,558,276 186,091  115,559   40,583    26,365     (901)   25,464
          ========= =======  =======  =======  ========  =======  ========
  Percent
   of
   Revenue             11.9%     7.4%     2.6%      1.7%    -0.1%      1.6%

Diluted EPS:
  As Reported                                  $   1.25  $  0.08  $   1.33
  As Adjusted                                  $   0.61  $ (0.02) $   0.59

See definitions of EBITDA and EBITDAR on Reconciliation of Net Income to EBITDA(M) and EBITDAR(M) stated previously in the As Reported section for the three and twelve months ended December 31.

Normalizing adjustments are transactions or adjustments not related to ongoing operations, including income from a tax benefit associated with the partial reversal of a valuation allowance on a deferred tax asset, gain on sale of a non-core property, adjustments relating to prior periods self- insurance costs, charges associated with the refinancing of certain debt agreements, income from settlement of a claim associated with a prior period acquisition, and integration costs related to the Harborside acquisition.

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.

              SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

            NORMALIZING ADJUSTMENTS - YEAR TO DATE COMPARISON
                  (in thousands, except per share data)


                          AS REPORTED - TWELVE MONTHS 2008
          ----------------------------------------------------------------
                                                Income
                                                 from
                                              Continuing            Net
          Revenue   EBITDAR  EBITDA   Pre-tax Operations Disc Ops  Income
          --------- -------  -------  -------  --------  -------  --------

As Reported -
 Twelve
 Months
 2008     1,824,184 234,371  160,607   66,626   113,974   (4,687)  109,287
  Percent
   of
   Revenue             12.8%     8.8%     3.7%      6.2%    -0.3%      6.0%

Normalizing
 Adjustments:
Benefit
 for income
 taxes            -       -        -        -   (74,012)       -   (74,012)
Gain on
 sale of
 property         -       -        -     (900)     (540)       -      (540)
Release of
 insurance
 reserves
 related to
 prior
 periods          -  (2,650)  (2,650)  (2,650)   (1,590)    (222)   (1,812)
Prior
 periods
 self-
 insurance
 costs            -   3,550    3,550    3,550     2,130      450     2,580
Harborside
 integration
 costs            -   1,469    1,469    1,469       881        -       881
          --------- -------  -------  -------  --------  -------  --------
Adjusted As
 Reported -
 Twelve
 Months
 2008     1,824,184 236,740  162,976   68,095    40,843   (4,459)   36,384
          ========= =======  =======  =======  ========  =======  ========
  Percent
   of
   Revenue             13.0%     8.9%     3.7%      2.2%    -0.2%      2.0%

Diluted EPS:
  As Reported                                  $   2.59  $ (0.10) $   2.49
  As Adjusted                                  $   0.93  $ (0.10) $   0.83




                 PRO FORMA SUN & HARBORSIDE - TWELVE MONTHS 2007
          ----------------------------------------------------------------
                                                Income
                                                 from
                                              Continuing            Net
          Revenue   EBITDAR  EBITDA   Pre-tax Operations Disc Ops  Income
          --------- -------  -------  -------  --------  -------  --------

Pro Forma
 Sun &
 Harborside -
 Twelve
 Months
 2007     1,719,176 207,089  129,603   41,545    53,279    2,365    55,644
  Percent
   of
   Revenue             12.0%     7.5%     2.4%      3.1%     0.1%      3.2%

Normalizing
 Adjustments:
Benefit
 for income
 taxes            -       -        -        -   (26,040)  (1,787)  (27,827)
Debt
 refinancing
 fee              -       -        -    3,173     2,062        -     2,062
Write-off of
 deferred
 financing
 costs            -       -        -      615       400        -       400
Prior
 acquisition
 claim
 settlement       -  (2,276)  (2,276)  (2,276)   (1,479)       -    (1,479)
Release of
 insurance
 reserves
 related to
 prior
 periods          -  (8,598)  (8,598)  (8,598)   (5,588)  (2,536)   (8,124)
Harborside
 bad debt
 expense          -   5,860    5,860    5,860     3,809        -     3,809
Harborside
 integration
 costs            -   4,495    4,495    4,495     2,922        -     2,922
Harborside
 investor
 fees             -     275      275      275       179        -       179
Harborside
 merger
 costs            -     192      192      192       125        -       125
          --------- -------  -------  -------  --------  -------  --------
Adjusted
 Pro Forma
 Sun &
 Harborside -
 Twelve
 Months
 2007     1,719,176 207,037  129,551   45,281    29,669   (1,958)   27,711
          ========= =======  =======  =======  ========  =======  ========
  Percent
   of
   Revenue             12.0%     7.5%     2.6%      1.7%    -0.1%      1.6%

Diluted EPS:
  Pro Forma                                    $   1.23  $  0.05  $   1.28
  Adjusted
   Pro Forma                                   $   0.68  $ (0.04) $   0.64

See definitions of EBITDA and EBITDAR on Reconciliation of Net Income to EBITDA(M) and EBITDAR(M) stated previously in the As Reported section for the three and twelve months ended December 31.

Normalizing adjustments are transactions or adjustments not related to ongoing operations, including income from a tax benefit associated with the partial reversal of a valuation allowance on a deferred tax asset, charges associated with the refinancing of certain debt agreements, income from settlement of a claim associated with a prior period acquisition, adjustments relating to prior periods self-insurance costs, a bad debt charge recorded by Harborside prior to the acquisiton, integration costs related to the Harborside acquisition, and investor fees and merger costs recorded by Harborside prior to the acquisition.

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.

Contact Information

  • Contact: Investor Inquiries:
    (505) 468-2341

    Media Inquiries:
    (505) 468-4582