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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period from to .
Commission file number 1-12040
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SUN HEALTHCARE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 85-0410612
(State of Incorporation) (I.R.S. Employer Identification No.)
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101 SUN LANE, NE
ALBUQUERQUE, NEW MEXICO 87109
(505) 821-3355
(Address and telephone number of Registrant)
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share, New York Stock Exchange
and Preferred Stock Purchase Rights
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
On March 26, 1997, Sun Healthcare Group, Inc. had 49,130,217 outstanding
shares of Common Stock. Of those, 39,434,107 shares of Common Stock were held by
nonaffiliates. The aggregate market value of such Common Stock held by
nonaffiliates, based on the average of the high and low sales prices of such
shares on the New York Stock Exchange on March 26, 1997, was approximately
$571,795,000.
Documents Incorporated by Reference:
Portions of Sun Healthcare Group, Inc.'s definitive Proxy Statement
for the 1997 Annual Meeting of Shareholders
are incorporated by Reference into Part III of this Form 10-K.
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SUN HEALTHCARE GROUP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
PAGE
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PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 16
Item 3. Legal Proceedings............................................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 20
Executive Officers of the Registrant......................................................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 23
Item 6. Selected Financial Data...................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... 26
Item 8. Financial Statements and Supplementary Data.................................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures...................................................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 45
Item 11. Executive Compensation....................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 45
Item 13. Certain Relationships and Related Transactions............................................... 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 45
Signatures................................................................................................ 55
PART I
ITEM 1. BUSINESS
GENERAL
Sun Healthcare Group, Inc., through its direct and indirect subsidiaries
(collectively referred to herein as "Sun" or the "Company"), is a leading
provider of long-term, subacute and related specialty healthcare services. At
December 31, 1996, the Company operated 160 long-term and subacute care
facilities with 19,321 licensed beds in 19 states in the United States and 75
long-term care facilities with 3,420 registered beds in the United Kingdom. In
addition, the Company provides rehabilitation therapy, respiratory therapy,
temporary therapy staffing services, and pharmaceutical products and services,
to both affiliated and nonaffiliated facilities in the United States, and
outpatient therapy in Canada.
The Company's long-term and subacute care facilities provide a broad range
of healthcare services, including nursing care, subacute care, therapy and other
specialized services such as care to patients with Alzheimer's disease. The
Company's long-term and subacute care facility operations have experienced
significant growth since the Company's inception in 1989. This growth has been
primarily from acquisitions of long-term and subacute care facilities. The
Company believes its long-term and subacute care operations provide it with a
platform for expanding its therapy and pharmaceutical businesses to affiliated
and nonaffiliated long-term and subacute care facilities. In addition, the
Company believes that its expertise in operating long-term and subacute care
facilities enables it to provide its therapy and pharmaceutical services more
effectively and efficiently than providers without such operating expertise.
The Company currently offers physical, occupational and speech therapy
("rehabilitation therapy"), through Sundance Rehabilitation Corporation
("Sundance") and respiratory therapy through Golden Care, Inc. ("Golden Care"),
to patients in affiliated and nonaffiliated long-term and subacute care
facilities. At December 31, 1996, the Company provided therapy services to 911
facilities in 42 states, 759 of which were operated by nonaffiliated parties and
152 of which were affiliated facilities.
Through CareerStaff Unlimited, Inc. ("CareerStaff"), the Company is a
nationwide provider of temporary therapy staffing. CareerStaff provides
therapists skilled in the areas of physical, occupational and speech therapy
primarily to hospitals and nursing home contract service providers. At December
31, 1996, CareerStaff provided temporary therapy staffing services in 36 states.
At December 31, 1996, the Company, through Sunscript Pharmacy Corporation
("Sunscript"), operated 18 pharmacies that provided pharmaceutical products and
services to a total of 437 long-term and subacute care facilities in 21 states,
325 of which were operated by nonaffiliated parties and 112 of which were
affiliated facilities. In addition, the Company operated six pharmacies in the
United Kingdom at December 31, 1996.
INDUSTRY OVERVIEW
The long-term care industry encompasses a broad range of related specialty
healthcare services provided to the elderly and to other patients with medically
complex needs who can be cared for outside of the acute care hospital
environment and generally cannot be efficiently and effectively cared for at
home. Long-term and subacute care facilities offer skilled nursing care, routine
rehabilitation therapy and other support services, primarily to elderly
patients. Long-term and subacute care facilities may also provide a broad range
of specialized healthcare services such as care for patients with Alzheimer's
disease and subacute care. Subacute care includes those services provided to
patients with medically complex conditions who require ongoing medical and
nursing supervision and access to specialized equipment and services, but do not
require many of the other services provided by an acute care hospital. The
Company believes that the demand for the services provided by long-term and
subacute care facilities will increase substantially during the next decade due
primarily to demographic trends, advances in medical technology
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and the impact of cost containment measures by government and private pay
sources. At the same time, government restrictions and high construction and
start-up costs are expected to limit the supply of long-term and subacute care
facilities.
Ancillary services such as therapy and pharmaceutical services increase
long-term and subacute care facility profitability by expanding the range of
services provided at such facilities. Therapy services provided by the Company
primarily consist of rehabilitation and respiratory therapy services.
Pharmaceutical services include dispensing pharmaceuticals for such purposes as
infusion therapy, pain management, antibiotic therapy and parenteral nutrition.
Additional services include providing consultant pharmacists and assistance in
preparation of billing documentation. These ancillary services have
significantly greater operating margins than the margins associated with the
provision of routine services to patients at long-term and subacute care
facilities. Also, the increased use of long-term and subacute care facilities as
alternatives to acute care facilities has greatly increased the demand for such
ancillary services. This trend has created greater markets for the Company's
therapy and pharmacy services to nonaffiliated long-term and subacute care
facilities.
The temporary staffing industry has grown rapidly over the last several
years. Temporary rehabilitation therapy staffing is increasingly becoming a
valuable tool for managing personnel costs and for meeting specialized or
fluctuating employment requirements, particularly as healthcare providers engage
in corporate downsizing. Effective use of temporary personnel enables businesses
to reduce fixed overhead and addresses the growing costs and difficulty of
hiring, training, laying off and redeploying permanent full-time workers.
The long-term care industry in the United Kingdom is currently undergoing
significant change. As a result of demographic trends and recent United Kingdom
legislation and policy, the Company believes there is a growing demand for
long-term care, including more highly specialized and higher quality care. The
Company believes that supply is not keeping pace with demand and that such
demand, along with limited access to capital, is promoting industry
consolidation. These factors are placing significant burdens on small, local
operators, thereby providing, in the Company's view, opportunities for larger,
better-financed long-term care providers such as the Company.
DEMOGRAPHIC TRENDS. The primary consumers of long-term and subacute care
services in the United States and the United Kingdom are persons over 65 years
of age. The Company believes that increases in the number of people in such age
group will continue to result in increased demand for long-term and subacute
care services.
IMPACT OF COST CONTAINMENT MEASURES. In response to rapidly rising
healthcare costs, governmental and private pay sources in the United States have
adopted cost containment measures that have reduced average lengths of hospital
stays. The federal government has acted to curtail increases in healthcare costs
under Medicare by limiting acute care hospital reimbursement for specific
services to predetermined fixed amounts. Under this payment system,
reimbursement for acute care hospital services is based on regional and national
rates established for diagnosis-related groups regardless of length of stay. In
addition, private insurers have begun to limit reimbursement to predetermined
"reasonable charges," while managed care organizations such as health
maintenance organizations ("HMOs") and preferred provider organizations are
attempting to limit hospitalization costs by negotiating discounted rates for
hospital services and by monitoring and reducing hospital utilization. As a
result, average hospital stays have been shortened, with many patients being
discharged despite a continuing need for nursing care. For many of these
patients, home healthcare is not a viable alternative because of the complexity
of medical services and equipment required. Many of the long-term and subacute
care facilities operated by the Company are able to provide these services,
especially rehabilitation and respiratory therapy and pharmaceutical services.
In addition, the facilities that provide these services are able to do so at a
significantly lower cost than acute care hospitals, due to their lower capital
costs, overhead and salary levels.
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LIMITS ON SUPPLY OF LONG-TERM AND SUBACUTE CARE FACILITIES. The
construction of long-term and subacute care facilities and the addition of beds
or services in existing facilities is regulated in most states in which the
Company operates. Many states have implemented health plans that either limit
construction of new long-term and subacute care facilities or limit the number
of long-term beds and thus effectively limit the number of new facilities that
can be constructed. High construction costs and start-up expenses also act to
constrain growth in the number of facilities. See "--Government Regulation" and
"--Competition."
INDUSTRY CONSOLIDATION. Recently, the long-term and subacute care industry
in the United States has been subject to competitive pressures that have
resulted in a trend towards consolidation of smaller, local operators into
larger, more established regional or national operators. Increasing complexity
of medical services provided, growing regulatory and compliance requirements and
increasingly complicated reimbursement systems have resulted in consolidation of
operators who lack the sophisticated management information systems, operating
efficiencies and financial resources to compete efficiently and effectively.
LONG-TERM AND SUBACUTE CARE SERVICES--UNITED STATES
As of December 31, 1996, the Company owned, leased or managed, through its
subsidiaries in the United States, 160 licensed long-term and subacute care
facilities with 19,321 licensed beds located in 19 states. Each long-term and
subacute care facility is located near at least one general acute care hospital,
and the Company has entered into transfer agreements with local hospitals to
accept patients discharged from such hospitals.
BASIC PATIENT AND ANCILLARY SERVICES. The Company's long-term and subacute
care facilities provide inpatient skilled nursing and custodial services as well
as rehabilitative, restorative and transitional medical services. The Company
provides 24-hour nursing care in these facilities by registered nurses, licensed
practical nurses and certified nursing aides. The Company also provides a broad
range of support services including rehabilitation therapy, dietary services,
therapeutic recreational activities, social services, housekeeping and laundry
services and pharmaceutical and medical supplies.
SPECIALIZED SERVICES. Specialized healthcare services are those provided to
patients with medically complex needs. These services typically generate higher
profit margins than those associated with the provision of routine patient
services because of the higher reimbursement rates associated with caring for
patients with complex medical conditions. At December 31, 1996, the Company
provided therapy services for Medicare patients at 155 of its 160 long-term and
subacute care facilities. Such services are provided to Medicare patients within
distinct units at these facilities. At December 31, 1996, the Company provided
specialized care for patients with Alzheimer's disease at 43 of its 160
long-term and subacute care facilities under the supervision of specially
trained skilled nursing staff. These facilities also provide therapeutic
recreation and social services personnel. The Company's Alzheimer's program
includes an individually planned activities program, counseling, sensory
stimulation and a family support group.
SUBACUTE CARE. The Company defines subacute care as a minimum of four and
one-half nursing hours and one hour of therapy per patient day. Subacute care
includes those services provided to patients with medically complex conditions
who require ongoing medical and nursing supervision and access to specialized
equipment and services, but do not require many of the other services provided
by an acute care hospital. Services in this category include ventilator and
oxygen care, HIV care, intravenous therapy, complex wound care, traumatic brain
injury care, post-stroke care and hospice care. The Company has the ability to
provide subacute services at most of its long-term care facilities. In addition,
the Company operates 45 Phoenix Units, which are free-standing dedicated
subacute care units within long-term care facilities. The subacute care units
represent, in some cases, a substantial portion of the total beds in the
facility; in other cases, these units represent a smaller portion of overall
facility capacity. The Company plans to expand its provision of subacute care to
other long-term care facilities. The Company believes that there is significant
demand for subacute care and that this sector of the healthcare market offers
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opportunities for growth. By offering a continuum of subacute healthcare
services, the Company is able to respond to a broad spectrum of patient clinical
needs and payor cost containment objectives.
LONG-TERM CARE SERVICES--UNITED KINGDOM
As of December 31, 1996, the Company, through its wholly owned subsidiary,
Exceler Healthcare Group PLC ("Exceler"), operated 75 long-term care facilities
with 3,420 registered beds in the United Kingdom. During 1995 and 1996, the
Company acquired a 29% ownership interest in Ashbourne PLC ("Ashbourne"), a
long-term care provider in the United Kingdom. The Company acquired the
remaining 71% of Ashbourne in January 1997. At December 31, 1996, Ashbourne
operated 49 long-term care facilities with 3,583 registered beds in the United
Kingdom.
BASIC RESIDENT AND ANCILLARY SERVICES. Basic resident services include
those typically provided to residents in nursing homes with respect to
activities of daily living and general medical needs. The Company provides
24-hour nursing and personal care by registered nurses and care assistants in
all of its facilities. The Company also provides a broad range of support
services, including dietary services, therapeutic recreational activities,
social services, housekeeping and laundry services, pharmaceutical and medical
supplies and routine therapy.
SPECIALIZED SERVICES. The Company currently offers various specialized
services at certain of its nursing homes, including day care, care for the young
physically disabled, care for elderly mentally infirm residents and
post-operative care. These services typically generate higher profit margins
than those associated with the provision of routine patient services. Day care
services provide elderly members of the community with facilities focused on
their personal care, recreation and stimulation. The care of the young
physically disabled involves occupational therapy in addition to basic services.
Certain of the Company's homes provide care for elderly mentally infirm
residents, including those with Alzheimer's disease.
Additional financial information regarding the Company's operations in the
United Kingdom is included in Note 17 to the Company's Consolidated Financial
Statements.
THERAPY SERVICES
The Company provided therapy services in 42 states as of December 31, 1996.
These services primarily consist of rehabilitation and respiratory therapy
services. These services were provided by approximately 6,700 therapists to 152
affiliated and 759 nonaffiliated long-term and subacute care facilities as of
December 31, 1996.
TEMPORARY THERAPY STAFFING
In June 1995, the Company acquired CareerStaff, which is the one of the
largest provider of temporary therapy staffing with a nationwide network of
offices. CareerStaff provides licensed therapists skilled in the areas of
physical, occupational and speech therapy primarily to hospitals and nursing
home contract service providers, with a growing emphasis towards home healthcare
providers. As of December 31, 1996, CareerStaff had on assignment approximately
1,900 therapists working out of 20 offices providing temporary rehabilitation
therapist staffing in major metropolitan areas and 10 offices specializing in
placements of temporary travelling therapists in smaller cities and rural areas.
The Company believes that CareerStaff complements the Company's rehabilitation
therapy services operations by enabling the Company to provide temporary therapy
staffing services for Sun's rehabilitation contracts with both affiliated and
nonaffiliated facilities.
For the years ended December 31, 1996, 1995 and 1994, hospitals represented
approximately 47%, 49% and 49%, respectively, of CareerStaff's revenues, and
nursing home contract service providers represented approximately 22%, 23% and
31%, respectively, of CareerStaff's revenues. Although CareerStaff continues to
derive the majority of its revenues from hospitals and nursing home contract
service providers, an increasing percentage of CareerStaff's revenues has been
derived from home healthcare agencies.
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PHARMACEUTICAL SERVICES
The Company commenced its pharmaceutical business in 1993. At December 31,
1996, the Company operated fifteen pharmacies, three in-house long-term care
pharmacies, one supply distribution center and one pharmaceutical billing and
consulting center which together provided pharmaceutical products and services
to 437 long-term and subacute care facilities in 21 states, 325 of which were
operated by nonaffiliated parties. The Company acquired its first regional
pharmacy in the United Kingdom in the fourth quarter of 1995 and acquired five
additional pharmacies in the United Kingdom during 1996.
Pharmaceutical services include dispensing pharmaceuticals for such purposes
as infusion therapy, pain management, antibiotic therapy and parenteral
nutrition. Additional services include providing consultant pharmacists and
assistance in preparation of billing documentation. These services are typically
provided to nonaffiliated and affiliated facilities, including subacute and
skilled nursing care facilities, assisted living facilities, group houses,
correctional facilities, mental health facilities and home healthcare companies.
The Company intends to pursue opportunities to expand its pharmaceutical
business through acquisitions and internal growth both in the United States and
in the United Kingdom.
ASSISTED LIVING
The Company has committed $47,000,000 to the development of a number of
assisted living facilities which are intended to serve the elderly who do not
need the full-time nursing care provided by long-term and subacute care
facilities but who do need some assistance with the activities of daily living.
See "Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
ACQUISITIONS
In February 1997, the Company agreed to acquire Retirement Care Associates,
Inc. ("Retirement Care"), an operator of 107 skilled nursing facilities and
assisted living centers, and its 65% owned subsidiary, Contour Medical, Inc.
("Contour"), a national provider of medical/surgical supplies. In addition, the
Company agreed to acquire the remaining 35% of Contour not presently owned by
Retirement Care. The acquisition of Contour is expected to be accounted for as a
purchase. The Retirement Care and Contour transactions are expected to close in
the second half of 1997. The acquisition of Retirement Care is expected to be
accounted for as a pooling of interests. The agreements call for the Company to
issue 0.6625 shares of common stock in exchange for each outstanding share of
Retirement Care common stock (subject to adjustment as provided in the
agreement) and for the Company to pay $8.50 per share in cash, stock or a
combination of cash and stock (at the election of the Company) for each
outstanding share of Contour common stock not presently owned by Retirement
Care.
Additional significant acquisitions include (i) the acquisition of the
remaining 71% interest in Ashbourne, a long-term care provider in the United
Kingdom, during the first quarter of 1997 for L67,300,000 ($110,100,000) in
cash, which followed the Company's acquisition of a 29% ownership interest in
Ashbourne during 1996 and 1995 for approximately $36,048,000 in cash, (ii) the
acquisition of APTA Healthcare ("APTA") on December 15, 1996 for L13,733,000
($23,545,000 as of December 31, 1996), (iii) the acquisition of CareerStaff, a
provider of temporary therapy staffing, in June 1995, for 6,080,600 shares of
Common Stock, which had a market value of approximately $107,100,000 at the date
of acquisition, (iv) the acquisition of Golden Care, a respiratory therapy
company, in May 1995, for 2,106,904 shares of Common Stock and options to
purchase an additional 234,100 shares of Common Stock, which had a market value
of approximately $40,000,000 at the date of acquisition, (v) the acquisition of
100% of the stock of Exceler, a long-term care provider in the United Kingdom,
in September 1994 and February 1995 for an aggregate purchase price of
$18,640,000 in cash and (vi) the acquisition of Columbia Health Care, Inc., a
Canadian provider of outpatient rehabilitation therapy services, in November
1995 for
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approximately $8,500,000 in cash and warrants to purchase 500,000 shares of
common stock at an exercise price of $15.375 per share. Acquisitions present
problems of integrating the acquired operations into existing operations.
Expansion through the use of leases and management agreements has permitted
the Company to increase the size of its operations and earnings capacity without
significant capital expenditures, although in certain cases payments have been
required in connection with the restructuring of lease arrangements, and it is
common for a security deposit or a letter of credit to be required at the
inception of a lease term. In addition, in certain cases the Company is required
to expend significant sums immediately following acquisitions to finance such
facilities' operations until payments are received from payor sources for
services rendered by the Company. The Company has also in the past made and
expects to continue to make acquisitions through the use of its own stock as
consideration, thereby avoiding expenditure of cash. Regulatory approval is
generally required in connection with the Company's assumption of operating
responsibility for new facilities.
The Company continually evaluates opportunities to acquire or develop its
healthcare operations, including but not limited to its therapy and
pharmaceutical businesses. In evaluating opportunities, management considers,
among other factors, location (including synergies with existing Company
operations), demographics, price, the availability of financing on acceptable
terms (including lease terms and the ability to use Common Stock as acquisition
consideration), the competitive and regulatory environment and the opportunity
to improve performance through the implementation of the Company's operating
strategy.
The Company is continuously discussing with third parties the possible
acquisition of long-term and subacute care facilities and other healthcare
operations. Such acquisitions are often initiated and completed over a short
period of time. While the Company regularly considers and evaluates
opportunities for expansion and is engaged in discussions with various parties
regarding acquisitions which, if completed, would be material, it does not have
any firm agreements with respect to material acquisitions or expansion except
for the Company's acquisition of RCA and Contour as previously discussed.
Potential acquisition candidates generally include companies or facilities in
geographic proximity to facilities operated by the Company, those with similar
operations or those that fit within the Company's operating strategy. In
addition, the Company intends to continue to explore international acquisitions,
particularly in Europe. Subject to the requirements of Delaware law and the New
York Stock Exchange, the Company's stockholders will have no advance opportunity
to evaluate the merits and risks of future acquisitions. There can be no
assurance that any future acquisitions will be completed or that the Company's
historical rate of growth in assets, revenues or net earnings will be sustained.
Acquisitions present problems of integrating the acquired operations with
existing operations, including the loss of key personnel and institutional
memory of the acquired business, difficulty in integrating corporate,
accounting, financial reporting and management information systems and strain on
existing levels of personnel to operate such acquired businesses. In addition,
certain assumptions regarding the financial condition of an acquired business
may later prove to be incorrect. For example, a significant percentage of the
receivables of the acquired company may ultimately prove to be uncollectible,
which may result in significant write-offs. The Company's net earnings for the
years ended December 31, 1995 and 1994 were adversely impacted by problems
associated with integrating the operations of The Mediplex Group, Inc.
("Mediplex"), which was acquired by the Company in June 1994, including the
write-off during 1995 and 1994 of certain Mediplex receivables from periods
prior to the acquisition and an impairment loss during 1995 related to the
goodwill associated with six of the forty facilities acquired in the Mediplex
acquisition. In addition, net earnings for the year ended December 31, 1996 were
adversely affected by certain negative revenue adjustments and write-offs of
certain accounts receivables associated with Mediplex. These adjustments were
primarily the result of changes in accounting estimates based on events
occurring in 1996. Mediplex is the most significant acquisition undertaken by
the Company to date, and the acquisition of Mediplex allowed the Company to
expand its long-term and subacute care businesses. See
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"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations." The Company's ability to manage its growth effectively will
require it to continue to improve its corporate accounting, financial reporting
and management information systems, and to attract, train, motivate and manage
its employees effectively. There can be no assurance that the Company will be
able to successfully integrate acquired operations or to successfully manage any
growth; failure to do so effectively and on a timely basis could have a material
adverse effect upon the Company's financial condition and results of operations.
If the Company is unable to effectively integrate the operations of an
acquired entity with the Company's existing operations, the Company may elect to
divest some or all of the acquired operations. In the second quarter of 1996 the
Company sold its ambulatory surgery subsidiary. The Company's decision to sell
its ambulatory surgery subsidiary was influenced in part by the marketplace's
resistance to the integration of subacute care with ambulatory surgery.
REVENUE SOURCES
The Company derives its revenues from a combination of (i) state Medicaid
programs for indigent patients, (ii) the Federal Medicare program for certain
elderly and disabled patients, (iii) private payment sources, which includes
payments for therapy and pharmaceutical services provided to nonaffiliated long-
term and subacute care facilities, (iv) foreign operations in the United Kingdom
and Canada and (v) other miscellaneous sources. Such private pay sources may
themselves derive all or a portion of their revenues from Medicaid and/or
Medicare.
The following table sets forth the percentage of total revenues by payor
source for the Company for the periods indicated:
YEAR ENDED DECEMBER 31,
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SOURCES OF REVENUES 1996 1995 1994
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Medicaid..................................................................................... 31% 34% 40%
Medicare..................................................................................... 23 23 20
Private pay and other (1).................................................................... 41 41 39
Foreign operations........................................................................... 5 2 1
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(1) Includes revenues from therapy services, which includes payments for
rehabilitation and respiratory therapy, temporary therapy staffing services
and pharmaceutical services provided to nonaffiliated long-term and subacute
facilities and not directly charged to Medicaid or Medicare. Such private
pay sources may themselves derive all or a portion of their revenues from
Medicaid and/or Medicare.
UNITED STATES REVENUE SOURCES
The Company's revenues from long-term and subacute care services are
determined by a number of factors, including: (i) the licensed bed capacity of
its facilities, (ii) the occupancy rates of its facilities, (iii) the mix of
patients and the rates of reimbursement among payor categories (Medicaid,
Medicare and private pay and other) and (iv) the extent to which subacute care
and certain ancillary services available in the Company's facilities are
utilized by the patients and paid for by the respective payor sources. The
Company utilizes reimbursement specialists and retains outside reimbursement
consultants to monitor both Medicaid and Medicare regulatory developments and to
assist in compliance with all program requirements with a view to obtaining all
lawful reimbursement.
MEDICAID. The Medicaid program is a program created by the Social Security
Act to benefit indigent persons who are aged, blind or disabled. Payment is made
under state-administered reimbursement programs governed by Federal guidelines.
Although Medicaid programs vary from state to state, typically they provide for
fixed rate payments to healthcare providers at levels designed to compensate an
efficiently
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and economically operated facility. Reimbursement rates are typically determined
by the state from "cost reports" filed annually by each facility, on a
prospective or retrospective basis. Under most state Medicaid programs,
individual facilities are reimbursed on a prospective rate system, subject to
retroactive adjustment. Under a prospective system, per diem rates are
established (generally on an annual basis) based upon certain historical costs
of providing services during the prior year, adjusted to reflect factors such as
inflation and any additional services required to be performed. Retroactive
adjustments, if any, are based on a recomputation of the applicable
reimbursement rate following an audit of cost reports. Providers must accept
reimbursement from Medicaid as payment in full for the services rendered. The
provider may not bill the patient for services covered by the Medicaid program
but may bill the patient for noncovered services. There can be no assurance that
Medicaid reimbursement will be sufficient to cover actual costs incurred by the
Company with respect to Medicaid services rendered. State Medicaid plans also
require that providers must be subject to governmental audit to ensure the
propriety of costs incurred, which are used as the basis for payments.
Most of the Company's facilities participate in the Medicaid program. The
Company's facilities in Arizona participate in the Arizona Health Care Cost
Containment System Program (the "AHCCCS Program"), which is operated under a
Federal Medicaid waiver. The AHCCCS Program is an alternative to the
conventional Medicaid program. The AHCCCS Program provides Federal financial
assistance for care it provides to needy individuals who would be eligible for
Medicaid in any other state. The AHCCCS Program is designed primarily to secure
healthcare on a capitated basis under contracts awarded to qualified bidders,
but it also pays some contractors on a fee-for-service basis when capitated
contracts are impractical. The Company negotiates the rates of reimbursement
with the county in which services are provided, on either a capitated or
fee-for-service basis, depending on the county. Under the AHCCCS Program,
nursing facility services are covered for eligible patients of all ages.
Certain states, including Massachusetts, are studying methods for reducing
expenses under their Medicaid programs, which initiatives could have an adverse
effect on applicable Medicaid rates. Connecticut has undertaken a study of
acuity levels and is considering changes in its reimbursement system to take
levels of acuity into account for the reimbursement of nursing costs. The
Company cannot currently determine the potential effect of any such changes.
MEDICARE. Medicare is a federally funded and administered health insurance
program that provides coverage for beneficiaries who require certain intensive
rehabilitation therapy services or skilled nursing and certain related medical
services, such as rehabilitation therapy, pharmaceuticals, medical supplies and
ancillary, diagnostic and other necessary services of the type provided by
skilled nursing facilities. Medicare inpatient benefits are not available for
patients requiring intermediate and custodial levels of care. In general,
Medicare payments for skilled nursing services and rehabilitative care are based
on allowable costs. With certain exceptions, Medicare pays on an interim basis,
subject to year-end cost settlement. Each facility receives interim payments
during the year. Total incurred costs are later adjusted upward or downward to
reflect actual allowable direct and indirect costs of services based on the
submission of a cost report at the end of each year. If allowable cost is less
than the interim payments, depending on the effective date of the adjustment,
the Company could be required to refund prospectively the excess of amounts it
receives over such allowable costs. If such refund were required to be made, it
would be due shortly following notice from Medicare, and would likely require
the Company to borrow under its revolving credit facility. There can be no
assurance that Medicare reimbursement will be sufficient to cover actual costs
incurred by the Company with respect to Medicare services rendered. As of
December 31, 1996, 155 of the Company's 160 long-term and subacute care
facilities in the United States (or 97% of such facilities) were certified to
receive payment for costs incurred while providing benefits covered under
Medicare.
Medicare reimbursement for services provided in skilled nursing facilities
is based upon the lesser of (i) actual allowable routine and ancillary operating
costs and capital costs or (ii) charges. Facilities that have been in operation
longer than three full cost reporting periods are subject to limits on their
actual
8
routine per diem costs. The routine service cost limits, which are regionally
adjusted for labor costs, are required to be updated annually by HCFA. However,
these limits were frozen by HCFA for its past three fiscal years ended September
30, 1995. The freeze expired on October 1, 1995. However, no new cost limits
have been published.
Hospitals that provide acute care are paid for non-physician services to
Medicare inpatients under the federal prospective payment system ("PPS"), under
which payments are based on standard amounts adjusted for the patient's
diagnosis without regard to the hospital's actual inpatient operating costs.
Medicare payments for inpatient services provided by rehabilitation and
psychiatric hospitals or units that meet the requirements to be exempted from
the PPS are generally reimbursed on a reasonable cost basis, subject to certain
limits and exceptions. Medicare payment for most outpatient ancillary services
provided in non-acute care facilities is based upon the lesser of reasonable
costs or charges.
Rehabilitation hospitals or units in acute care hospitals must meet certain
eligibility requirements for exclusion from PPS. Rehabilitation hospitals must
show that they provided services to an inpatient population of whom at least 75%
required intensive rehabilitative services for the treatment of conditions that
fell within ten specified categories of injury and disease. The rehabilitation
facilities meeting these requirements are reimbursed by Medicare for their
portion of the actual allowable operating and capital costs for the first three
full cost reporting periods under current or previous ownership. After this
period, the facilities will be subject to limits on their actual operating costs
per discharge. The cost limits were imposed under regulations adopted under the
Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). The TEFRA limit is
determined based upon actual Medicare allowable operating costs per discharge
incurred in a base year, and is updated annually by an amount approved by HCFA.
The annual payment update reflects changes in the hospital market basket and
budgetary policy. Rehabilitation facilities subject to TEFRA limits will be
reimbursed the lesser of their actual allowable operating and capital costs or
the TEFRA limit plus capital costs. If a facility's actual allowable operating
costs are less than the TEFRA limit, it will receive in addition to its actual
costs an "incentive" payment which is equivalent to the lesser of 50% of the
difference between the TEFRA amount and actual operating costs or 5% of the
TEFRA amount.
The Company's respiratory therapy subsidiary derives a significant
percentage of its net revenues and net operating earnings from the provision of
respiratory therapy services and related supplies, equipment and medical gases
to beneficiaries of the Medicare and Medicaid programs who reside in long-term
and subacute care facilities. In general, long-term and subacute care facilities
that contract with an outside provider for the furnishing of respiratory therapy
services are reimbursed under Part A of the Medicare program through the annual
facility cost reporting process. Reimbursement is made under Medicare's
reasonable cost principles, subject to salary equivalency guidelines that
operate as cost limits. Respiratory therapy services furnished under a contract
with an outside provider are Medicare covered services and reimbursable under
Medicare Part A only if furnished by a "transfer hospital" with which the
long-term and subacute care facility has entered into a "transfer agreement."
Golden Care has entered into contracts with a number of hospitals that
participate in the Federal Medicare program and the hospitals have established
transfer agreements with a number of skilled nursing facilities. Pursuant to
Golden Care's contract, the hospitals rent necessary respiratory therapy
equipment from Golden Care and receive comprehensive and specific management
services from Golden Care. The hospitals pay Golden Care monthly rental payments
for the equipment, and certain other fees for the management, administrative and
other related services that Golden Care renders. Golden Care also has entered
into contracts with a number of skilled nursing facilities to provide necessary
medical supplies, medical gases and respiratory therapy equipment, pursuant to a
fee schedule. The skilled nursing facilities pay Golden Care upon receipt of the
medical supplies and medical gases and monthly for the necessary respiratory
therapy equipment.
Current Medicare regulations that apply to transactions between related
parties, such as the Company's subsidiaries, are relevant to the amount of
Medicare reimbursement that the Company is entitled to receive for the
rehabilitation and respiratory therapy and pharmaceutical services that it
provides to
9
affiliated facilities. These related party regulations require that, among other
things, (i) the Company's rehabilitation and respiratory and pharmaceutical
subsidiaries must each be a bona fide separate organization; (ii) a substantial
part of the rehabilitation and respiratory therapy services or pharmaceutical
services, as the case may be, of the relevant subsidiary must be transacted with
nonaffiliated entities, and there is an open, competitive market for the
relevant services; (iii) rehabilitation and respiratory therapy services and
pharmaceutical services, as the case may be, are services that commonly are
obtained by long-term and subacute care facilities from other organizations and
are not a basic element of patient care ordinarily furnished directly to
patients by such long-term and subacute care facilities; and (iv) the prices
charged to the Company's long-term and subacute care facilities by its
rehabilitation and respiratory therapy services subsidiaries and pharmaceutical
subsidiary are in line with the charges for such services in the open market and
no more than the prices charged by its rehabilitation and respiratory therapy
services and pharmaceutical subsidiaries under comparable circumstances to
nonaffiliated long-term and subacute care facilities. The related party
regulations do not indicate a specific level of services that must be provided
to nonaffiliated entities in order to satisfy the "substantial part" requirement
of such regulations. In instances where this issue has been litigated by others,
the final determination of the appropriate threshold to satisfy the "substantial
portion" requirement has varied.
Net revenues from rehabilitation therapy services provided to nonaffiliated
facilities represented 66%, 64% and 67% of total rehabilitation services net
revenues for the years ended December 31, 1996, 1995 and 1994, respectively.
Respiratory therapy services provided to nonaffiliated facilities represented
55% and 64% of total respiratory therapy services net revenues for the year
ended December 31, 1996 and the period from the date of acquisition of Golden
Care on May 5, 1995 to December 31, 1995, respectively. The Company's
respiratory therapy operations did not provide services to affiliated facilities
prior to the acquisition of Golden Care on May 5, 1995. Net revenues from
pharmaceutical services billed to nonaffiliated facilities represented 78%, 78%
and 81% of total pharmaceutical services revenues for the years ended December
31, 1996, 1995 and 1994. The Company believes that it satisfies the requirements
of the related party regulations regarding nonaffiliated business. Consequently,
it has claimed and received reimbursement under Medicare for rehabilitation and
respiratory therapy and pharmaceutical services provided to patients in its own
facilities at a higher rate than if it did not satisfy these requirements. If
the Company were deemed not to have satisfied these regulations, the
reimbursement that the Company receives for rehabilitation and respiratory
therapy and pharmaceutical services provided to its own facilities would be
materially and adversely affected. If, upon audit by Federal or state
reimbursement agencies, such agencies find that these regulations have not been
satisfied, and if, after appeal, such findings are sustained, the Company could
be required to refund some or all of the difference between its cost of
providing these services and the higher amount actually received. While the
Company believes that it has satisfied and will continue to satisfy these
regulations, there can be no assurance that its position would prevail if
contested by relevant reimbursement agencies. The Company believes that it will
be able to integrate the Retirement Care operations so as to remain in
compliance with these regulations; however, in order to so comply the Company
may be required to restrict the number of Retirement Care facilities to which
the Company provides therapy and pharmacy services. The foregoing statements
with respect to the Company's ability to satisfy these regulations are forward
looking and could be affected by a number of factors, including the
interpretation of Medicare regulations by Federal or state reimbursement
agencies and the Company's ability to provide services to nonaffiliated
facilities.
PRIVATE PAY SOURCES. Private pay revenues include payments from individuals
who pay directly for services without governmental assistance, revenues from
nonaffiliated facilities, served by the Company's ancillary therapy and pharmacy
operations, commercial insurers, Blue Cross organizations, HMOs, preferred
provider organizations, workers' compensation programs and other similar payment
sources. Payments from these private pay sources may be charge-based, cost-based
or based on periodically renewable contracts negotiated with these payors. Some
medical conditions treated with rehabilitation therapy services are covered by
liability insurance, rather than health benefits policies. In such cases,
reimbursement rates are established on a case-by-case basis.
10
Although the level of charges by the Company to private patients in its
facilities is not subject to the same regulatory control as with Medicaid or
Medicare, its charges are still generally limited to customary and reasonable
charges for such healthcare services. In addition, many managed care
organizations and other non-governmental payors are under pressure to contain or
reduce costs through increasing case management review of services, lowering
reimbursement rates and negotiating reduced contract pricing.
THERAPY SERVICES TO NONAFFILIATES. Revenues from therapy services to
nonaffiliates are derived from the Company's therapy business which provides
rehabilitation and respiratory therapy, and respiratory products and supplies,
to patients at long-term and subacute care facilities not operated by the
Company. In general, payments for these therapy services are received directly
from the long-term care facilities, which in turn are paid by Medicare or other
payors. Revenues from therapy services provided to affiliated facilities are
included in the Medicaid, Medicare and private pay sources of revenues of the
Company. The Company's charges to nonaffiliates, though not directly regulated,
are effectively limited by regulatory reimbursement policies imposed on the
long-term and subacute care facilities that receive these therapy services, as
well as competitive market factors. The Company's contracts with the
nonaffiliated facilities are generally terminable on 30 to 60 days' notice, so
that if reimbursement policies changed in such a way that contract therapy rates
owed by such facilities to the Company exceeded reimbursement paid by Medicare
or other payors to such facilities, they would be able to terminate their
contractual relationships with the Company. In addition, in substantially all
instances, the Company may be contractually required to indemnify the
nonaffiliated facility for amounts it has been paid which are subsequently
disallowed by Medicare.
CareerStaff revenues are included in the Private and Other category, since
all CareerStaff revenues are derived from billings to facilities served, rather
than directly from Medicare or Medicaid; although Medicare or Medicaid may
reimburse the facilities for the cost of services provided to CareerStaff.
PHARMACEUTICAL SERVICES TO NONAFFILIATES. Revenues from the Company's
pharmaceutical services are derived from the provision of such services to
patients at long-term and subacute care facilities, most of which are not
operated by the Company. The Company enters into non-exclusive contracts with
nonaffiliated facilities, and personnel at such facilities submit prescriptions
to the Company on behalf of patients at such facilities. The Company is in most
cases paid directly by Medicare, Medicaid or private pay sources, and not by the
long-term care facility. The amounts that can be charged for prescriptions are
often limited by Medicaid regulations.
UNITED KINGDOM REVENUE SOURCES
The Company derives its revenues in the United Kingdom from a combination of
(i) income support payments by the United Kingdom Department of Social Security
(the "DSS"), (ii) local authority payments and (iii) private payor sources.
DSS INCOME SUPPORT. The majority of residents in nursing homes in the
United Kingdom are funded by income support payments by the DSS. DSS income
support is paid without any assessment of care need. Under the DSS income
support system, if an individual had less than L8,000 in assets and insufficient
income to cover the cost of home care, that individual is eligible for DSS
income support for nursing home care. A single set of national rates is applied
throughout the United Kingdom (except in London where an additional premium is
payable). DSS income support levels are reviewed annually and generally are
increased with United Kingdom inflation rates. Residents receiving income
support who entered homes before April 1993 will continue to have their fees
paid until they die or leave the nursing home. Consequently, the funding changes
introduced by the Community Care Act will take effect gradually as those who
receive payments from the DSS under the pre-April 1993 system are replaced by
residents who now receive local authority funding.
LOCAL AUTHORITY FUNDING. Since implementation of the Community Care Act, if
an individual is assessed by a local authority as requiring nursing home care,
the local authority will place that individual in a nursing home with which it
has contracted (or a home of the individual's choice) and will recover from
11
the resident any income which he or she may have to cover such costs. In
addition, local authorities may place a charge over a resident's property and
recover the fees for nursing home care from the proceeds of the sale following
the death of the spouse. The local authority is free to contract with any
nursing home and may agree to any fee with the operator of the nursing home. In
practice, most local authorities have used the level of DSS income support
payments as a benchmark against which to set their fees. As a result, local
authority rates are likely to rise in line with DSS income support payments.
Some local authorities, however, have been willing to pay a higher fee for
higher dependency residents or higher quality nursing homes. An individual may
choose to go to a different nursing home than the one offered by the local
authority, provided the extra cost, or "top up," if any, is borne by the
individual or by a third party. Approximately 30% of the Company's residents
receiving income support or local authority funding pay such "top up" payments.
PRIVATE PAYOR SOURCES. Privately funded residents typically pay
approximately 10% more than DSS or local authority-funded residents. The Company
believes that the financial resources of the elderly are projected to increase
in the future. As a result, there is likely to be a decrease in the number of
people who are eligible for local authority funding or DSS income support. The
majority of privately funded residents pay for the cost of nursing home care
with the proceeds from the sale of their home. Health insurance and other
financial products that provide financing for long-term nursing care are in
their infancy in the United Kingdom and it is unlikely that these products will
account for a significant portion of nursing home revenues in the near future.
GOVERNMENT REGULATION
The healthcare industry is subject to substantial federal, state and local
regulation. The various layers of governmental regulation affect the Company's
business by controlling its growth, requiring licensure or certification of its
facilities, regulating the use of its properties and controlling reimbursement
to the Company for services provided. See "Revenue Sources." Licensing,
certification and other applicable governmental regulations vary from
jurisdiction to jurisdiction, are revised periodically, and vary among the
nursing home, therapy and pharmacy operations.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the healthcare system, either nationally or at the state
level. Among the proposals under consideration are cost controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, and requirements that all businesses offer health insurance
coverage to their employees. It is not clear at this time whether any proposals
will be adopted, or, if adopted, what effect, if any, such proposals would have
on the Company's business. There can be no assurance that currently proposed or
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the financial results or operations of the Company.
In 1993, the Health Care Financing Administration ("HCFA") issued a
directive to fiscal intermediaries that administer the Medicare reimbursement
policies to review costs incurred by providers of occupational therapy and
speech therapy provided by contract suppliers such as the Company's
rehabilitation therapy subsidiary. Although HCFA has published salary
equivalency guidelines for contract physical therapy and respiratory therapy,
guidelines for occupational therapy and speech therapy have not yet been
published in final form. Implementation of speech and occupational salary
equivalency guidelines in accord with draft proposals of HCFA could directly or
indirectly limit reimbursement for certain of the Company's occupational and
speech therapy services. Reimbursement for such services is currently evaluated
under Medicare's reasonable cost principles.
In 1995, and periodically since then, HCFA has provided information to
intermediaries for their use in determining reasonable costs for occupational
and speech therapy. The information set forth in such directives, although not
intended to impose limits on reasonable costs for speech therapy and
occupational therapy, suggests that fiscal intermediaries should carefully
review costs which appear to be in excess of
12
what a "prudent buyer" would pay for those services. While the effect of these
directives is still uncertain, they are a factor considered by such
intermediaries in evaluating the reasonableness of amounts paid by providers for
the services of the Company's rehabilitation therapy subsidiary. These
directives will become obsolete for cost reporting periods beginning after
salary equivalency guidelines for all therapies are finalized. In addition, some
intermediaries also require facilities to justify the cost of contract
therapists versus employed therapists as an aspect of the "prudent buyer"
analysis. Accordingly, the "prudent buyer" analyses could result in lower
reimbursement rates and a corresponding decrease in net revenues of the Company.
With respect to rehabilitation therapy services provided to affiliated
facilities, a retroactive adjustment of Medicare reimbursement could be made for
some prior periods. An adjustment of reimbursement rates with respect to therapy
services provided to nonaffiliated facilities could result in indemnity claims
against the Company, based on the terms of substantially all of the Company's
existing contracts with such facilities, for payments previously made by such
facilities to the Company that are reduced by Medicare in the audit process. The
Company derives a significant percentage of its net earnings from the provision
of therapy services; a change in reimbursement rates resulting from
implementation of this directive or a reduction in reimbursement as a result of
a change in application of reasonable cost guidelines could have a material
adverse affect on the Company's financial condition and results of operations,
depending on the rates adopted and the Company's costs for providing these
services.
Additional measures are likely to be adopted in the future as Federal and
state governments attempt to control escalating healthcare costs. Any reductions
in reimbursement levels under Medicaid, Medicare or private payor programs and
any changes in applicable government regulations or interpretations of programs
are subject to statutory and regulatory changes, retroactive rate adjustments to
incurred costs, administrative rulings and government funding restrictions, all
of which may materially affect the rate of payment to facilities and the
Company's therapy and pharmaceutical businesses. There can be no assurance that
payments under government or private payor programs will remain at levels
comparable to present levels or will be adequate to cover the costs of providing
services to patients eligible for assistance under such programs. Significant
decreases in utilization of therapy services and limits on reimbursement for
therapy services could have a material adverse effect on the Company's financial
condition and results of operations.
Many of the states in which the Company operates have adopted CON statutes
applicable to the services provided by the Company. Such statues provide
generally that, prior to the construction of new beds, the addition of new
services or the making of certain capital expenditures exceeding defined levels,
a state agency must determine that a need exists for such proposed activities.
Failure to obtain the necessary state approval can result in the inability to
provide the service, operate the facility or complete the addition or other
change, and can also result in the imposition of sanctions or adverse action in
respect of the facility's license and reimbursement.
All of the Company's long-term and subacute care facilities in the United
States are licensed under applicable state law where licensure is required. As
of December 31, 1996, 155 of the Company's 160 long-term and subacute care
facilities in the United States (or 97% of such facilities) were certified to
receive benefits provided under Medicare, and 157 (or 99% of such facilities)
were approved as providers under Medicaid. Both initial and continuing
qualification of a facility to participate in the Medicaid or Medicare program
depend upon many factors, including accommodations, equipment, services, patient
care, safety, personnel, physical environment and adequate policies, procedures
and controls. In order to participate in the Medicare program, a facility must
be licensed and certified as a provider of skilled nursing services. Effective
October 1, 1990, the Omnibus Budget Reconciliation Act of 1987 eliminated the
different certification standards for "skilled" and "intermediate care" nursing
facilities under the Medicaid program in favor of a single "nursing facility"
standard. This standard requires, among other things, that the Company have at
least one registered nurse on each day shift and one licensed nurse on each
other shift, and increases training requirements for nurse's aides by requiring
a minimum number of training hours and a certification test before a nurse's
aide can commence work. States continue to be required to certify that nursing
facilities provide "skilled care" in order to obtain Medicare reimbursement.
Licensing,
13
certification and other applicable standards vary from jurisdiction to
jurisdiction and are revised periodically. State agencies survey all long-term
care facilities on a regular basis to determine whether such facilities are in
compliance with the requirements for participation in government sponsored third
party payor programs.
The Company believes that its facilities are in substantial compliance with
the various Medicare and Medicaid regulatory requirements of certification.
However, in the ordinary course of its business, the Company receives notices of
deficiencies for failure to comply with various regulatory requirements. The
Company reviews such notices and seeks to take appropriate corrective action. In
most cases, the Company and the reviewing agency will agree upon the measures to
be taken to bring the facility into compliance. In some cases or upon repeat
violations, the reviewing agency has the authority to impose fines, temporarily
suspend admission of new patients to the facility, suspend or decertify from
participation in the Medicare or Medicaid programs and, in extreme
circumstances, revoke a facility's license. These actions would adversely affect
a facility's ability to continue to operate, the ability of the Company to
provide certain services and the facility's eligibility to participate in the
Medicare or Medicaid programs.
Certain of the Company's long-term and subacute care facilities have
received notices in the past from state agencies that, as a result of certain
alleged deficiencies, the agencies were assessing fines or were taking steps to
decertify the facility from participation in Medicare and Medicaid programs.
However, the deficiencies were remedied before any facilities were decertified.
To date, none of the Company's facilities has had its license or certification
revoked.
The Company's therapy and pharmaceutical businesses provide Medicare and
Medicaid covered services and products to long-term and subacute care facilities
under arrangements with both affiliated and nonaffiliated long-term and subacute
care facilities. Under these arrangements, the Company's therapy subsidiary
bills and is paid by the long-term and subacute care facility for the services
actually rendered and the details of billing the Medicare and Medicaid programs
are handled directly by the long-term and subacute care facility. With certain
exceptions, the Company's pharmaceutical subsidiary bills, and is paid by,
Medicare, Medicaid or the private pay source directly. As a result, the
Company's therapy business generally (including Sundance and CareerStaff) is not
Medicare and Medicaid certified and does not enter into provider agreements with
the Medicare and Medicaid programs, but the Company's pharmaceutical business
does participate in the Medicare and Medicaid programs.
Various state and federal laws regulate the relationship between providers
of healthcare services and physicians, including employment or service
contracts, and investment relationships. These laws include the broadly worded
Fraud and Abuse Provisions of the Medicare and Medicaid statutes, which prohibit
various transactions involving Medicare or Medicaid covered patients or
services. Violations of these provisions may result in civil or criminal
penalties for individuals or entities and/or exclusion from participation in the
Medicare and Medicaid programs. For example, conviction of abusive or fraudulent
behavior with respect to one facility could subject other facilities under
common control or ownership to exclusion from participation in the Medicare and
Medicaid programs. For example, conviction of abusive or fraudulent behavior
with respect to one facility could subject other facilities under common control
or ownership to exclusion from participation in the Medicare and Medicaid
programs. The full extent of the application of these provisions is not
presently known. However, the Company believes that it has not entered into any
relationship with physicians or other healthcare providers that might be
considered to fall within the coverage of the Fraud and Abuse Provisions and
other related state and federal laws. The Company believes that it will be able
to arrange its future business relationships so as to comply with the Fraud and
Abuse Provisions or any safe harbor guidelines issued pursuant thereto.
All states have adopted a "patient's bill of rights" that sets forth
standards dealing with such issues as using the least restrictive treatment,
patient confidentiality, allowing patient access to the telephone and mail,
allowing the patient to see a lawyer and requiring the patient to be treated
with dignity. In addition, the Company, as an operator of health care
facilities, is subject to various federal, state and local consumer protection
laws.
14
By virtue of the Company's ownership of Exceler and APTA and an ownership
interest in Ashbourne, certain of the operations from which the Company may
derive income are subject to national and local regulations in the United
Kingdom, including The Community Care Act 1990 and The Registered Homes Act
1984, as well as various zoning, health and safety, reimbursement and general
corporate regulations.
The Company also is subject to federal, state and local laws, regulations
and ordinances that govern activities or operations that may have adverse
environmental effects (such as the generation, handling, storage and disposal of
medical and hazardous wastes) or impose liability for the costs of remediation
of contaminated property in certain circumstances without regard to fault. The
Company could incur liability under such laws for the activities of former
operators of facilities acquired by the Company. Certain of the Company's
operations routinely involve the handling of medical wastes, some of which are
or may become regulated as hazardous substances. The Company has not incurred,
and does not expect to incur, any significant expenditures or liabilities for
environmental matters. As a result, the Company believes that its environmental
obligations will not materially affect the Company.
COMPETITION
The Company operates in a highly competitive industry. The nature of
competition varies by location. Its facilities generally operate in communities
that are also served by similar facilities operated by others. Some competing
facilities are located in buildings that are newer than those operated by the
Company and provide services not offered by the Company, and some are operated
by entities having greater financial and other resources and longer operating
histories than the Company. In addition, some facilities are operated by
nonprofit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other resources not available to the
Company. Some hospitals that either currently provide long-term and subacute
care services or are converting their under-utilized facilities into long-term
and subacute care facilities are also a potential source of competition to the
Company. The Company also competes with other companies in providing
rehabilitation therapy services and pharmaceutical products and services to the
long term care industry and in employing and retaining qualified therapists and
other medical personnel. Many of these competing companies have greater
financial and other resources than the Company.
The Company competes with other facilities based on key competitive factors
such as its reputation for the quality and comprehensiveness of care provided;
the commitment and expertise of its staff; the innovativeness of its treatment
programs; local physician and hospital support; marketing programs; charges for
services; and the physical appearance, location and condition of its facilities.
The range of specialized services, together with the price charged for services,
are also competitive factors in attracting patients from large referral sources.
There is limited, if any, competition in price with respect to Medicaid and
Medicare patients, because revenues for services to such patients are strictly
controlled and based on fixed rates and uniform cost reimbursement principles.
See "Revenue Sources."
The Company may also face competition from other facilities, hospitals or
healthcare companies when it initiates a CON project or seeks to acquire a CON
or a facility covered by an existing CON. CON programs affect the opportunity to
develop or acquire new facilities by creating a regulatory system that can be
used by competitors to delay the implementation of growth strategies. CON laws,
applicable in many of the states in which the Company's facilities are located,
also currently restrict the number of facilities that can compete with the
Company in such states.
EMPLOYEES
As of December 31, 1996, the Company had approximately 35,900 full-time and
part-time employees. Of this total, there were approximately 22,400 employees at
the long-term and subacute care facilities in the United States, 2,500 employees
at the long-term care facilities in the United Kingdom, 6,400 employees involved
in providing rehabilitation therapy services in the United States, 300 employees
providing rehabilitation therapy services in Canada, 700 employees at the
pharmaceutical operations in the United
15
States, 2,200 employees in the temporary therapy staffing business, 700
employees of hospitals who are managed by the Company and provide respiratory
therapy services and 700 employees at the corporate and regional offices.
Certain of the Company's employees in Connecticut, Massachusetts, California,
Washington and New Mexico are covered by collective bargaining contracts. The
Company believes it has satisfactory relationships with the unions that
represent its employees, but it cannot predict the effect of continued union
representation or organizational activities on its future activities.
Although the Company believes it is able to employ sufficient nurses and
therapists to provide its services, a shortage of healthcare professional
personnel in any of the geographic areas in which it operates could affect the
Company's ability to recruit and retain qualified employees and could increase
its operating costs. The Company competes with other healthcare providers for
both professional and service employees and with non-healthcare providers for
service employees.
INSURANCE
Healthcare companies are subject to medical professional liability, personal
injury and other liability claims that are customary risks inherent in the
operation of health facilities and are generally covered by insurance. The
Company maintains property, liability and professional liability insurance
policies in amounts and with such coverages and deductibles that are deemed
appropriate by management, based upon historical claims, industry standards and
the nature and risks of its business. The Company also requires that physicians
practicing at its facilities carry medical professional liability insurance to
cover their respective individual professional liabilities.
The Company has self-insured the healthcare risks of employees who have
elected coverage under the Company-sponsored plans. Workers' compensation
coverage is effected through self-insurance, retrospective or high-deductible
insurance policies or other hybrid policies which vary by the states in which
the Company operates except that the Company's long-term and subacute care
subsidiary is a non-subscriber to the workers' compensation program in Texas.
The costs of paying for healthcare and workers' compensation claims can
fluctuate depending on the type and number of claims in any given period.
ITEM 2. PROPERTIES
FACILITIES. Most of the Company's long-term and subacute care facilities
are subject to long-term operating leases, subleases, or management agreements.
The Company considers its properties to be in good operating condition and
suitable for the purposes for which they are being used. The Company's
facilities that are leased are subject to long-term operating leases or
subleases, the terms of which range from 6 to 23 years, and require the Company,
among other things, to fund all applicable capital expenditures, taxes,
insurance and maintenance costs. The Company's rights as lessee or sublessee
could be subject to termination upon a foreclosure by the underlying mortgage
lender or termination by the lessor. The annual rent payable under each of the
leases generally increases based on a fixed percentage (generally 2 to 3%) and,
in some instances, based on increases in revenues or income and reimbursement
rates or number of occupied beds. Many of the leases contain renewal options to
extend the term for between 5 to 40 consecutive years. Thirty-four of the
Company's facilities are leased from Meditrust. The Meditrust leases generally
provide for a fixed annual 2.5% increase over the prior year's rent and have
initial terms expiring between 2004 and 2008 with renewal options for five
consecutive five year terms. The Meditrust leases contain cross-default
provisions, so that a default under any one of the Meditrust leases may trigger
a default under all mortgages and leases financed by Meditrust. Seventeen of the
Company's long-term and subacute care facilities are subject to management
agreements, which generally provide the Company with management fees based on a
percentage of the revenues of the managed facility and may also include a fixed
fee component.
At December 31, 1996, the Company had an aggregate of $32,712,000 of
outstanding mortgages with Meditrust which contain cross-default provisions with
all of such mortgages and leases also financed by Meditrust.
16
FACILITIES IN THE UNITED STATES. The following table sets forth certain
information concerning the long-term and subacute care facilities owned, leased
or managed by the Company in the United States as of December 31, 1996. Unless
otherwise indicated, all facilities listed below are leased by the Company.
NUMBER OF NUMBER OF
STATE FACILITIES LICENSED BEDS (1)
- -------------------------------------------------------------------------------- ---------- -----------------
Massachusetts (2)............................................................... 35 4,574
Texas........................................................................... 22 2,705
Washington (3).................................................................. 21 1,924
California (4).................................................................. 17 2,185
Connecticut (5)................................................................. 15 2,159
Arizona......................................................................... 10 1,527
Illinois........................................................................ 9 980
Idaho (6)....................................................................... 9 813
New Jersey (7).................................................................. 5 766
New Mexico...................................................................... 4 277
Florida (3)..................................................................... 3 390
Oklahoma........................................................................ 2 135
Oregon.......................................................................... 2 195
Colorado (3).................................................................... 1 117
Kentucky........................................................................ 1 55
Louisiana....................................................................... 1 177
Maryland........................................................................ 1 170
Indiana......................................................................... 1 95
Iowa............................................................................ 1 77
--- ------
160 19,321
--- ------
--- ------
- ------------------------
(1) "Licensed Beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from licensed beds available for
use.
(2) Includes three facilities owned and two facilities managed by the Company.
(3) Includes one facility owned by the Company.
(4) Includes fourteen facilities managed by the Company.
(5) Includes one facility managed by the Company and is the holder by assignment
of an opion to acquire this facility.
(6) Includes three facilities owned by the Company.
(7) Includes one facility managed by the Company.
See "Item 13--Certain Relationships and Related Transactions" for a
description of certain relationships between the Company and certain of its
executive officers and directors with respect to leases for certain of the above
facilities in the United States.
17
FACILITIES IN THE UNITED KINGDOM. The following table sets forth certain
information concerning the long-term care facilities owned or leased by the
Company as of December 31, 1996. Unless otherwise indicated, all facilities
listed below are leased by the Company.
NUMBER OF
NUMBER OF REGISTERED
COUNTY FACILITIES BEDS(1)
- -------------------------------------------------------------------------------- ---------- -----------------
Nottinghamshire (2)............................................................. 12 459
West Midlands (3)............................................................... 12 542
Leicestershire (4).............................................................. 5 219
Derbyshire (4).................................................................. 4 176
Merseyside (5).................................................................. 4 226
Tyne and Wear (6)............................................................... 4 188
Berkshire (7)................................................................... 3 112
Greater Manchester (4).......................................................... 3 115
London (6)...................................................................... 3 175
Owent........................................................................... 3 119
Staffordshire (5)............................................................... 3 154
Clwyd (4)....................................................................... 2 89
Londonderry..................................................................... 2 96
South Yorkshire (5)............................................................. 2 143
Armagh (5)...................................................................... 1 41
Cambridgeshire (5).............................................................. 1 19
Cheshire (5).................................................................... 1 40
Down............................................................................ 1 40
Essex (5)....................................................................... 1 50
Humberside...................................................................... 1 86
Midglamoargan................................................................... 1 60
Newry........................................................................... 1 39
Norfolk (5)..................................................................... 1 13
Shropshire...................................................................... 1 65
Suffolk (5)..................................................................... 1 15
Warwickshire (5)................................................................ 1 35
West Yorkshire.................................................................. 1 104
--
-----
75 3,420
--
--
-----
-----
- ------------------------
(1) "Registered Beds" refers to the number of beds for which a register has been
issued, which may vary in some instances from registered beds available for
use.
(2) Includes four facilities owned by the Company.
(3) Includes ten facilities owned by the Company.
(4) Includes two facilities owned by the Company.
(5) Includes one facility owned by the Company.
(6) Includes three facilities owned by the Company.
(7) Includes two facilities owned and one facility managed by the Company.
CONSTRUCTION OF HEALTHCARE FACILITIES IN THE UNITED KINGDOM. The Company
intends to complete construction of seven facilities in the United Kingdom
through its wholly owned subsidiary Sun Healthcare Group International, Ltd. The
aggregate number of beds for these seven projects is 992 and the estimated
aggregate capital cost of these seven facilities is approximately L7,300,000
($12,500,000) as of December 31, 1996.
18
PHARMACEUTICAL SERVICES. As of December 31, 1996, the Company operated
fifteen pharmacies and three in-house long-term care pharmacies in 21 states,
six pharmacies in the United Kingdom, one supply distribution center and one
pharmaceutical billing and consulting center.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal actions and administrative
proceedings and is subject to various claims arising in the ordinary course of
business. The Company does not believe that the ultimate disposition of these
matters will have a material adverse effect on the financial position or results
of operations of the Company.
Prior to the Company's acquisition of CareerStaff, a holder of CareerStaff's
common stock filed a lawsuit (the "CareerStaff Litigation") as a purported class
action against CareerStaff and the directors of CareerStaff alleging breach of
fiduciary duty in entering into a merger agreement with the Company and against
the Company alleging that the Company aided and abetted the alleged breach of
fiduciary duty by the CareerStaff directors. The CareerStaff Litigation was
voluntarily dismissed without prejudice on May 8, 1996.
On June 30, 1995, two civil class action complaints were filed against the
Company and certain of its current and former directors and officers in the
United States District Court for the District of New Mexico. Two more
complaints, based on the same underlying events, were filed on August 30, 1995.
On October 6 and October 10, 1995, two additional complaints were filed, also
based on the same underlying events. These six complaints were consolidated by a
court order dated November 27, 1995 and an amended class action complaint,
captioned IN RE SUN HEALTHCARE GROUP, INC. LITIGATION (the "Complaint"), was
filed in the United States District Court for the District of New Mexico on
January 26, 1996. The Complaint was purportedly brought on behalf of all persons
who either purchased shares of the Company's common stock between October 26,
1994 and June 27, 1995, or who exchanged their shares of common stock of
CareerStaff for shares of the Company's common stock pursuant to a merger
agreement between CareerStaff and the Company. The Complaint alleges that
defendants misrepresented or failed to disclose material facts about the United
States Department of Health and Human Services' Office of Inspector General
("OIG") investigation and about the Company's operations and financial results,
which plaintiffs contend artificially inflated the price of the Company's
securities.
In October 1996, the Company reached an agreement in principle to settle
these class action lawsuits for $24,000,000 which the Company funded in the
fourth quarter of 1996. The settlement is subject to the execution of definitive
documentation and court approval. The Company received $9,000,000 from its
directors and officers liability insurance carrier for its claim submitted in
connection with the settlement in March 1997.
On or about January 23, 1996, two former stockholders of Golden Care filed a
lawsuit (the "Golden Care Litigation") against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of Indiana. Plaintiffs allege, among other things, that the Company did
not disclose material facts concerning the investigation by the OIG and that the
Company's financial results were misstated. The Complaint purports to state
claims, INTER ALIA, under Federal and state securities laws and for breach of
contract, including a breach of the registration rights agreement pursuant to
which the Company agreed to register the shares being registered for resale by
such former Golden Care stockholders. Plaintiffs purport to seek recission,
unspecified compensatory damages, punitive damages and other relief. By Order
dated October 11, 1996, the court granted in part and denied in part defendants'
motion to dismiss. The Company believes it has meritorious defenses to the
Complaint. There can be no assurance that the Golden Care Litigation will not
have an impact on the Company's accounting for the merger.
On September 8, 1995, a derivative action was filed in the United States
District Court for the District of New Mexico, captioned BRICKELL PARTNERS V.
TURNER, ET AL. The complaint was not served on any defendant. On June 19, 1996,
an amended complaint alleging breach of fiduciary duty by certain current and
former of the Company's directors and officers based on substantially the same
events as those set forth in the above
19
described securities class actions was filed and subsequently served on the
defendants. On August 5, 1996, the District Court dismissed this action without
prejudice for failure to serve the defendants within the required time period.
Brickell Partners filed a new complaint, alleging the same claims, on August 19,
1996. Defendants have moved to dismiss the new complaint. The Company believes
it has meritorious defenses to the new complaint.
The Company believes the Golden Care Litigation and the derivative action
will not have a material adverse impact on its financial condition or results of
operations, although the unfavorable resolution of any of these actions in any
reporting period could have a material adverse impact on the Company's results
of operations for that period. The foregoing statements with respect to the
possible outcomes of the Golden Care Litigation and the derivative action are
forward looking and could be affected by a number of factors, including judicial
interpretations of applicable law, the uncertainties and risks inherent in any
litigation, particularly a jury trial, the existence, scope and number of any
subsequently filed complaints, the scope of insurance coverage, and the outcome
of the OIG investigation and all factors that could affect that outcome.
In January 1995, the Company learned that it was the subject of a pending
Federal investigation. The investigating agencies are the United States
Department of Health and Human Services' Office of Inspector General and the
United States Department of Justice. The government is still in the process of
collecting information. The Company has cooperated and continues to cooperate
with the investigation.
At this time, the Company understands that the investigation includes a
review of whether the Company's rehabilitation therapy subsidiary properly
provided and/or billed for concurrent therapy services and whether it provided
unnecessary or unordered services to residents of skilled nursing facilities.
The Company understands that the investigation also includes a review of whether
its long-term care subsidiary properly disclosed its relationship with the
Company's rehabilitation therapy subsidiary and properly sought reimbursement
for services provided by that subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its
precise scope might be. If there have been improper practices or the
investigation is broader in scope than the Company currently understands it to
be, depending on the nature and extent of such impropriety, the investigation
could result in the imposition of civil, administrative, or criminal fines,
penalties, or restitutionary relief, and may have a negative impact on the
Company. From time to time the negative publicity surrounding the investigation
has slowed the Company's success in obtaining additional outside contracts in
the rehabilitation therapy business, which has resulted in higher than required
therapist staffing levels, and has affected the private pay enrollment in
certain inpatient facilities. Based on its current understanding of the
investigation, however, the Company does not believe that the outcome of the
investigation will have a material adverse effect on the Company's financial
condition or results of operations. The foregoing statements with respect to the
outcome of the investigation are forward looking and could be affected by a
number of factors, including the actual scope of the investigation, the
government's factual findings and the interpretation of Federal statutes and
regulations by the government and Federal courts.
In 1996, the Connecticut Attorney General's office and the Connecticut
Department of Social Services ("DSS") began investigating whether Medicaid cost
reports for 1993 and 1994 submitted to the DSS by the Company's long-term care
subsidiary contained false and misleading fiscal information. Based on its
current understanding of the investigation, the Company believes the
investigation will not have a material adverse effect on the Company's financial
condition or results of operations. The foregoing statement with regard to the
outcome of this investigation is forward looking and could be affected by a
number of factors, including the factual findings and interpretation of
applicable laws and regulations by the Attorney General and the DSS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
20
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 26, 1997 were as follows:
Andrew L. Turner, age 50, is Chairman of the Board of Directors, President
and Chief Executive Officer of the Company. Mr. Turner has served in each of
these capacities for the Company since its formation. Mr. Turner is also the
founder of the Company and has overseen the development of the Company's
business since its inception in 1989. Mr. Turner was also a founder and
previously served as Chief Operating Officer of Horizon Healthcare Corporation,
a healthcare services provider, from 1986 to 1989. Prior to 1986, Mr. Turner
served as a Senior Vice President of Operations of The Hillhaven Corporation
("Hillhaven"). Mr. Turner has over 20 years of experience in the long-term care
industry.
Robert D. Woltil, age 42, became a director of the Company in March 1996.
Mr. Woltil became the Senior Vice President for Financial Services and Chief
Financial Officer of the Company in February 1996. From 1982 to January 1996,
Mr. Woltil served in various capacities for Beverly Enterprises, Inc.
("Beverly"), a healthcare services provider. From May 1995 until January 1996.
Mr. Woltil was President and Chief Executive Officer of Pharmacy Corporation of
America, a subsidiary of Beverly. From 1992 to May 1995, Mr. Woltil was the
Chief Financial Officer of Beverly, and from 1990 to 1992, Mr. Woltil was the
Vice President--Financial Planning and Control for Beverly. Mr. Woltil is also a
certified public accountant.
Robert A. Levin, age 42, became a director of the Company in April 1993 and
has served as the Secretary of Sun from April 1993 to October 1996. Effective
January 1, 1996, Mr. Levin became the Senior Vice President for Rehabilitation
Services. This position includes responsibility for all therapy services of the
Company, including those of Sundance Rehabilitation Company ("Sundance"), the
Company's rehabilitation therapy subsidiary. From January 1991 to December 1995,
Mr. Levin was the President and Chief Operating Officer of Sundance. Previously
Mr. Levin was Vice President of National Accounts for Medline Industries, Inc.,
a manufacturer and distributor of medical supplies.
Warren C. Schelling, age 43, became a Director of the Company in October
1996. Mr. Schelling became the Senior Vice President for the Pharmaceutical
Services Division effective January 1, 1996. This position includes
responsibility for all of the Company's pharmaceutical services, including those
of Sunscript Pharmacy Corporation ("Sunscript"), the Company's pharmacy
subsidiary. From July 1994 to December 1995, Mr. Schelling was the President of
Sunscript. Prior to joining the Company, Mr. Schelling was the President and
Chief Operating Officer of HPI Health Care Services, Inc. a subsidiary of
Diagnostek, Inc., which provides pharmacy management services to hospitals,
HMOs, long-term care facilities and health systems, from January 1993 to July
1994. From January 1994 to July 1994, Mr. Schelling also served as the Executive
Vice President/Pharmacy Services Officer at Diagnostek, Inc. From September 1985
to January 1993, Mr. Schelling was a manager in HPI Health Care Services, Inc.
Mark G. Wimer, age 43, became a Director of the Company in July 1993. Mr.
Wimer became the Senior Vice President of Inpatient Services effective January
1, 1996. This position includes responsibility for all inpatient services of the
Company, including those of Sunrise Healthcare Corporation ("Sunrise"), the
Company's subsidiary responsible for operations of the Company's long-term care
facilities. Mr. Wimer previously served as the President of Sunrise effective
July 1, 1993 until December 1995. From February 1988 to July 1993, Mr. Wimer was
President and Chief Executive Officer of Franciscan Eldercare Corporation, a
non-profit organization that develops and manages long-term care facilities.
From November 1984 through February 1988, Mr. Wimer was Regional Vice President
of Operations for Hillhaven and had responsibility for management of long-term
care facilities for such company in Washington, Oregon, Idaho and Montana.
Julie Collins, age 49, became Senior Vice President of Administrative
Services in January 1, 1996. This position is responsible for overseeing
corporate communications, human resources, risk management, training and
corporate office facilities management. From September 1994 to December 1995,
Ms. Collins was the Vice President Human Resources. Prior to joining the
Company, Ms. Collins was the Vice President of Human Resources and Support
Services for St. Joseph Health System in Atlanta, Georgia
21
from 1993 to 1994. From July 1991 to September 1993, Ms. Collins had been the
Vice President of Sunrise. From 1990 to 1991, Ms. Collins was Director of Human
Resources for Sheperd Spinal Center in Atlanta, Georgia.
Susan M. LaBelle, age 44, became Senior Vice President--SunSolution Division
in January 1997. This position is responsible for developing a marketing program
to integrate all of the Company's ancillary services. From July 1994 to December
1996, Ms. LaBelle was Vice President of Marketing at Baxter Healthcare
Corporation, a manufacturer and distributor of medical products. From July 1989
to July 1994, Ms. LaBelle was Director of Marketing at McGaw, Inc., a
manufacturer and distributor of medical products.
Robert F. Murphy, age 43, became Senior Vice President and the General
Counsel of the Company in November 1995 and Secretary of the Company in October
1996. From 1986 to 1995 Mr. Murphy served in several capacities as an officer
and legal counsel to FHP International Corporation, most recently as Vice
President and Associate General Counsel. Previously Mr. Murphy was in private
practice beginning in 1978.
Warren H. McInteer, age 37, became Vice President of Mergers & Acquisitions
in August 1995. Mr. McInteer became the Treasurer of the Company in June 1995.
Prior to joining the company, Mr. McInteer was the Vice President of Financial
Planning for Continental Medical Systems ("Continental") in Mechanicsburg,
Pennsylvania, from 1993 to 1995. From 1985 to 1993, Mr. McInteer was a
management consultant for Price Waterhouse working from offices in Baltimore,
London and Philadelphia.
William C. Warrick, age 34, became Vice President, Corporate Controller in
March 1994. From July 1991 to March 1994, Mr. Warrick directed financial
reporting for Continental. From July 1990 to June 1991, Mr. Warrick held a
similar position with McCrory Stores, a retail chain store company. Previously
Mr. Warrick was an accountant with KPMG Peat Marwick. Mr. Warrick is a certified
public accountant.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
THE COMPANY
The Company's common stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "SHG." The following table shows the high and low sales
prices for the common stock as reported by the NYSE for the periods indicated:
HIGH LOW
------ ------
1995
First Quarter............................................. $28.13 $23.00
Second Quarter............................................ 27.13 12.25
Third Quarter............................................. 16.38 12.25
Fourth Quarter............................................ 14.75 9.13
1996
First Quarter............................................. $14.25 $11.25
Second Quarter............................................ 15.63 12.88
Third Quarter............................................. 14.63 11.63
Fourth Quarter............................................ 13.63 11.50
There were approximately 2,977 holders of record as of March 26, 1997 of the
Company's common stock.
The Company has not paid nor declared any dividends on its common stock
since its inception and anticipates that its future earnings will be retained to
finance the continuing development of its business. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, future earnings, the success of the Company's
business activities, regulatory and capital requirements, the general financial
condition of the Company and general business conditions. The Company is
restricted from paying dividends under its revolving credit facility. See "Item
7--Management's Discussion and Analysis of Financial Condition and Result of
Operations-- Liquidity and Capital Resources."
23
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Consolidated Financial Data for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the
Company's Consolidated Financial Statements. The financial data set forth below
should be read in connection with "Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the Company's
Consolidated Financial Statements and related notes thereto.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996(3) 1995(4)(5) 1994 1993 1992
---------- ---------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE)
Total net revenues.......................................... $1,316,308 $1,135,508 $ 673,354 $230,815 $135,733
Earnings before pro forma income taxes and extraordinary
loss...................................................... 52,466 12,794 36,807 22,710 7,258
Earnings (loss) before extraordinary item (1)............... 21,536 (20,568) 19,561 13,463 4,373
Extraordinary item.......................................... -- (3,413) -- -- --
---------- ---------- --------- -------- --------
Net earnings (loss) (1)..................................... $ 21,536 $ (23,981) $ 19,561 $ 13,463 $ 4,373
---------- ---------- --------- -------- --------
---------- ---------- --------- -------- --------
Net earnings (loss) per common and common equivalent share
(1)(2):
Before extraordinary loss................................... $ 0.46 $ (0.43) $ 0.61 $ 0.72 $ 0.29
Extraordinary loss.......................................... -- (0.07) -- -- --
---------- ---------- --------- -------- --------
Net earnings................................................ $ 0.46 $ (0.50) $ 0.61 $ 0.72 $ 0.29
---------- ---------- --------- -------- --------
---------- ---------- --------- -------- --------
Weighted average number of common and common equivalent
shares.................................................... 46,840 47,419 31,830 18,608 14,902
Working capital............................................. $ 211,582 $ 237,147 $ 197,150 $ 45,451 $ 2,057
Total assets................................................ 1,229,426 1,042,503 1,054,223 110,488 27,760
Long-term debt, net of current portion...................... 483,453 348,460 398,534 11,967 1,365
Stockholders' equity........................................ 572,137 569,042 550,449 70,361 8,232
- ------------------------
(1) Results for the year ended December 31, 1995 and prior years represent pro
forma amounts to include pro forma taxes of CareerStaff and Golden Care
prior to their conversions to be taxed as C corporations, which occurred in
June 1994 and May 1995, respectively.
(2) See Note 1(o) to the Company's Consolidated Financial Statements for net
earnings (loss) per share information. Also, pro forma net earnings per
share data for the years ended December 31, 1993 and 1992, are calculated
based upon the number of shares of the Company's common stock issued upon
the formation of Sun Healthcare Group, Inc. on April 15, 1993, which placed
under the control of a single corporation all of the Company's operations
and the appropriate weighted average number of shares of the Company's
common stock for common stock transactions of the Company subsequent to the
Company's preincorporation agreement dated as of April 13, 1993, and also
include the appropriate weighted average number of shares of the Company's
common stock for common stock transactions of CareerStaff and Golden Care
for the years ended December 31, 1993 and 1992.
(3) Results for the year ended December 31, 1996 include a $24,000,000 charge
recognized by the Company to settle certain of the lawsuits brought by
shareholders and, as a reduction of this settlement charge, $9,000,000 which
was received from the Company's directors and officers' liability insurance
carrier in connection with the settlement (see Note (14) to the Consolidated
Financial Statements). In addition, in 1996, the Company recorded additional
expenses of $4,250,000 related to monitoring and responding to the
continuing investigation by the United States Department of Health and Human
Services' Office of Inspector General ("OIG") and to responding to the
remaining
24
shareholder litigation related to the announcement of the OIG investigation.
The charges to not contain any estimated amounts for settlement of the OIG
investigation or remaining shareholder litigation matters.
(4) Results for the year ended December 31, 1995 include a charge of $3,256,000
in connection with the payment of an inducement fee to effect the conversion
in January 1995 of $39,449,000 of the 6 1/2% Convertible Subordinated
Debentures and an extraordinary charge of $3,413,000, net of the related tax
benefit, in connection with the tender offer of the 11 3/4% Senior
Subordinated Notes. (See Note (6) to the Consolidated Financial Statements).
(5) Also included in results for the year ended December 31, 1995 is $5,800,000
of transaction-related merger costs incurred in connection with the merger
of the Company with CareerStaff and Golden Care (see Note (2) to the
Consolidated Financial Statements), a $59,000,000 impairment loss recorded
by the Company which primarily relates to goodwill associated with six of
the forty facilities acquired in the acquisition of Mediplex (see Note
(1(g)) to the Consolidated Financial Statements), $4,006,000 related to
averting a strike and negotiating new contracts for certain unionized homes
in Connecticut, and a charge of $5,505,000 related to monitoring and
responding to the investigation by the OIG and legal fees resulting from the
shareholder litigation.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, through its direct and indirect subsidiaries (hereinafter
collectively referred to as "the Company"), is a provider of long-term, subacute
and related specialty healthcare services, including rehabilitation and
respiratory therapy services and pharmaceutical services. Long-term care and
subacute care services and outpatient therapy services are provided through
affiliated facilities. Therapy services and pharmaceutical services are provided
in both affiliated and nonaffiliated facilities located in the United States.
The Company also provides long-term care and pharmaceutical services in the
United Kingdom and outpatient rehabilitation therapy services in Canada.
The Company's strategy is to increase profitability through the provision of
ancillary services such as rehabilitation and respiratory therapy services and
pharmaceutical services to both affiliated and nonaffiliated facilities. These
services have significantly higher margins than the margins associated with
routine services provided to residents of facilities. The Company's earnings
growth has historically resulted from its acquisition of long-term and subacute
care facilities ("facilities"), use of its long-term care and subacute care
operations as a base for expansion of ancillary services, provision of ancillary
services to nonaffiliated facilities and expansion of ancillary services through
acquisitions.
The Company's results of operations for the years ended December 31, 1996,
1995 and 1994 reflect the acquisition of facilities, the growth of the Company's
existing facility operations, the expansion of the Company's therapy service
operations and temporary therapy staffing services, and the growth of the
Company's pharmaceutical service operations. In June 1995, the Company merged
with CareerStaff Unlimited, Inc. ("CareerStaff"), a provider of temporary
staffing of physical, occupational and speech therapists to the healthcare
industry, and in May 1995, the Company merged with Golden Care, Inc. ("Golden
Care"), a provider of respiratory therapy services to facilities. Both
transactions were accounted for as poolings of interest. The Company acquired
The Mediplex Group, Inc. ("Mediplex") in June 1994, which was accounted for as a
purchase.
In February 1997, the Company agreed to acquire Retirement Care Associates,
Inc. ("Retirement Care"), an operator of 107 skilled nursing facilities and
assisted living centers, and its 65% owned subsidiary, Contour Medical, Inc.
("Contour"), a national provider of medical/surgical supplies. In addition, the
Company agreed to acquire the remaining 35% of Contour not presently owned by
Retirement Care. The acquisition of Contour is expected to be accounted for as a
purchase. These transactions are expected to close in the second half of 1997.
The acquisition of Retirement Care is expected to be accounted for as a pooling
of interests. In January 1997, the Company acquired the portion not previously
owned by the Company of Ashbourne PLC, an operator of 49 nursing and residential
support facilities in the United Kingdom.
At December 31, 1996, the Company operated 160 facilities with 19,321
licensed beds in the United States and 75 facilities with 3,420 licensed beds in
the United Kingdom.
At December 31, 1995, the Company operated 131 facilities with 15,921
licensed beds in the United States and 28 facilities with 1,437 licensed beds in
the United Kingdom. In 1996, the Company acquired 32 facilities in the United
States and 43 facilities in the United Kingdom, resulting in a total increase of
3,874 and 1,750 licensed beds in the United States and United Kingdom,
respectively. In addition, in 1996 the Company developed and opened four
facilities in the United Kingdom with a total of 230 licensed beds.
At December 31, 1994, the Company operated 115 facilities with 13,904
licensed beds in the United States and 18 facilities with 840 licensed beds in
the United Kingdom. In 1995, the Company acquired twelve facilities in the
United States and eight facilities in the United Kingdom, resulting in a total
increase of 1,295 and 484 licensed beds in the United States and United Kingdom,
respectively. In addition, in 1995 the Company developed and opened four
facilities in the United States and two in the United Kingdom, with 525 and 111
licensed beds in the United States and United Kingdom, respectively. In 1994,
the
26
Company acquired 60 facilities with 7,652 licensed beds, including 36 facilities
with 5,317 licensed beds at December 31, 1994, through the acquisition of
Mediplex. In August 1994, the Company acquired a 68% interest in Exceler Health
Care Group PLC ("Exceler"), a United Kingdom corporation. The Company acquired
the remaining 32% interest in Exceler in February 1995.
The Company's therapy service operations include the provision of physical,
occupational and speech therapy, the provision of respiratory care, and the
distribution of related equipment and supplies. The Company entered the
respiratory therapy service business through its May 1995 merger with Golden
Care. As of December 31, 1996, the Company provided its therapy services to 759
nonaffiliated facilities, an increase of 116 facilities from the 643
nonaffiliated facilities serviced at December 31, 1995.
The Company entered the temporary therapy staffing service business through
its June 1995 merger with CareerStaff. The Company had 20, 18 and 14 division
offices at December 31, 1996, 1995 and 1994, respectively. During the twelve
months ended December 31, 1996, the Company provided a total of 2,402,000
temporary therapy staffing hours, an increase of 403,000 hours from the
1,999,000 temporary therapy staffing hours provided during the twelve months
ended December 31, 1995.
The Company's pharmaceutical service operations include the provision of
pharmaceuticals and the distribution of related supplies. As of December 31,
1996, the Company operated fifteen regional pharmacies, three in-house long-term
care pharmacies, six pharmacies in the United Kingdom, one supply distribution
center and one pharmaceutical billing and consulting center.
The Company's foreign operations, in addition to the nursing home facilities
in the United Kingdom, include the provision of outpatient therapy services in
Canada through the Company's acquisition of Columbia Health Care Inc.
("Columbia") in 1995 and pharmaceutical services in the United Kingdom.
The following table sets forth certain operating data for the Company as of
the dates indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Long-term and Subacute Care Facility Operations
Long-term and subacute care facilities:
Domestic operations (including managed facilities)..................... 160 131 115
Foreign operations..................................................... 75 28 18
--------- --------- ---------
Total................................................................ 235 159 133
--------- --------- ---------
--------- --------- ---------
Licensed beds:
Domestic operations (including managed facilities)..................... 19,321 15,921 13,904
Foreign operations..................................................... 3,420 1,437 840
--------- --------- ---------
Total................................................................ 22,741 17,358 14,744
--------- --------- ---------
--------- --------- ---------
Therapy Service Operations:
Nonaffiliated facilities served.......................................... 759 643 513
Affiliated facilities served............................................. 152 125 108
--------- --------- ---------
Total................................................................ 911 768 621
--------- --------- ---------
--------- --------- ---------
Temporary Therapy Staffing Service Operations:
Hours billed to nonaffiliates (in thousands)............................. 2,402 1,999 1,158
--------- --------- ---------
--------- --------- ---------
Pharmaceutical Operations:
Nonaffiliated facilities served.......................................... 325 271 136
Affiliated facilities served............................................. 112 101 76
--------- --------- ---------
Total................................................................ 437 372 212
--------- --------- ---------
--------- --------- ---------
27
RESULTS OF OPERATIONS
The following table sets forth the amount and percentages of certain
elements of total net revenues for the periods presented (dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- ---------------------
Long-term and subacute care services.......... $ 826,780 63% $ 759,459 67% $ 476,146 71%
Therapy services to nonaffiliates............. 220,592 17 170,154 15 106,144 16
Temporary therapy staffing services to
nonaffiliates................................ 116,818 9 96,500 9 55,258 8
Pharmaceutical services to nonaffiliates...... 70,673 5 51,409 5 20,427 3
Foreign operations............................ 60,985 4 27,072 2 6,196 1
Ambulatory surgery............................ 11,857 1 26,197 2 7,260 1
Management fees and other..................... 8,603 1 4,717 -- 1,923 --
------------ --------- ------------ --------- ---------- ---------
Total net revenues........................ $ 1,316,308 100% $ 1,135,508 100% $ 673,354 100%
------------ --------- ------------ --------- ---------- ---------
------------ --------- ------------ --------- ---------- ---------
Revenues for long-term and subacute care services include revenues billed to
patients for therapy and pharmaceutical services provided by the Company's
affiliated operations. Revenues for therapy services provided to affiliated
facilities were $113,925,000, $92,177,000 and $45,157,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Revenues provided to affiliated
facilities for pharmaceutical services were $19,503,000, $14,187,000 and
$4,900,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
28
The following table presents the percentage of total net revenues
represented by certain items for the Company for the periods presented:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Total net revenues........................................................... 100% 100% 100%
--------- --------- ---------
Costs and expenses:
Operating.................................................................. 84.2 81.9 82.1
Corporate general and administrative....................................... 4.7 4.5 4.7
Provision for losses on accounts receivable................................ 1.1 1.3 4.1
Depreciation and amortization.............................................. 2.6 2.4 1.8
Interest, net.............................................................. 2.0 1.9 1.5
Conversion expense......................................................... -- 0.3 0.3
Merger expenses............................................................ -- 0.5 --
Strike costs............................................................... -- 0.4 --
Investigation and litigation costs......................................... 1.5 0.5 --
Impairment loss............................................................ -- 5.2 --
--------- --------- ---------
Total costs and expenses................................................. 96.1 98.9 94.5
--------- --------- ---------
Earnings before income taxes and extraordinary loss.......................... 3.9 1.1 5.5
Income taxes(1).............................................................. 2.3 2.9 2.6
--------- --------- ---------
Net earnings (loss) before extraordinary loss(1)............................. 1.6 (1.8) 2.9
Extraordinary loss........................................................... -- (0.3) --
--------- --------- ---------
Net earnings (loss)(1)....................................................... 1.6% (2.1)% 2.9%
--------- --------- ---------
--------- --------- ---------
- ------------------------
(1) Results for the years ended December 31, 1995 and 1994 represent pro forma
amounts to include pro forma taxes of CareerStaff and Golden Care prior to
their conversion to be taxed as C Corporations, which occurred in June 1994
and May 1995, respectively.
The results of the Company's ambulatory surgery operations are immaterial to
the Company's consolidated results and, therefore, this discussion excludes the
Company's ambulatory surgery operations. The Company sold its ambulatory surgery
subsidiary in the second quarter of 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1995
Total net revenues for the year ended December 31, 1996 increased 16% from
$1,135,508,000 for the year ended December 31, 1995 to $1,316,308,000.
Net revenues from long-term and subacute care services were negatively
impacted in the fourth quarter of 1996 by certain changes in accounting
estimates for third-party settlements (see "Effects From Changes in
Reimbursement" and Note 1(d) to the Consolidated Financial Statements). In the
fourth quarter of 1996, the Company recorded negative revenue adjustments
totaling approximately $23,047,000 resulting from changes in accounting
estimates of amounts realizable from third-party payors. These changes in
accounting estimates primarily arose out of the cost reporting settlement
process in the latter part of 1996, including the settlement of outstanding
Medicare cost reports and the results of Medicare and Medicaid cost report
audits. Amounts pertaining to prior quarters are not material to the results
previously reported for those quarters. Approximately $19,400,000 of the
adjustments related to changes in estimates out of the settlement of prior
years' cost reports including $11,100,000 of adjustments from the Company's
Mediplex facilities. Some of the issues, as resolved in the settled cost
reports, have a continuing impact on recorded revenue rates and therefore will
negatively affect future operating results. However, the Company does not expect
this impact to materially affect future periods. After considering these
adjustments, net revenues increased 9% from $759,459,000 for the year ended
December 31, 1995 (which
29
was adversely affected by the factors noted below) to $826,780,000 for the year
ended December 31, 1996. Approximately $82,632,000 of this increase resulted
from 18 leased or owned facilities acquired during the year ended December 31,
1996 and 16 facilities acquired or opened at various times during the year ended
December 31, 1995. Net revenues for facilities opened before January 1, 1995
decreased $15,311,000 due to the negative revenue adjustments previously
discussed and the sale of three of these facilities during 1996. The sold
facilities contributed $17,735,000 of the decrease.
Net revenues from therapy services to nonaffiliated facilities increased 30%
from $170,154,000 for the year ended December 31, 1995, to $220,592,000 for the
year ended December 31, 1996 primarily as a result of an increase in the number
of nonaffiliated facilities served from 643 facilities at December 31, 1995 to
759 facilities at December 31, 1996.
Net revenues from temporary therapy staffing services to nonaffiliated
facilities increased 21% from $96,500,000 for the year ended December 31, 1995
to $116,818,000 for the year ended December 31, 1996 primarily as a result of an
increase in service hours billed to nonaffiliates from 1,999,000 hours in 1995
to 2,402,000 hours in 1996. The increase in service hours billed was primarily
attributable to the increase of services at division offices open for over one
year and to new offices established through acquisitions.
Net revenues from pharmaceutical services to nonaffiliated facilities
increased 37% from $51,409,000 for the year ended December 31, 1995 to
$70,673,000 for the year ended December 31, 1996. The growth in net revenues was
primarily a result of the increase in the number of nonaffiliated facilities
served from 271 at December 31, 1995 to 325 at December 31, 1996. The increase
in nonaffiliated facilities served was the result of the opening and acquisition
of pharmacies during 1996 and 1995 and the increase in the number of
nonaffiliated facilities served by pharmacies open prior to January 1, 1995.
Net revenues from foreign operations increased 125% from $27,072,000 for the
year ended December 31, 1995 to $60,985,000 for the year ended December 31,
1996. Net revenue growth of $17,997,000 was attributable to the acquisition of
Columbia, a provider of outpatient rehabilitation therapy in Canada, during
November 1995. The remaining net revenue increase of $15,916,000 was
attributable to the 47 facilities acquired or opened in the United Kingdom
during the year ended December 31, 1996 and the 10 facilities acquired or opened
in the United Kingdom during the year ended December 31, 1995.
Operating expenses, which includes rent expense of $91,666,000 and
$73,727,000 for the years ended December 31, 1996 and 1995, respectively,
increased 19% from $929,493,000 for the year ended December 31, 1995 to
$1,107,821,000 for the year ended December 31, 1996. The increase resulted
primarily from the net increase of 62 leased or owned facilities during the year
ended December 31, 1996 and 26 leased or owned facilities during the year ended
December 31, 1995 and the growth in therapy and temporary therapy staffing
services. Operating expenses as a percentage of net revenues increased from
81.9% for the year ended December 31, 1995 to 84.2% for the year ended December
31, 1996. This increase was primarily attributable to negative revenue
adjustments recorded by the Company during the fourth quarter of 1996 (as
discussed above). In addition, the increase can also be attributed to newly
developed facilities opened during 1996 and 1995, which, during the start-up
period, have experienced lower operating margins as the Company implements its
operating strategies, and to increased operating costs without a corresponding
increase in billing rates due to competitive pressures. Seasonal declines in
therapist productivity during the holiday season in the fourth quarter also
contributed to the decrease. The Company's operating costs during the holiday
season remained relatively constant despite temporary revenue reductions due to
the reduced number of business days during the fourth quarter in 1996 as
compared to 1995.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, increased 21% from $51,468,000 for the
year ended December 31, 1995 to $62,085,000 for the year ended December 31,
1996. As a percentage of net revenues, corporate general and administrative
expenses increased from 4.5% for the year ended December 31, 1995 to 4.7% for
the year ended December 31, 1996. The increase was primarily due to expansion of
the Company's corporate infrastructure to support the operations of fourteen
facilities in California for which the Company entered into a
30
management agreement during the third quarter of 1996. The increase was also due
to an increase in costs relating to the expansion of the Company's corporate
infrastructure to support the developing foreign operations and implementation
of new business strategies.
The provision for losses on accounts receivable increased 2% from
$14,623,000 for the year ended December 31, 1995 to $14,970,000 for the year
ended December 31, 1996. As a percentage of net revenues, provision for losses
on accounts receivable decreased from 1.3% for the year ended December 31, 1995
to 1.1% for the year ended December 31, 1996. In 1995, $7,608,000 of Mediplex
accounts receivable were written-off, of which $3,549,000 represented accounts
receivable existing at the date of the acquisition of Mediplex. The write-offs
of Mediplex accounts receivable in 1995 were primarily the result of the
difficulties the Company experienced in integrating Mediplex's accounting and
management information systems which hampered collection efforts, changes in
estimates of amounts realizable from third-party payors (see "Effects from
Changes in Reimbursement") and the recognition of losses on balances retained
from the disposition of five of Mediplex's psychiatric care and substance abuse
facilities and related outpatient centers on September 30, 1995. In 1996, the
Company continued to experience higher than expected write-offs of patient
accounts receivable primarily at its Mediplex facilities and recorded an
additional provision for losses on accounts receivable of approximately
$6,550,000. In addition, in 1996 the Company increased its accounts receivable
reserve in response to a slowdown in collections from nonaffiliated facilities
for therapy services due to delays in payment by the nonaffiliated facilities'
Medicare fiscal intermediaries (see "Liquidity and Capital Resources").
Depreciation and amortization increased 22% from $27,734,000 for the year
ended December 31, 1995 to $33,817,000 for the year ended December 31, 1996. As
a percentage of net revenues, depreciation and amortization expense remained
relatively constant at 2.6% and 2.4% for the years ended December 31, 1996 and
1995, respectively.
Net interest expense increased 19% from $21,829,000 for the year ended
December 31, 1995 to $25,899,000 for the year ended December 31, 1996. The
increase is primarily related to borrowings associated with the repurchase of
2,030,116 shares of the Company's outstanding common stock and purchase of a
9.9% interest in OmniCell Technologies, Inc. ("OmniCell"). Each of these
acquisitions was financed by borrowings under the Company's revolving credit
facility. As a percentage of net revenues, interest expense remained relatively
constant at 2.0% and 1.9% for the years ended December 31, 1996 and 1995,
respectively.
In 1996, the Company reached an agreement in principle to settle certain of
the class-action lawsuits brought by shareholders for $24,000,000 and
recognized, as a reduction of the settlement cost, a $9,000,000 claim from its
directors and officers liability insurance carrier. Although the Company funded
the settlement payment in 1996, the Company did not receive payment from its
insurance carrier until March 1997. In addition, in 1996 the Company accrued
additional charges and expenses of $4,250,000 related to monitoring and
responding to the continuing investigation by the U.S. Department of Health and
Human Services' Office of Inspector General ("OIG") and responding to the
remaining shareholder litigation filed after the announcement of the OIG
investigation. In 1995, the Company also recorded charges and expenses of
$5,505,000 related to monitoring and responding to the continuing investigation
by the OIG and legal fees resulting from shareholder litigation. The 1995
charges also included costs incurred by the Company in connection with financing
activities which were not concluded due to negative publicity resulting from the
OIG investigation. The charges do not contain any estimated amounts for
settlement of the OIG investigation or remaining shareholder litigation matters
(see "Effects from Changes in Reimbursement" and "Litigation").
The Company incurred a nonrecurring charge of $3,256,000 in connection with
the payment of an inducement fee to effect the conversion in January 1995 of
$39,449,000 of the 6 1/2% Convertible Debentures. In addition, in 1995 the
Company recorded an extraordinary charge of $3,413,000, net of the related
31
tax benefit, in connection with the tender offer, completed in January 1995, for
$78,698,000 principal amount of the 11 3/4% Senior Subordinated Notes. No
similar charges were recorded during 1996.
In connection with the mergers with CareerStaff and Golden Care, the Company
recognized $5,800,000 of transaction related merger costs in the second quarter
of 1995. These included advisor fees and transitional costs related to
consolidating operations. No similar charges were recorded during 1996.
During 1995, the Company recorded charges and expenses of $4,006,000 related
to averting a strike and negotiating new contracts for certain unionized nursing
homes in Connecticut. No similar charges were recorded during 1996.
The Company periodically evaluates the carrying value of goodwill along with
any other related long-lived assets in relation to the future undiscounted cash
flows of the underlying businesses to assess recoverability. The Company adopted
Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
on December 31, 1995. Under SFAS 121, an impairment loss is recognized if the
sum of the expected long-term cash flows is less than the carrying amount of the
goodwill and other assets being evaluated. The difference between the carrying
amount of the goodwill and other assets being evaluated and the estimated fair
market value of the assets represents the impairment loss. The Company
determines fair value using certain multiples of earnings before interest,
taxes, depreciation and amortization based on current prices for comparable
assets. The impairment loss, as determined by SFAS 121, of $59,000,000 recorded
by the Company primarily relates to the goodwill associated with six of the
forty facilities acquired in the Mediplex acquisition. The impairment loss at
these six facilities was the result of the following circumstances: (i) three
facilities were organized by the Service Employees International Union
subsequent to the acquisition resulting in significantly higher labor costs;
(ii) two facilities experienced significant declines in private pay census and
revenues due to, in one instance, funding reductions in certain programs
providing private pay patients and, in the other instance, the opening of two
new facilities by competitors; and (iii) the remaining facility received lower
than expected Medicaid rates from the State of Connecticut and due to the high
acuity of the patients treated at the facility, reimbursement was not adequate.
If the Company had not elected early adoption of SFAS 121, the impairment loss
would have been based solely on the difference between the assets carrying value
and cumulative long-term cash flows which would have resulted in a loss of
$48,900,000. The operations of the impaired facilities are not material to the
consolidated earnings or cash flows of the Company, and therefore, management
does not expect future operating results of the impaired facilities to have a
material adverse effect on the Company's financial condition or results of
operations. However, the impaired facilities are experiencing marginal or
negative cash flows. As they are leased under long-term operating leases, the
Company expects that this trend will continue until it can implement measures to
turn around their performance or to dispose of the facilities.
The Company's effective tax rate was 41% for the year ended December 31,
1996 after excluding the investigation and litigation charge, and was unchanged
from the pro forma effective tax rate for the year ended December 31, 1995 after
excluding the conversion fee, the merger expenses, the impairment loss and the
deferred tax charge relating to the conversion of Golden Care from a S
corporation to a C corporation upon merging with the Company. The pro forma
provision for income taxes for the year ended December 31, 1995 reflects tax
expense that would have been recorded if Golden Care had been subject to and
liable for Federal and state income taxes as a C corporation prior to the
termination of its S corporation status in May 1995.
Net earnings were $21,536,000 for the year ended December 31, 1996 as
compared to a pro forma net loss of $23,981,000 for the year ended December 31,
1995. Net earnings decreased 26% from net earnings of $53,601,000 before the
extraordinary loss for early extinguishment of debt, the conversion fee, the
merger expenses, the strike, the investigation and litigation costs, the
impairment loss, and the deferred tax charge (the "extraordinary or unusual
charges") for the year ended December 31, 1995 to $42,375,000 for the year ended
December 31, 1996 before the investigation and litigation charge. As a
percentage of net
32
revenues, net earnings were 3.2% for the year ended December 31, 1996 before the
investigation and litigation charge, as compared to 4.7% for the year ended
December 31, 1995 before the extraordinary or unusual charges. The decrease was
primarily due to the revenue adjustments recorded by the Company's long-term and
subacute care services (discussed above).
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
Total net revenues for the year ended December 31, 1995 increased from the
year ended December 31, 1994 by $462,154,000, a 69% increase, to $1,135,508,000.
Net revenues from long-term and subacute care services, which includes
revenues generated from therapy and pharmaceutical services provided at the
Company's facilities, increased from $476,146,000 for the year ended December
31, 1994 to $759,459,000 for the year ended December 31, 1995, a 60% increase.
Approximately $220,672,000 or 78% of this increase in long-term and subacute
care net revenues is a direct result of the inclusion of a full year's revenues
from 40 facilities which were acquired in the Mediplex acquisition on June 23,
1994 including the opening of four additional facilities in 1995 for which
Mediplex had obtained Certificates of Need prior to the acquisition.
Approximately $41,910,000 or 15% of this increase results from 36 facilities,
acquired since December 31, 1993. The remaining net revenue increase of
$20,731,000 is primarily attributable to an increase in revenue per patient day
and an increase in occupancy levels since December 31, 1994 on a same facility
basis for the 55 facilities in operation all of fiscal 1995 and 1994. The
increase in revenue per patient day was a result of payor rate increases and the
Company's focus on expanding its subacute services.
Net revenues from therapy services to nonaffiliated facilities increased 60%
from $106,144,000 for the year ended December 31, 1994 to $170,154,000 for the
year ended December 31, 1995, primarily as a result of the increased services to
nonaffiliated facilities from 513 facilities at December 31, 1994 to 643
facilities at December 31, 1995.
Net revenues from temporary therapy staffing services to nonaffiliated
facilities increased 75% from $55,258,000 for the year ended December 31, 1994
to $96,500,000 for the year ended December 31, 1995, primarily as a result of
the increased service hours billed to nonaffiliates from 1,157,535 hours in 1994
to 1,999,092 hours in 1995. The increase in service hours billed is attributable
primarily to the expansion of services at division offices open for over one
year and to new offices established through acquisitions.
Net revenues from pharmaceutical services to nonaffiliated facilities
increased 152% from $20,427,000 for the year ended December 31, 1994 to
$51,409,000 for the year ended December 31, 1995. The growth in net revenues is
primarily the result of the inclusion of a full year's revenues in pharmacy
services revenues from the opening or acquisition of eight regional pharmacies
during 1994 and the opening or acquisition of three regional pharmacies during
1995. The growth in net revenues is also a result of the increase in services to
nonaffiliated facilities from 136 at December 31, 1994 to 271 at December 31,
1995.
Net revenues from foreign operations increased 337% from $6,196,000 for the
year ended December 31, 1994 to $27,072,000 for the year ended December 31,
1995. The growth in net revenues was attributable to the acquisition of Exceler
and the increase in the number of long-term care facilities operated by Exceler
from 18 as of December 31, 1994 to 28 as of December 31, 1995.
During the second half of 1995, the rate of growth of the Company's earnings
was negatively affected by the following factors:
DELAYED REVENUE RECOGNITION. Anticipated Medicare payments and rate
adjustments were delayed as a result of the required change of fiscal
intermediaries from Blue Cross of New Mexico to Blue Cross of Texas. The
announced change slowed the processing of requests for exceptions to the
Medicare established routine cost limitations for reimbursement, which in turn
led to delayed revenue recognition. In addition, the change led to delays in
receipt of payments resulting in increased borrowings under the Company's
revolving credit facility and additional interest expense.
33
REIMBURSEMENT RATES. In July 1995, the states of Illinois and Connecticut
instituted lower than expected Medicaid reimbursement rates for long-term care
providers. These new rates remained in effect until June of 1996. During this
period, the Company operated eight facilities in Illinois and eighteen
facilities in Connecticut.
GOVERNMENT INVESTIGATION. The Company's rehabilitation therapy subsidiary
is under investigation by the OIG (See "Effects From Changes in Reimbursement").
The Company believes that in the second half of 1995 the negative publicity
surrounding the OIG investigation slowed the Company's success in obtaining
additional outside contracts in its rehabilitation therapy business, which
resulted in higher than required therapist staffing levels and affected the
private patient enrollment at certain inpatient facilities.
In addition, during the third and fourth quarters of 1995, the Company was
negotiating a new labor contract with employees at the Company's eight unionized
facilities in Connecticut who were represented by the Service Employees
International Union ("SEIU"). The Company reached a settlement with the SEIU on
November 2, 1995, and averted a possible labor union strike. However, due to the
additional cost of preparing for a possible labor union strike and negotiating a
settlement, along with the related adverse publicity, the Company temporarily
experienced higher operating costs and a decline in census at certain facilities
in the third and fourth quarters of 1995. The Company recorded a charge in the
fourth quarter of certain costs related to the negotiations and strike
preparation (as discussed below).
Operating expenses, which includes rent expense of $73,727,000 and
$43,626,000 for the year ended December 31, 1995 and 1994, respectively, were
$929,493,000 for the year ended December 31, 1995 and $552,662,000 for the year
ended December 31, 1994, an increase of 68%. The increase resulted primarily
from the acquisition and development of 26 facilities and the growth in therapy
and temporary staffing services. Operating expenses as a percentage of net
revenues decreased from 82.1% for the year ended December 31, 1994 to 81.9% for
the year ended December 31, 1995, which can be attributed to the growth in
therapy services, temporary therapy staffing services, pharmaceutical services
and subacute care services, which have higher operating margins than the margins
associated with routine long-term care services. These gains were partially
offset by costs associated with the change in fiscal intermediaries, lower than
expected Medicaid reimbursement rates (as discussed above) and the negative
publicity surrounding the investigation by the OIG.
Corporate general and administrative expenses, which include regional costs
related to the supervision of operations, increased from $31,633,000 for the
year ended December 31, 1994 to $51,468,000 for the year ended December 31,
1995, an increase of 63%. As a percentage of net revenues, corporate general and
administrative expenses were 4.5% and 4.7% for the years ended December 31, 1995
and 1994, respectively.
The provision for losses on accounts receivable was $14,623,000 for the year
ended December 31, 1995, as compared to $27,632,000 for the year ended December
31, 1994. The decrease in the provision reflects the write-off in the fourth
quarter of 1994 of $23,446,000 of Mediplex accounts receivable (as discussed
below). In 1995, an additional $7,608,000 of Mediplex accounts receivable were
written-off, of which $3,549,000 represented accounts receivable existing at the
date of acquisition. The additional write-offs of Mediplex accounts receivable
in 1995 were primarily the result of the difficulties the Company experienced in
integrating Mediplex's accounting and management information systems which
hampered collection efforts, changes in estimates of amounts realizable from
third-party payors (see "Effects from Changes in Reimbursement") and the
recognition of losses on balances retained from the disposition of five of
Mediplex's psychiatric care and substance abuse facilities and related
outpatient centers on September 30, 1995. The provision for losses on accounts
receivable excluding the write-off of Mediplex accounts receivable in the fourth
quarter of 1994 and the fourth quarter of 1995 described above was $7,015,000
and $4,186,000 for the years ended December 31, 1995 and 1994, respectively. As
a percentage of net revenues, the provision for losses on accounts receivable
excluding the write-off of the Mediplex
34
accounts receivable described above remained constant at 0.6% for the years
ended December 31, 1995 and 1994.
The provision for losses on accounts receivable recorded in the fourth
quarter of 1994 attributable to Mediplex accounts receivable represented
approximately 27% of the balances acquired in June 1994 and approximately 3% of
the total consideration paid in the acquisition (including debt assumed). The
portion of the 1994 provision for losses on accounts receivable attributable to
Mediplex accounts receivable existing at the date of acquisition was comprised
of $8,709,000 related to patient balances and $14,737,000 related to third-party
payor settlement amounts including Medicare and Medicaid government payors. In
acquiring Mediplex, the Company relied upon Mediplex's public filings with the
Securities and Exchange Commission. After the acquisition, as the integration of
revenue systems of the Company and Mediplex proceeded, the Company determined
that the reserve for uncollectible balances previously set by Mediplex was not
consistent with reserve levels deemed appropriate under the Company's reserve
policies and that additional reserves were required for contractual adjustments
to patient billings. In addition, the Company determined that certain of the
former Mediplex policies regarding accounts receivable from third-party payors
were inconsistent with the Company's policies and that certain third-party
receivables would not be reimbursed in light of applicable regulatory
determinations. It also became apparent from the Company's review of the
historical records that the Company would be unable to collect certain accounts.
Accordingly, management determined that certain patient balances acquired in the
acquisition of Mediplex were uncollectible, certain third-party receivables
recorded by Mediplex prior to the acquisition exceeded final settlements, and
certain liabilities existed for amounts claimed in excess of reimbursable
amounts. This resulted in the determination that $23,446,000 of such accounts
receivable existing at the date of the acquisition were impaired as of the
fourth quarter of 1994 or earlier.
Depreciation and amortization for the year ended December 31, 1995 totaled
$27,734,000 compared to $11,797,000 for the year ended December 31, 1994, an
increase of 135%. As a percentage of net revenues, depreciation and amortization
expense increased from 1.8% in the year ended December 31, 1994 to 2.4% for the
year ended December 31, 1995. The increases are primarily due to the inclusion
of a full year of amortization of goodwill related to the acquisition of
Mediplex and the other acquisitions accounted for as purchases and the
additional depreciation of owned facilities acquired through the Mediplex and
Exceler acquisitions.
Net interest expense for the year ended December 31, 1995 totaled
$21,829,000 compared to $10,548,000 for the year ended December 31, 1994, an
increase of 107%. As a percentage of net revenues, interest expense increased
from 1.5% for the year ended December 31, 1994 to 1.9% for the year ended
December 31, 1995. The increase is due to the issuance of the 6% Convertible
Debentures on March 1, 1994, the additional interest expense associated with the
outstanding debt of Mediplex assumed in the acquisition of Mediplex and to
increases in borrowings under the Company's revolving credit facility primarily
to fund acquisitions, capital expenditures and the debt tender offer referred to
below. In addition, as previously discussed, the required change in fiscal
intermediaries delayed rate adjustments and payments, resulting in increased
borrowings under the Company's revolving credit facility.
The Company incurred a nonrecurring charge of $3,256,000 in connection with
the payment of an inducement fee to effect the conversion in January 1995 of
$39,449,000 of the 6 1/2% Convertible Debentures, and in August 1994, the
Company incurred a similar charge of $2,275,000 related to the conversion of
$24,377,000 of the 6 1/2% Convertible Debentures. In addition, in 1995 the
Company recorded an extraordinary charge of $3,413,000, net of the related tax
benefit, in connection with the tender offer, completed in January 1995, for
$78,698,000 principal amount of the 11 3/4% Senior Subordinated Notes.
In connection with the mergers with CareerStaff and Golden Care, the Company
recognized $5,800,000 of transaction related merger costs in the second quarter
of 1995. These included advisor fees and transitional costs related to
consolidating operations.
35
During 1995, the Company recorded charges and expenses of $4,006,000 related
to averting a strike and negotiating new contracts for certain unionized nursing
homes in Connecticut. The Company has also recorded charges and expenses of
$5,505,000 related to monitoring and responding to the continuing investigation
by the OIG and legal fees resulting from shareholder litigation. The litigation
charge also includes costs incurred by the Company in its intended debt offering
which was aborted due to the negative publicity resulting from the OIG
investigation. The negative publicity prevented the Company from obtaining an
acceptable interest rate. The charges do not contain any estimated amounts for
settlement of the OIG or shareholder matters.
The Company recorded an impairment loss, as determined by SFAS 121, of
$59,000,000 during 1995 (as described above).
Pro forma effective tax rates were 41% for the year ended December 31, 1995,
after excluding the conversion fee, the merger expenses, the impairment loss and
the deferred tax charge relating to the conversion of Golden Care from a S to a
C corporation upon merging with the Company as compared to 44% for the year
ended December 31, 1994, after excluding the conversion fee. The pro forma
provision for income taxes reflects tax expense that would have been recorded if
CareerStaff and Golden Care had been subject to and liable for Federal and state
income taxes as C corporations prior to the terminations of their S corporation
status in June 1994 and May 1995, respectively. The decrease in the effective
tax rate is due to the reduced impact of the nondeductible portion of goodwill
recorded in connection with the acquisition of Mediplex and a more favorable mix
of state income than the prior year.
The pro forma net loss was $23,981,000 for the year ended December 31, 1995
as compared to the pro forma net earnings of $19,561,000 for the year ended
December 31, 1994. Pro forma net earnings before the extraordinary loss for
early extinguishment of debt for the year ended December 31, 1995, excluding the
conversion fee, the merger expenses, the strike, the investigation and
litigation costs, the impairment loss and the deferred tax charge, increased
145% to $53,601,000 from pro forma net earnings of $21,836,000 for the year
ended December 31, 1994, excluding the conversion fee. Pro forma net earnings
before the extraordinary loss for early extinguishment of debt and excluding the
conversion fees, the merger expenses, the strike, the investigation and
litigation costs, the impairment loss and the deferred tax charge as a
percentage of net revenues were 4.7% as compared to 3.2% for the year ended
December 31, 1995 and 1994, respectively. The increase is primarily due to a
reduction in the provision for losses on accounts receivable (as described
above) in 1995 as compared to 1994 and to the decrease in the effective tax rate
during the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $211,582,000,
including cash and cash equivalents of $14,880,000, as compared to working
capital of $237,147,000, including cash and cash equivalents of $23,102,000 at
December 31, 1995. For the year ended December 31, 1996, net cash provided by
operations was $26,812,000 compared to net cash provided by operations for the
year ended December 31, 1995 of $6,786,000. The net cash provided by operations
for the year ended December 31, 1996 reflects the Company's growth in net
earnings and reduced Federal and state tax payments due to realization of
certain deferred tax assets. This was offset by the net cash used for operations
to fund an increase in accounts receivable and payment of the $24,000,000
shareholder litigation settlement (as described below).
The Company's accounts receivable have increased since January 1, 1996.
Accounts receivable increased in part because of the growth in the therapy and
pharmaceutical services businesses since December 31, 1995; however, accounts
receivable for rehabilitation services to nonaffiliates have increased by
$26,968,000 since December 31, 1995 to $78,833,000 at December 31, 1996, and
continue to increase disproportionately to the growth in revenue of that line of
business. Collections of therapy services receivables from nonaffiliated
facilities have slowed because payment is primarily dependent upon such
36
facilities' receipt of payment from fiscal intermediaries which, in some
instances, have been delayed because fiscal intermediaries are conducting
reviews of such facilities' therapy claims. As a result, the Company has
increased its provision for losses on accounts receivable (see "Results of
Operations").
Accounts receivable also increased during the year ended December 31, 1996
due to the increased number of filings for requests for additional reimbursement
of costs based on exceptions to the Medicare established routine cost
limitations for reimbursement ("RCLs") for which payment has been delayed
pending settlement of the respective cost reports. These exceptions are
permitted under the Medicare regulations to reimburse providers for the costs of
treating higher acuity patients than are routinely seen in a long-term care
facility. Included in net revenues are amounts related to exceptions to the RCLs
of $12,268,000 and $8,862,000 for the years ended December 31, 1996 and 1995,
respectively. These amounts represent management's estimate, based on its prior
experience, of amounts that will ultimately be approved and paid by its fiscal
intermediaries. Accounts receivable include requests for exceptions to the RCLs
of $19,119,000 and $11,115,000 as of December 31, 1996 and 1995, respectively.
Amounts realizable are subject to final settlement of the respective cost
reports. (See "Effects from Changes in Reimbursement").
Other significant operating uses of cash for the year ended December 31,
1996 were payments of $29,293,000 for interest and net payments totaling
$7,608,000 for income taxes.
In 1996, the Company reached an agreement in principle to settle certain of
the class-action lawsuits brought by shareholders for $24,000,000 which was paid
during the fourth quarter of 1996. The Company recognized as a reduction of the
settlement cost a $9,000,000 claim from its directors and officers liability
insurance carrier. The Company received payment from its insurance carrier in
March 1997. In addition, in 1996 the Company accrued additional charges and
expenses of $4,250,000 related to monitoring and responding to the continuing
OIG investigation and responding to the remaining shareholder litigation filed
after the announcement of the OIG investigation. In 1995, the Company recorded
charges and expenses of $5,505,000 related to monitoring and responding to the
continuing investigation by the OIG and legal fees resulting from shareholder
litigation. (See Note 14 to the Consolidated Financial Statements). The 1995
charges also included costs incurred by the Company in connection with financing
activities which were not concluded due to negative publicity resulting from the
OIG investigation. The charges do not contain any estimated amounts for
settlement of the OIG investigation or remaining shareholder litigation matters
(see "Effects from Changes in Reimbursement" and "Litigation"). As of December
31, 1996, the Company had recorded costs totaling approximately $4,200,000 which
had not been paid as of December 31, 1996.
The Company incurred $76,223,000 and $73,497,000 in capital expenditures for
the years ended December 31, 1996 and 1995, respectively. Substantially all such
expenditures during the year ended December 31, 1996 were for the continued
development and construction of one facility in the United States and ten new
facilities in the United Kingdom, the construction of two new corporate office
buildings and routine capital expenditures. These expansions were financed
through borrowings under the Company's revolving credit facility and from
amounts previously classified as restricted cash. The Company had capital
expenditure commitments, as of December 31, 1996, under various contracts,
including approximately $10,400,000 in the United States and L7,300,000
($12,500,000 as of December 31, 1996) in the United Kingdom. These include
contractual commitments to improve existing facilities and to develop and
construct one and seven facilities in the United States and United Kingdom,
respectively.
The Company paid $65,405,000 and $48,167,000 for acquisitions during the
years ended December 31, 1996 and 1995, respectively. The Company also paid
$10,174,000 and $25,874,000 for the acquisition of minority interest investments
in Ashbourne PLC ("Ashbourne") in the years ended December 31, 1996 and 1995,
respectively, and paid $25,332,000 for the acquisition of a 9.9% investment in
OmniCell during the year ended December 31, 1996. During the year ended December
31, 1996, the Company acquired the ownership of, the leasehold rights to, or the
management of eleven long-term care facilities in the United
37
Kingdom and six long-term care facilities in the United States. In addition, the
Company sold the leasehold rights to three long-term care facilities in the
United States facilities during 1996. The Company also acquired eleven
outpatient rehabilitation clinics in Canada and six pharmacies in the United
Kingdom.
On February 18, 1997, the Company signed definitive agreements with each of
Retirement Care and Contour, under which the Company agreed to acquire
Retirement Care and its approximately 65% owned subsidiary, Contour. The
agreements call for the Company to issue 0.6625 shares of common stock in
exchange for each outstanding share of Retirement Care common stock (subject to
adjustment as provided in the agreement) and for the Company to pay $8.50 per
share in cash, stock or a combination of cash and stock (at the election of the
Company) for the remaining 35% of Contour not presently owned by Retirement
Care. The acquisition of Retirement Care is expected to be accounted for as a
pooling of interests and the acquisition of Contour is expected to be accounted
for as a purchase.
Subsequent to December 31, 1996, the Company will pay L13,733,000
($23,545,000 as of December 31, 1996) which is the consideration due to former
shareholders of APTA Healthcare PLC ("APTA") (see Note 2 to the Consolidated
Financial Statements). In addition, the Company completed the acquisition of all
the outstanding shares of Ashbourne. The cost of acquiring the remaining shares
not held by the Company as of December 31, 1996, was approximately L67,300,000
($110,100,000), excluding acquisition expenses and the cost of purchasing
Ashbourne management options. In addition, subsequent to December 31, 1996, the
Company acquired the operations of nine long-term care and assisted living
facilities for $12,000,000 plus the assumption of all the facilities' leases. In
connection with this acquisition, the Company agreed to provide financing of
$5,800,000 to the owner of the nine facilities for expansion of certain of the
facilities. Both acquisitions were funded by borrowings under the Company's
revolving credit facility.
The Company conducts business outside of the United States, in the United
Kingdom and in Canada. The foreign operations account for 4% of the Company's
total net revenues during the year ended December 31, 1996 and 16% of the
Company's consolidated total assets as of December 31, 1996. Because of the
Company's foreign growth strategies, the Company does not expect to repatriate
funds invested overseas and, therefore, foreign currency transaction exposure is
not normally hedged. Exceptional planned foreign currency cash flow
requirements, such as acquisitions overseas, are hedged selectively to prevent
fluctuations in the anticipated foreign currency value. Changes in the net worth
of the Company's foreign subsidiaries arising from currency fluctuations are
accumulated in the translation adjustments component of stockholders' equity.
In June 1996, the Company completed the sale of all of the outstanding stock
of SunSurgery Corporation, its ambulatory surgery subsidiary, for approximately
$27,900,000 in cash and the assumption of $5,600,000 in debt by the buyer. As of
the date of the sale, SunSurgery Corporation had approximately $3,100,000 in
cash which was retained by the buyer.
In 1996, the Company sold three of its long-term and subacute care
facilities for $11,934,000 including the assumption of debt totaling $3,168,000
and leased them back under fifteen year leases. Also in 1996, the Company,
through its United Kingdom subsidiary, sold ten of its long-term care facilities
for $25,837,000 and leased them back under twelve year leases. These
transactions produced no material gain or loss.
Subsequent to December 31, 1996, the Company sold three of its long-term and
subacute care facilities for approximately $13,200,000 in cash and approximately
$5,800,000 in the assumption of debt and leased them back under fourteen year
leases.
In October 1996, the Company entered into a Fourth Amended and Restated
Credit Agreement (the "Credit Facility") with certain banks, including
NationsBank of Texas, N.A. as administrative lender. The Credit Facility
provides up to $490,000,000 in a revolving line of credit and letters of credit.
The Credit Facility expires on October 28, 2001, and is collateralized by a
pledge of the stock of the majority of the
38
Company's subsidiaries. Borrowings bear interest at either the prevailing prime
rate or the LIBOR rate plus 0.5% to 1.5%, depending on the Company's
consolidated debt to cash flow coverage ratio. The Credit Facility, among other
things, (i) requires the Company to maintain certain financial ratios, (ii)
restricts the Company's ability to incur debt and liens, make investments,
liquidate or dispose of assets, merge with another corporation, create or
acquire subsidiaries, and make acquisitions, and (iii) prohibits the payment of
dividends, the acquisition of treasury stock and the prepayment or modification
of certain debts of the Company. The Company had $279,300,000 of outstanding
borrowings and $18,272,000 of outstanding standby letters of credit under the
Credit Facility at December 31, 1996.
The Company has $32,712,000 of mortgages with Meditrust as of December 31,
1996, which contain less restrictive covenants than the Credit Facility and
which include cross default provisions with all of such mortgages and
thirty-four leases also financed by Meditrust. The Company also is the obligor
on an outstanding letter of credit for $3,921,000 as of December 31, 1996, to
guarantee outstanding debt obligations of $3,850,000 for a partnership through
which the Company acquired a 50% interest. The partnership owns a long-term care
facility which is leased to a third party operator.
The Company has agreed to lend $47,000,000, through a revolving subordinated
credit agreement ("Revolving Credit Agreement") to a developer of assisted
living facilities for the development, construction and operation of assisted
living facilities. The advances are subject to certain conditions including
availability of mortgage financing for 50% of the cost of each project and
approval of each project by the Company. At December 31, 1996, five assisted
living facilities were under development which would require funding by the
Company totaling approximately $24,300,000, of which $9,000,000 had been
advanced. The developer is in the process of obtaining mortgage financing. If
mortgage financing is not obtained, the Company will be obligated to fund 100%
of these five projects for approximately $51,700,000. The Company's advances
under the Revolving Credit Agreement will be subordinate to the mortgage
financing. A subsidiary of the Company has an option to purchase each assisted
living facility after it becomes operational.
The Company's ongoing capital requirements relate to the costs associated
with its facilities under construction, routine capital expenditures, advances
under the Revolving Credit Agreement, potential acquisitions and implementation
of growth strategies.
The Company believes that its current borrowing capacity under its Credit
Facility and cash from operations will be sufficient to satisfy its working
capital needs, facilities under construction, routine capital expenditures,
advances under the Revolving Credit Agreement, current debt service obligations
and to fund potential conversions of 6 1/2% Convertible Debentures. The Company
anticipates that it will fund its construction commitments as well as its
requirements relating to future growth through (i) the available borrowing
capacity under the Credit Facility, (ii) the use of operating leases and common
stock in the future as a means of acquiring facilities and new operations, (iii)
the availability of sale-leaseback financing through real estate investment
trusts and other financing sources and (iv) the sale of securities in the public
or private capital markets. However, there can be no assurance that the Company
may not require additional sources of financing in the next twelve months,
particularly if it pursues acquisitions requiring significant cash
consideration. Even if the Company does not have an immediate need for
additional financing, it may seek to access the public or private capital
markets if it believes that conditions are favorable. However, the Company's
access to the public or private markets may be adversely affected by the status
of the OIG investigation. In addition, such acquisitions or additional
financings may require approval of the various lenders under the Company's
Credit Facility. If such sources of financing are not available, the Company may
not be able to pursue growth opportunities as actively as it has in the past,
and may be required to alter certain of its operating strategies.
39
EFFECTS FROM CHANGES IN REIMBURSEMENT
The Company derives a substantial percentage of its total revenues from
Medicare, Medicaid and private insurance. The Company's financial condition and
results of operations may be affected by the revenue reimbursement process,
which in the Company's industry is complex and can involve lengthy delays
between the time that revenue is recognized and the time that reimbursement
amounts are settled. Net revenues realizable under third-party payor agreements
are subject to change due to examination and retroactive adjustment by payors
during the settlement process. Payors may disallow in whole or in part requests
for reimbursement based on determinations that certain costs are not
reimbursable or reasonable or because additional supporting documentation is
necessary. The Company recognizes revenues from third-party payors and accrues
estimated settlement amounts in the period in which the related services are
provided. The Company estimates these settlement balances by making
determinations based on its prior settlement experience. Differences between the
net amounts accrued and subsequent settlements are recorded in operations at the
time of settlement. The majority of third-party payor balances are settled two
to three years following the provision of services. The Company's financial
condition and results of operations may also be affected by the timing of
reimbursement payments and rate adjustments from third-party payors. The Company
has from time to time experienced delays in receiving reimbursement from
intermediaries.
The Company's growth strategy relies heavily on the acquisition of long-term
and subacute care facilities. Regardless of the legal form of the acquisition,
the Medicare and Medicaid Programs often require that the Company assume certain
obligations relating to the reimbursement paid to the former operators of the
facilities. For example, the Company may be responsible for any final cost
report settlements or findings in the examination process which result in the
recoupment from the Company of reimbursement previously paid to the former owner
if the former owner is unable to meet its repayment obligations.
The Company recently learned that a fiscal intermediary and a Medicaid
agency in one of the states in which the Company operates may be examining cost
reports filed by a predecessor operator of several facilities acquired in the
Mediplex acquisition. If, as a result of any such examination, it is concluded
that overpayments to the predecessor operator were made, the Company, as the
current operator of such facilities, may be held financially responsible for any
such overpayments. However, at this time the Company is unable to predict the
outcome of any such examination.
Various cost containment measures adopted by governmental and private pay
sources have begun to restrict the scope and amount of reimbursable healthcare
expenses and limit increases in reimbursement rates for medical services. Any
reductions in reimbursement levels under Medicaid, Medicare or private payor
programs and any changes in applicable government regulations or interpretations
of existing regulations could significantly affect the Company's profitability.
Furthermore, government programs are subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and government
funding restrictions, all of which may materially affect the rate of payment to
the Company's facilities and its therapy and pharmaceutical businesses. There
can be no assurance that payments under governmental or private payor programs
will remain at levels comparable to present levels or will be adequate to cover
the costs of providing services to patients eligible for assistance under such
programs. Significant decreases in utilization and limits on reimbursement could
have a material adverse effect on the Company's financial condition and results
of operations, including the possible impairment of certain assets.
In 1993, the Health Care Financing Administration ("HCFA") issued a
directive to fiscal intermediaries that administer the Medicare reimbursement
policies to review costs incurred by providers of occupational therapy and
speech therapy provided by contract suppliers such as the Company's
rehabilitation therapy subsidiary. Although HCFA has published salary
equivalency guidelines for contract physical therapy and respiratory therapy,
guidelines for occupational therapy and speech therapy have not
40
yet been published in final form. Implementation of speech and occupational
salary equivalency guidelines in accord with draft proposals of HCFA could
directly or indirectly limit reimbursement for certain of the Company's
occupational and speech therapy services. Reimbursement for such services is
currently evaluated under Medicare's reasonable cost principles.
In 1995, and periodically since then, HCFA has provided information to
intermediaries for their use in determining reasonable costs for occupational
and speech therapy. The information set forth in such directives, although not
intended to impose limits on reasonable costs for speech therapy and
occupational therapy, suggest that fiscal intermediaries should carefully review
costs which appear to be in excess of what a "prudent buyer" would pay for those
services. While the effect of these directives is still uncertain, they are a
factor considered by such intermediaries in evaluating the reasonableness of
amounts paid by providers for the services of the Company's rehabilitation
therapy subsidiary. These directives will become obsolete for cost reporting
periods beginning after salary equivalency guidelines for all therapies are
finalized. In addition, some intermediaries also require facilities to justify
the cost of contract therapists versus employed therapists as an aspect of the
"prudent buyer" analysis. Accordingly, the "prudent buyer" analyses could result
in lower reimbursement rates and a corresponding decrease in net revenues of the
Company. With respect to rehabilitation therapy services provided to affiliated
facilities, a retroactive adjustment of Medicare reimbursement could be made for
some prior periods. An adjustment of reimbursement rates with respect to therapy
services provided to nonaffiliated facilities could result in indemnity claims
against the Company, based on the terms of substantially all of the Company's
existing contracts with such facilities, for payments previously made by such
facilities to the Company that are reduced by Medicare in the audit process. The
Company derives a significant percentage of its net earnings from the provision
of therapy services; a change in reimbursement resulting from implementation of
this directive or a reduction in reimbursement rates as a result of a change in
application of reasonable cost guidelines could have a material adverse affect
on the Company's financial condition and results of operations, depending on the
rates adopted and the Company's costs for providing these services.
Current Medicare regulations that apply to transactions between related
parties, such as the Company's subsidiaries, are relevant to the amount of
Medicare reimbursement that the Company is entitled to receive for the
rehabilitation and respiratory therapy and pharmaceutical services that it
provides to Company-operated facilities. These Medicare regulations require
that, among other things, a substantial part of the rehabilitation and
respiratory therapy services or pharmaceutical services, as the case may be, of
the relevant subsidiary be transacted with nonaffiliated entities in order for
the Company to receive reimbursement for services provided to Company-operated
facilities at the rates applicable to services provided to nonaffiliated
entities. The Medicare regulations do not indicate a specific level of services
that must be provided to nonaffiliated entities in order to satisfy the
"substantial part" requirement of such regulations. In instances where this
issue has been litigated by others, the final determination of the appropriate
threshold to satisfy the "substantial portion" requirement has varied.
Net revenues from rehabilitation therapy services provided to nonaffiliated
facilities represented 66% and 64% of total rehabilitation services net revenues
for the years ended December 31, 1996 and 1995, respectively. Respiratory
therapy services provided to nonaffiliated facilities represented 55% and 64% of
total respiratory therapy services net revenues for the year ended December 31,
1996 and the period from the date of acquisition of Golden Care on May 5, 1995
to December 31, 1995, respectively. The Company's respiratory therapy operations
did not provide services to affiliated facilities prior to the acquisition of
Golden Care on May 5, 1995. Net revenues from pharmaceutical services billed to
nonaffiliated facilities represented 78% of total pharmaceutical services
revenues for the years ended December 31, 1996 and 1995. The Company believes
that it satisfies the requirements of these regulations regarding nonaffiliated
business. Consequently, it has claimed and received reimbursement under Medicare
for rehabilitation and respiratory therapy and pharmaceutical services provided
to patients in its own facilities at a higher rate than if it did not satisfy
these requirements. If the Company were deemed to not have satisfied these
regulations, the reimbursement that the Company receives for rehabilitation and
respiratory therapy and
41
pharmaceutical services provided to its own facilities would be materially and
adversely affected. If, upon audit by Federal or state reimbursement agencies,
such agencies find that these regulations have not been satisfied, and if, after
appeal, such findings are sustained, the Company could be required to refund
some or all of the difference between its cost of providing these services and
the higher amount actually received. While the Company believes that it has
satisfied and will continue to satisfy these regulations, there can be no
assurance that its position would prevail if contested by relevant reimbursement
agencies. The foregoing statements with respect to the Company's ability to
satisfy these regulations are forward looking and could be affected by a number
of factors, including the interpretation of Medicare regulations by Federal or
state reimbursement agencies and the Company's ability to provide services to
nonaffiliated facilities.
The Company's subsidiaries, including those which provide subacute and
long-term care, rehabilitation and respiratory therapy and pharmaceutical
services, are engaged in industries which are extensively regulated. As such, in
the ordinary course of business, the operations of these subsidiaries are
continuously subject to state and Federal regulatory scrutiny, supervision and
control. Such regulatory scrutiny often includes inquiries, investigations,
examinations, audits, site visits and surveys, some of which may be non-routine.
In addition to being subject to the direct regulatory oversight of state and
Federal regulatory agencies, these industries are frequently subject to the
regulatory supervision of fiscal intermediaries. Fiscal intermediaries are
agents of HCFA who interpret and implement applicable laws and regulations and
make decisions about the appropriate reimbursement to be paid under Medicare and
Medicaid. The Company's subsidiaries are subject to the oversight of several
different intermediaries. Those different intermediaries have taken varying
interpretations of the applicable laws and regulations. The lack of uniformity
in the interpretation and implementation of such laws and regulations reflects
in part the fact that the statutory standards are subject to interpretation and
the manuals which are published and utilized by HCFA and the intermediaries in
performing their regulatory functions are often not sufficiently specific to
provide clear guidance in the areas which are the subject of regulatory
scrutiny.
It is the policy of the Company to comply with all applicable laws and
regulations, and the Company believes that its subsidiaries are in substantial
compliance with all material laws and regulations which are applicable to their
businesses. However, given the extent to which the interpretation and
implementation of applicable laws and regulations varies and the lack of clear
guidance in the areas which are the subject of regulatory scrutiny, there can be
no assurance that the business activities of the Company's subsidiaries will not
from time to time become the subject of regulatory scrutiny, or that such
scrutiny will not result in interpretations of applicable laws or regulations by
government regulators or intermediaries which differ materially from those taken
by the Company's subsidiaries.
In January 1995, the Company learned that it was the subject of a pending
Federal investigation. The investigating agencies are the United States
Department of Health and Human Services' Office of Inspector General and the
United States Department of Justice. The government is still in the process of
collecting information. The Company has cooperated and continues to cooperate
with the investigation.
At this time, the Company understands that the investigation includes a
review of whether the Company's rehabilitation therapy subsidiary properly
provided and/or billed for concurrent therapy services and whether it provided
unnecessary or unordered services to residents of skilled nursing facilities.
The Company understands that the investigation also includes a review of whether
its long-term care subsidiary properly disclosed its relationship with the
Company's rehabilitation therapy subsidiary and properly sought reimbursement
for services provided by that subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its precise scope might be. If there have been improper
practices or the investigation is broader in scope that the Company currently
understands it to be, depending on the nature and extent of such impropriety,
the
42
investigation could result in the imposition of civil, administrative, or
criminal fines, penalties, or restitutionary relief, and may have a negative
impact on the Company. From time to time the negative publicity surrounding the
investigation has slowed the Company's success in obtaining additional outside
contracts in the rehabilitation therapy business, which has resulted in higher
than required therapist staffing levels, and has affected the private pay
enrollment in certain inpatient facilities. Based on its current understanding
of the investigation, however, the Company does not believe that the outcome of
the investigation will have a material adverse effect on the Company's financial
condition or results of operations. The foregoing statements with respect to the
outcome of the investigation are forward looking and could be affected by a
number of factors, including the actual scope of the investigation, the
government's factual findings and the interpretation of Federal statutes and
regulations by the government and federal courts.
In 1996, the Connecticut Attorney General's office and the Connecticut
Department of Social Services ("DSS") began investigating whether Medicaid cost
reports for 1993 and 1994 submitted to the DSS by the Company's long-term care
subsidiary contained false and misleading fiscal information. Based on its
current understanding of the investigation, the Company believes the
investigation will not have a material adverse effect on the Company's financial
condition or results of operations. The foregoing statement with regard to the
outcome of this investigation is forward looking and could be affected by a
number of factors, including factual findings and interpretation of applicable
laws and regulations by the Attorney General and the DSS.
LITIGATION
Prior to the Company's acquisition of CareerStaff, a holder of CareerStaff's
common stock filed a lawsuit (the "CareerStaff Litigation") as a purported class
action against CareerStaff and the directors of CareerStaff alleging breach of
fiduciary duty in entering into a merger agreement with the Company and against
the Company alleging that the Company aided and abetted the alleged breach of
fiduciary duty by the CareerStaff directors. The CareerStaff Litigation was
voluntarily dismissed without prejudice on May 8, 1996.
On June 30, 1995, two civil class action complaints were filed against the
Company and certain of its current and former directors and officers in the
United States District Court for the District of New Mexico. Two more
complaints, based on the same underlying events, were filed on August 30, 1995.
On October 6 and October 10, 1995, two additional complaints were filed, also
based on the same underlying events. These six complaints were consolidated by a
court order dated November 27, 1995 and an amended class action complaint,
captioned IN RE SUN HEALTHCARE GROUP, INC. LITIGATION (the "Complaint"), was
filed in the United States District Court for the District of New Mexico on
January 26, 1996. The Complaint was purportedly brought on behalf of all persons
who either purchased shares of the Company's common stock between October 26,
1994 and June 27, 1995, or who exchanged their shares of common stock of
CareerStaff for shares of the Company's common stock pursuant to a merger
agreement between CareerStaff and the Company. The Complaint alleges that
defendants misrepresented or failed to disclose material facts about the OIG
investigation and about the Company's operations and financial results, which
plaintiffs contend artificially inflated the price of the Company's securities.
In October 1996, the Company reached an agreement in principle to settle
these class action lawsuits for $24,000,000 which the Company funded in the
fourth quarter of 1996. The settlement is subject to the execution of definitive
documentation and court approval. The Company received $9,000,000 from its
directors and officers liability insurance carrier for its claim submitted in
connection with the settlement in March 1997.
On or about January 23, 1996, two former stockholders of Golden Care filed a
lawsuit (the "Golden Care Litigation") against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of Indiana. Plaintiffs allege, among other things, that the Company did
not disclose material facts concerning the OIG investigation and that the
Company's financial results were
43
misstated. The Complaint purports to state claims, INTER ALIA, under Federal and
state securities laws and for breach of contract, including a breach of the
registration rights agreement pursuant to which the Company agreed to register
the shares being registered for resale by such former Golden Care stockholders.
Plaintiffs purport to seek recission, unspecified compensatory damages, punitive
damages and other relief. By Order dated October 11, 1996, the court granted in
part and denied in part defendants' motion to dismiss. The Company believes it
has meritorious defenses to the Complaint. There can be no assurance that the
Golden Care Litigation will not have an impact on the Company's accounting for
the merger.
On September 8, 1995, a derivative action was filed in the United States
District Court for the District of New Mexico, captioned BRICKELL PARTNERS V.
TURNER, ET AL. The complaint was not served on any defendant. On June 19, 1996,
an amended complaint alleging breach of fiduciary duty by certain current and
former of the Company's directors and officers based on substantially the same
events as those set forth in the above described securities class actions was
filed and subsequently served on the defendants. On August 5, 1996, the District
Court dismissed this action without prejudice for failure to serve the
defendants within the required time period. Brickell Partners filed a new
complaint, alleging the same claims, on August 19, 1996. Defendants have moved
to dismiss the new complaint. The Company believes it has meritorious defenses
to the new complaint.
The Company believes the Golden Care Litigation and the derivative action
will not have a material adverse impact on its financial condition or results of
operations, although the unfavorable resolution of any of these actions in any
reporting period could have a material adverse impact on the Company's results
of operations for that period. The foregoing statements with respect to the
possible outcomes of the Golden Care Litigation and the derivative action are
forward looking and could be affected by a number of factors, including judicial
interpretations of applicable law, the uncertainties and risks inherent in any
litigation, particularly a jury trial, the existence, scope and number of any
subsequently filed complaints, the scope of insurance coverage, and the outcome
of the OIG investigation and all factors that could affect that outcome.
EFFECTS OF INFLATION
Healthcare costs have been rising and are expected to continue to rise at a
rate higher than that anticipated for consumer goods as a whole. The Company's
operations could be adversely affected if it experiences significant delays in
receiving reimbursement rate increases from Medicaid and Medicare sources for
its labor and other costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to Item 8 is contained in the Company's
consolidated financial statements and financial statement schedules and are set
forth herein beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
To be incorporated by reference to the Company's definitive 1997 Proxy
Statement. Certain information relating to the executive officers of the Company
appears on pages 21 through 22 herein.
ITEM 11. EXECUTIVE COMPENSATION
To be incorporated by reference to the Company's definitive 1997 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To be incorporated by reference to the Company's definitive 1997 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To be incorporated by reference to the Company's definitive 1997 Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(i) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Earnings (Loss) for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity as of December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994
(All other financial statement schedules required by Rule 5-04 of Regulation
S-X are not applicable or the required information is included in the audited
financial statements.)
(b) Reports on Form 8-K
Report dated August 15, 1996 reporting the acquisition of certain accounts
receivable inventory, fixed assets and the assumption of liabilities to certain
contracts and leases from BDO Dunwoody Limited, in its capacity as Court
appointed Receiver and Manager of International Managed Health Care Inc.
45
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
2.1(1) Preincorporation Agreement dated as of April 13, 1993 between Sun and Andrew L. Turner, Nora L.
Turner and Elizabeth L. Keefer, as Trustee of Turner's Children's Trust No. 3
2.2(2)(7) Agreement and Plan of Merger dated January 27, 1994, by and among Sun, Sun Acquisition Corporation,
The Mediplex Group, Inc., Abraham D. Gosman and Andrew L. Turner, as amended. Filed without
schedules attached.
2.3(2) Asset Sale Agreement dated January 27, 1994 by and among Mediplex, Abraham D. Gosman and Sun
2.4(1) Plan or Reorganization and Merger Agreement by and between Honorcare Corporation, Don A. Karchmer,
Thomas E. Stewart, John E. Bingaman and James W. Campbell, Sun and Sunrise
2.5(15) Agreement and Plan of Merger dated as of April 27, 1995 by and between Golden Care, Inc., Golden
Acquisition Corporation and Sun
2.6(15) First Amendment to Agreement and Plan of Merger dated as of May 4, 1995 by and between Golden Care,
Inc., Golden Acquisition Corporation and Sun
2.7(16) Agreement and Plan of Merger dated March 30, 1995 by and between Sun, Sun Acquisition Corporation
and CareerStaff Unlimited, Inc.
2.8(16) First Amendment to Agreement and Plan of Merger dated April 7, 1995 by and between Sun, Sun
Acquisition Corporation and CareerStaff Unlimited, Inc.
2.9(15) Second Amendment to Agreement and Plan of Merger dated May 11, 1995 by and between Sun, Sun
Acquisition Corporation and CareerStaff Unlimited, Inc.
2.10(13) Share Purchase Agreement dated as of November 30, 1995 among Sun, Columbia Health Care Inc. and the
Vendors named therein. Schedule 14: Form of Warrant
2.11(10) Investment and Shareholders' Agreement between Sun Healthcare Group, Inc., Sun Healthcare Group
International Ltd., Exceler Health Care Group PLC, Guernroy Limited, John Ernest Moreton, The
Alexanders and the Optionholders relating to Exceler Health Care Group PLC, dated September 7,
1994
2.12(14) Deed of Amendment and Instrument relating to Exceler Health Care Group PLC dated February 15, 1995
2.13(24) Agreement and Plan of Merger and Reorganization, dated as of February 17, 1997 among Sun Healthcare
Group, Inc., Peach Acquisition Corporation and Retirement Care Associates, Inc.
2.14(24) Agreement and Plan of Merger and Reorganization, dated as of February 17, 1997 among Sun Healthcare
Group, Inc., Nectarine Acquisition Corporation and Contour Medical, Inc.
3.1(1) Certificate of Incorporation of Sun
3.2(1)(9) Bylaws of Sun, as amended
3.3(21) Certificate of Amendment to Certificate of Incorporation of Sun dated April 15, 1993
3.4(6) Certificate of Amendment to Certificate of Incorporation of Sun dated June 23, 1994
4.1(3) Fiscal Agency Agreement dated as of March 1, 1994 between Sun and NationsBank of Texas, N.A., as
Fiscal Agent
4.2(6) Amended and Restated Indenture, dated October 1, 1994, among Sun, The Mediplex Group, Inc. and Fleet
Bank of Massachusetts, N.A. as Trustee (Sun 6% Convertible Subordinated Debentures due 2004)
46
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
4.3(6) Amended and Restated First Supplemental Indenture to Amended and Restated Indenture, dated October
1, 1994, among Sun, The Mediplex Group, Inc. and Fleet Bank of Massachusetts, N.A. as Trustee
(Mediplex 6'% Convertible Subordinated Debentures due 2003)
4.4(17) Form of Rights Agreement, dated as of June 2, 1995, between Sun and Boatmen's Trust Company, which
includes the form of Certificate of Designations for the Series A Preferred Stock as Exhibit A,
the form of Right Certificate as Exhibit B and the form of Summary of Preferred Stock Purchase
Rights as Exhibit C.
4.5(18) First Amendment to Rights Agreement, dated as of August 11, 1995, amending the Rights Agreement,
dated as of June 2, 1995, between Sun and Boatmen's Trust Company
10.1(4) Lease Agreement dated as of August 31, 1986, by and between Karan Associates ("Lessee") and Campbell
Care of Wylie, Inc., Assignment of Lease dated November 20, 1989 by and between Campbell Care of
Wylie, Inc. and Honorcare Corporation ("Lessee"), with First Lease Addendum dated August 31, 1986,
Second Addendum dated January 9, 1987, Third Addendum dated November 30, 1989 and Fourth Addendum
dated July 12, 1993, and Assignment Agreement dated as of July 13, 1993, by and between Honorcare
Corporation ("Assignor") and Sun Healthcare Corporation ("Assignee") (Hillcrest Manor Nursing
Center)
10.2(21) Lease Agreement for West Magic Care Center dated as of August 1, 1987, between Skyview Associates
("Lessor") and Don Bybee and A. Keith Holloway ("Lessee")
10.3(1) Sublease, Assumption and Consent Agreement for Coronado Care Center dated as of May 31, 1990, among
Phoenix Nursing Home Limited Partnership ("Lessor"), Horizon Healthcare Corporation
("Lessee/Sublessor") and Sunrise ("Sublessee") pursuant to a Lease dated December 18, 1987 between
Lessor and Lessee (Lease attached as Exhibit)
10.4(1) Lease Agreement for East Mesa Care Center dated as of September 30, 1990, between East Mesa
Associates Limited Partnership ("Lessor") and Sunrise ("Lessee")
10.5(1) Assignment and Assumption of Lease with Consent of Lessor for Torrington Extend-A-Care Center dated
as of November 1, 1990, between Beverly Enterprises Connecticut, Inc. ("Assignor/ Lessee"), Turner
Enterprises, Inc. ("Assignee"), Andrew L. Turner and Nora Turner ("Guarantors"), Harvey J. Angell
and Zev Karkomi ("Special Guarantors") and Beverly Investment Properties, Inc. ("Lessor") (Lease
attached)
10.6(1) Lease Agreement for Mercer Island Care Center dated as of July, 1991, among Mercer View Convalescent
Center, Tenants-in-Common ("Lessor"), Sunrise ("Lessee") and Andrew L. Turner and Nora Turner,
husband and wife ("Guarantor")
10.7(1) Lease Agreement for Bayside Health and Rehabilitation Center dated as of July 26, 1991, between
Bellingham Associates Limited Partnership ("Lessor") and Sunrise ("Lessee")
10.8(4) Lease Agreement for the Coronado Care Center addition, dated as of August 30, 1991, by and between
Phoenix Nursing Home Limited Partnership II ("Lessor") and Sunrise ("Lessee")
10.9(1) Lease Agreement for Whispering Pines Care Center and Valley Rehabilitation Center dated as of
October 1, 1991, between Belle Mountain Associates Limited Partnership ("Lessor") and Sunrise
("Lessee")
10.10(1) Lease Agreement for Menlo Park Healthcare Center dated as of November 1, 1991, between Oregon
Associates Limited Partnership ("Lessor") and Sunrise ("Lessee")
10.11(1) Sublease Agreement for Hillside Living Center d/b/a Hillside Healthcare Center dated as of March 1,
1992, between Elite Care Corporation ("Sublessor") and Turner Enterprises, Inc. ("Sublessee")
(Lease attached as Exhibit)
47
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
10.12(1) Sublease Agreement for Crown Manor Living Center d/b/a Crown Manor Healthcare Center dated as of
March 1, 1992, between Elite Care Corporation ("Sublessor") and Turner Enterprises, Inc.
("Sublessee") (Lease attached as Exhibit)
10.13(1) Sublease Agreement for Colonial Manor Living Center d/b/a Colonial Manor Healthcare Center dated as
of March 1, 1992, between Elite Care Corporation ("Sublessor") and Turner Enterprises, Inc.
("Sublessee") (Lease attached as Exhibit)
10.14(1) Sublease Agreement for Douglas Living Center d/b/a Douglas Healthcare Center dated as of March 1,
1992, between Elite Care Corporation ("Sublessor") and Turner Enterprises, Inc. ("Sublessee")
(Lease attached as Exhibit)
10.15(1) Lease Agreement for Columbia View Nursing Home dated as of June 30, 1992, between Columbia
Associates Limited Partnership ("Lessor") and Turner Enterprises, Inc. ("Lessee")
10.16(1) Lease Agreement for Adams House Healthcare Center dated as of October 1, 1992, between Adams
Connecticut Associates Limited Partnership ("Lessor") and Turner Enterprises, Inc. ("Lessee")
10.17(1) Lease Agreement for San Juan Care Center and Burton Care Center dated as of October 31, 1992, by and
between Zev Karkomi and Jerold Ruskin (collectively, the "Lessors") and Sunrise ("Lessee")
10.18(1) Lease Agreement for Park Villa Convalescent Center dated as of April 1, 1993, between LTC
Properties, Inc. ("Lessor") and Sunrise ("Lessee")
10.19(4) Lease Agreement dated as of July 13, 1993, by and between Angelina Associates ("Lessor") and
Honorcare Corporation ("Lessee"), with Assignment Agreement dated as of July 13, 1993 by and
between Honorcare Corporation ("Assignor") and Sun Healthcare Corporation ("Assignee") (Angelina
Facility)
10.20(4) Lease Agreement dated as of July 13, 1993, by and between July Associates IV ("Lessor") and
Honorcare Corporation ("Lessee"), with Assignment Agreement dated as of July 13, 1993, by and
between Honorcare Corporation ("Assignor") and Sun Healthcare Corporation ("Assignee") (Park
Plaza)
10.21(4) Lease Agreement dated as of July 13, 1993, by and between Angelina Associates ("Lessor") and
Honorcare Corporation ("Lessee"), with Assignment Agreement dated as of July 13, 1993, by and
between Honorcare Corporation ("Assignor") and Sun Healthcare Corporation ("Assignee") (Wells)
10.22(4) Lease Agreement dated as of July 13, 1993, by and between Angelina Associates ("Lessor") and
Honorcare Corporation ("Lessee"), with Assignment Agreement dated as of July 13, 1993, by and
between Honorcare Corporation ("Assignor") and Sun Healthcare Corporation ("Assignee") (Pineywood)
10.23(4) Lease Agreement dated as of July 13, 1993, by and between Golden Age Associates ("Lessor") and
Honorcare Corporation ("Lessee") (Golden Age)
10.24(4) Lease Agreement dated as of July 13, 1993, by and between July Associates III ("Lessor") and
Honorcare Corporation ("Lessee") (High Plains)
10.25(8) Lease Agreement dated as of July 30, 1993 between Zev Karkomi, Thunderbird Associated Limited
Partnership and Sunrise Healthcare Corporation
10.26(8) Lease Agreement dated as of September 22, 1993, as amended, between Carlinville Associates and
Sunrise Healthcare Corporation
10.27(5) Lease Agreement dated October 1993, by and between Salem Associates, Ltd. ("Lessor") and Sunrise
("Lessee") (Doctors Nursing Home)
48
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
10.28(5) Lease Agreement dated as of December 6, 1993, by and between Massachusetts Nursing Homes Limited
Partnership ("Lessor") and Sunrise ("Lessee")
10.29(4) Lease Assignment and Transfer of Operations Agreement dated as of December 30, 1993, by and between
HEA of New Mexico, Inc. and Sunrise (Lease attached) (Country Life Manor)
10.30(4) Lease Agreement dated as of January 1, 1994, by and between October Associates ("Lessor") and
Sunrise ("Lessee") (Stanton Nursing Home)
10.31(4) Lease Agreement dated as of January 1, 1994, by and between Whitewright Associates ("Lessor") and
Sunrise ("Lessee") (Campbell Care of Whitewright)
10.32(4) Lease Agreement dated as of January 1, 1994, by and between October Associates ("Lessor") and
Sunrise ("Lessee") (Valley Mills Care Center)
10.33(4) Lease Agreement dated as of January 1, 1994, by and between October Associates ("Lessor") and
Sunrise ("Lessee") (Moody Care Center)
10.34(7) Lease Agreement dated as of April 26, 1994, by and between Sumner Nursing Home, L.L.C. and Sunrise
10.35(6) Lease Agreement by and between Bellingham II Associates Limited Partnership and Sunrise Healthcare
Corporation, dated May 31, 1994
10.36(6) Amendment and Restatement of Facility Lease Agreement [Lenox Hill]--Meditrust of Lynn, Inc. and
Mediplex Rehabilitation of Massachusetts, Inc., dated June 23, 1994
10.37(6) Amendment and Restatement of Facility Lease Agreement [Northampton]--New England Finance Corporation
and Mediplex Rehabilitation of Massachusetts, Inc., dated June 23, 1994
10.38(6) Amendment and Restatement of Facility Lease Agreement [Woodcrest]--Meditrust and Mediplex of New
Jersey, Inc., dated June 23, 1994
10.39(6) Amendment and Restatement of Facility Lease Agreement [Westport]--Meditrust and Mediplex of
Connecticut, Inc., dated June 23, 1994
10.40(6) Amendment and Restatement of Facility Lease Agreement [Newton]--Meditrust and Mediplex of
Massachusetts, Inc., dated June 23, 1994
10.41(6) Amendment and Restatement of Facility Lease Agreement [Wilmington]--Meditrust and Mediplex of
Massachusetts, Inc,, dated June 23, 1994
10.42(6) Amendment and Restatement of Facility Lease Agreement [Stamford] by and between
G-WZ of Stamford, Inc. and Meditrust Mortgage Investments, Inc., dated June 23, 1994
10.43(6) Amendment and Restatement of Facility Lease Agreement [Cheshire]--Meditrust and Mediplex of
Connecticut, Inc., dated June 23, 1994
10.44(6) Amendment and Restatement of Facility Lease Agreement [East Longmeadow]-- Meditrust and Quality
Nursing Care of Massachusetts, Inc., dated June 23, 1994
10.45(6) Amendment and Restatement of Facility Lease Agreement [Wethersfield]--Meditrust and Mediplex of
Connecticut, Inc., dated June 23, 1994
10.46(6) Amendment and Restatement of Facility Lease Agreement [Danbury]--Meditrust and Mediplex of
Connecticut, Inc., dated June 23, 1994
10.47(6) Amendment and Restatement of Facility Lease Agreement [Manatee]--Meditrust and Manatee Springs
Nursing Center, Inc., dated June 23, 1994
10.48(6) Amendment and Restatement of Facility Lease Agreement [Camden]--Plaza Medical Nursing Facility and
P.M.N.F. Management, Inc., dated June 23, 1994
10.49(6) Facility Lease Agreement [Washington]--Pacific Finance Corporation and Sunrise Healthcare
Corporation, dated June 23, 1994
49
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
10.50(6) Amendment and Restatement of Facility Lease Agreement [Darien]--New England Finance Corporation and
Mediplex of Connecticut, Inc., dated June 23, 1994
10.51(6) Amendment and Restatement of Facility Lease Agreement [Randolph]--Meditrust and Mediplex of
Massachusetts, Inc., dated June 23, 1994
10.52(6) Amendment and Restatement of Facility Lease Agreement [Peabody]--Meditrust and Mediplex of
Massachusetts, Inc., dated June 23, 1994
10.53(6) Amendment and Restatement of Facility Lease Agreement [Newington]--Meditrust and Mediplex of
Connecticut, Inc., dated June 23, 1994
10.54(6) Amendment and Restatement of Facility Lease Agreement [Beverly]--Meditrust and Mediplex of
Massachusetts, Inc., dated June 23, 1994
10.55(6) Facility Lease Agreement [Weymouth]--Meditrust of Massachusetts, Inc. and Mediplex of Massachusetts,
Inc., dated June 23, 1994
10.56(6) Amendment and Restatement of Facility Lease Agreement [Lexington]--Meditrust and Mediplex of
Massachusetts, Inc., dated June 23, 1994
10.57(6) Amendment and Restatement of Facility Lease Agreement [Michigan]--Meditrust Tri-States, Inc. and
Mediplex of Ohio, Inc., dated June 23, 1994
10.58(6) Amendment and Restatement of Facility Lease Agreement [Christian Hill]--Meditrust of Massachusetts,
Inc. and Mediplex Rehabilitation of Massachusetts, Inc., dated June 23, 1994
10.59(6) Amendment and Restatement of Facility Lease Agreement [Arkansas]--Meditrust of Benton, Inc. and
Mediplex Management of Texas, Inc., dated June 23, 1994
10.60(6) Amendment and Restatement of Facility Lease Agreement [Holyoke]--Meditrust of Massachusetts, Inc.
and Mediplex Rehabilitation of Massachusetts, Inc., dated June 23, 1994
10.61(6) Amendment and Restatement of Facility Lease Agreement [Southern Connecticut], dated June 23, 1994,
between New England Finance Corporation and Mediplex of Connecticut, Inc.
10.62(6) Amendment and Restatement of Facility Lease Agreement [Southbury], dated June 23, 1994, between New
England Finance Corporation and Mediplex of Connecticut, Inc.
10.63(6) Facility Lease Agreement [Bowling Green], dated June 23, 1994, between Meditrust of Kentucky, Inc.
and Mediplex of Kentucky, Inc.
10.64(6) Facility Lease Agreement [Milford], dated June 23, 1994, between Meditrust of Connecticut, Inc. and
Mediplex of Connecticut, Inc.
10.65(6) Lease and Security Agreement by and between Nationwide Health Properties, Inc. and Sunrise
Healthcare Corporation, dated September 1, 1994
10.66(6) Lease Agreement by and between Sumner Hills L.L.C. and Sunrise Healthcare Corporation, dated
September 9, 1994
10.67(20) Lease Agreement for Wheeler Care Center, dated as of July 24, 1995, by and between Wheeler
Healthcare Associates, L.L.C., a Texas limited liability company ("Lessor") and Sunrise Healthcare
Corporation ("Lessee").
10.68(20) Agreement with Respect to and Second Amendment of Lease Agreement, dated as of September 1, 1995, by
and between Massachusetts Nursing Homes Limited Partnership ("Lessor") and Sunrise Healthcare
Corporation ("Lessee").
10.69(20) Third Amendment of Lease Agreement, dated as of September 1, 1995, by and between Massachusetts
Nursing Homes Limited Partnership ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
50
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
10.70(20) Lease Agreement for Clifton Care Center, dated as of September 13, 1995, between Missouri Associates
("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.71(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust of Massachusetts,
Inc. ("Lessor") and New Bedford Nursing Center, Inc. ("Lessee") (Guaranty of Sun attached as
Exhibit).
10.72(20) Facility Sublease Agreement, dated as of September 30, 1995, by and between Meditrust of New Jersey,
Inc., as Sublessor, and West Jersey/Mediplex Rehabilitation Limited Partnership (Guaranty of Sun
attached as Exhibit).
10.73(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust of Massachusetts,
Inc. ("Lessor") and Mediplex of Massachusetts, Inc. ("Lessee") (Guaranty of Sun attached as
Exhibit).
10.74(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust of Massachusetts,
Inc. ("Lessor") and Sundance Rehabilitation Corporation ("Lessee") (Guaranty of Sun attached as
Exhibit).
10.75(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust of Massachusetts,
Inc. ("Lessor") and Mediplex of Concord, Inc. ("Lessee") (Guaranty of Sun attached as Exhibit).
10.76(20) Indemnity Agreement (New Bedford), dated as of September 30, 1995, by and among New Bedford Nursing
Center, Inc. ("Seller"), Sun and Meditrust of Massachusetts, Inc. ("Buyer").
10.77(20) Indemnity Agreement (Marlton), dated as of September 30, 1995, by and among West Jersey/Mediplex
Rehabilitation Limited Partnership, as Assignor, Sun and Meditrust of New Jersey, Inc., as
Assignee.
10.78(20) Indemnity Agreement (Concord), dated as of September 30, 1995, by and among Mediplex of
Massachusetts, Inc. ("Seller"), and Meditrust of Massachusetts, Inc. ("Buyer").
10.79(20) Indemnity Agreement (Concord-1B), dated as of September 30, 1995, by and among Sundance
Rehabilitation Corporation ("Seller"), Sun and Meditrust of Massachusetts, Inc. ("Buyer").
10.80(20) Indemnity Agreement (Concord--2A & 2B), dated as of September 30, 1995, by and among Mediplex of
Concord, Inc. ("Seller"), Sun and Meditrust of Massachusetts, Inc. ("Buyer").
10.81(20) Indemnity Agreement (Oradell), dated as of September 30, 1995, by and among Bergen Eldercare, Inc.
("Seller"), Sun and Meditrust of New Jersey, Inc. ("Buyer").
10.83(21) First Amendment to Lease Agreement for West Magic Care Center dated as of January 1, 1996, between
Skyview Associates ("Lessor") and Sunrise Healthcare Corporation ("Lessee")
10.84(21) Unconditional Guaranty of Lease dated as of January 1, 1996, between Sun Healthcare Group, Inc.
("Guarantor") and Skyview Associates ("Lessor")
10.85* Lease Agreement for Heritage Heights dated as of March 1, 1996, by and between Tor Associates
("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.86* Unconditional Guaranty of Lease dated March 1, 1996, by and between Sun Healthcare Group, Inc.
("Guarantor) and Tor Associates ("Lessor").
10.87(21) Omnibus Amendment to Facility Lease Agreements, dated as of March 28, 1996, by and between certain
subsidiaries of The Mediplex Group, Inc. and certain subsidiary of Sun.
51
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
10.88(23) Second Amendment to Lease, dated as of June 1, 1996, by and between East Mesa Associates Limited
Partnership ("Lesser") and Sunrise Healthcare Corporation ("Lessee").
10.89(22) Lease Agreement dated July 1, 1996 between Oak/Jones, Inc. and Sunrise Healthcare Corporation for
Oaks Health & Rehabilitation Center.
10.90(22) Lease Agreement dated July 1, 1996 between Oak/Jones, Inc. and Sunrise Healthcare Corporation for
Jones Health & Rehabilitation Center.
10.91(23) First Amendment to Lease dated as of August 1, 1996, by and between Sumner Nursing Home, L.L.C.
("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.92(23) Sub-Sublease Agreement, dated as of August 22, 1996, by and between Yuba Nursing Homes, Inc.
("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.93* Lease Agreement for Casa del Sol Nursing Home dated as of November 26, 1996, by and between Raton
Property Limited Company ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.94* Lease Agreement for Blue Mountain Convalescent Center dated as of November 30, 1996, by and between
Washington Associates ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.95* Unconditional Guaranty of Lease dated as of November 30, 1996, by and between Sun Healthcare Group,
Inc. ("Guarantor"), and Washington Associates ("Lessor").
10.96* Lease Agreement for Magic Valley Manor dated as of November 30, 1996, by and between Idaho
Associates L.L.C. ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.97* Lease Agreement for Payette Lakes Care Center dated as of November 30, 1996, by and between Idaho
Associates L.L.C. ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.98* Lease Agreement for Valley Rehabilitation and Living Center dated as of November 30, 1996, by and
between Idaho Associates L.L.C. ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.99* Unconditional Guaranty of Lease dated as of November 30, 1996 given by Sun Healthcare Group, Inc.
("Guarantor") to Idaho Associates, L.L.C. ("Lessor") relating to Magic Valley Manor.
10.100* Unconditional Guaranty of Lease dated as of November 30, 1996 given by Sun Healthcare Group, Inc.
("Guarantor") to Idaho Associates, L.L.C. ("Lessor") relating to Payette Lakes Care Center.
10.101* Unconditional Guaranty of Lease dated as of November 30, 1996 given by Sun Healthcare Group, Inc.
("Guarantor") to Idaho Associates, L.L.C. ("Lessor") relating to Valley Rehabilitation and Living
Center.
10.102(4) Form of Management Agreement between GF/Massachusetts, Inc. and Sunrise
10.103(6) Amendment and Restatement of Loan Agreement [Brookline] by and between Mediplex of Massachusetts,
Inc. and Meditrust Mortgage Investments, Inc., dated June 23, 1994
10.104(6) Amendment and Restatement of Loan Agreement [Columbus] by and between Mediplex Rehabilitation of
Massachusetts, Inc. and Meditrust Mortgage Investments, Inc., dated June 23, 1994
10.105(6) Loan Agreement [Denver] by and between Mediplex of Colorado, Inc. and Valley View Psychiatric
Services, Inc. and Meditrust Mortgage Investments, Inc., dated June 23, 1994
52
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------------ ----------------------------------------------------------------------------------------------------
10.106(21) Omnibus Amendment to Loan Agreements, dated as of March 28, 1996, by and between certain
subsidiaries of The Mediplex Group, Inc. and certain subsidiaries of Sun.
10.107(22) Fourth Amended and Restated Credit Agreement among Sun Healthcare Group, Inc., The Mediplex Group,
Inc., certain lenders, certain co-agents, and NationsBank of Texas, N.A., as Administrative
Lender, dated October 29, 1996.
10.108* First Amendment to Fourth Amended and Restated Credit Agreement among Sun Healthcare Group, Inc.,
The Mediplex Group, Inc., certain lenders, certain co-agents, and NationsBank of Texas N.A., as
Administrative Lender, dated December 2, 1996.
10.109(14) First Amendment to Sun 1992 Director Stock Option Plan
10.110(1) Sun 1993 Combined Incentive and Nonqualified Stock Option Plan
10.111(1) Sun 1993 Directors Stock Option Plan
10.112(14) Amendments to Sun 1993 Combined Incentive and Nonqualified Stock Option Plan
10.113(21) Sun 1995 Non-Employee Directors' Stock Option Plan
10.114(21) Sun Employee Stock Purchase Plan
10.115(21) 1996 Combined Incentive and Nonqualified Stock Option Plan
10.116(1) Tax Indemnity Agreement between Sun, Sundance Rehabilitation Corporation, Turner Enterprises, Inc.
and Andrew L. Turner and Nora L. Turner
10.117(1) Form of Indemnity Agreement between Sun and each of Sun's Directors before July 3, 1996
10.118* Form of Indemnity Agreement between Sun and each of Sun's Directors from and after July 3, 1996
10.119(1) Employment Agreement between Sun and Andrew L. Turner
10.120(1) Agreement as of May 5, 1993, between Sundance Rehabilitation Corporation and Andrew L. Turner
10.121(4) Employment Agreement between Sun and John E. Bingaman
10.122(6) Termination of Employment Agreement and Consulting Agreement by and between Sun Healthcare Group and
John E. Bingaman
10.123* Severance Agreement between Sun and Andrew L. Turner dated January 1, 1997
10.124* Form of Severance Agreement entered into between Sun and Julie Collins, Susan LaBelle, Robert Levin,
Robert Murphy, Warren Schelling, Mark Wimer and Robert Woltil
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Registrant
23.1* Consent of Arthur Andersen LLP
27.1* Financial Data Schedule
- ------------------------
* Filed herewith
(1) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-62670) on Form S-1.
(2) Incorporated by reference from exhibits to the Company's Form 8-K dated
January 27, 1994.
(3) Incorporated by reference from exhibits to the Company's Form 8-K dated
March 11, 1994.
(4) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference from exhibits to the Company's Form 10-Q/A-1 for
the quarter ended September 30, 1993.
53
(6) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended September 30, 1994.
(7) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-77522) on Form S-1.
(8) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-77272) on Form S-4.
(9) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-77870) on Form S-1.
(10) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-82296) on Form S-1.
(11) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-85194) on Form S-1.
(12) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-90248) on Form S-1.
(13) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-96240) on Form S-3.
(14) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(15) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended March 31, 1995.
(16) Incorporated by reference to the Company's Form 8-K filed April 12, 1995.
(17) Incorporated by reference from exhibits to the Company's Form 8-A filed
June 6, 1995.
(18) Incorporated by reference from exhibits to the Company's Form 8-A/A-1 filed
August 17, 1995.
(19) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended September 30, 1995.
(20) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(21) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended March 31, 1996.
(22) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended June 30, 1996.
(23) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended September 30, 1996.
(24) Incorporated by reference from exhibits to the Company's Form 8-K dated
February 17, 1997.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUN HEALTHCARE GROUP, INC.
By /s/ ANDREW L. TURNER
-----------------------------------------
Andrew L. Turner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MARCH 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ANDREW L. TURNER Chairman of the Board of
- ------------------------------ Directors, President, and March 27, 1997
Andrew L. Turner Chief Executive Officer
Senior Vice President
/s/ ROBERT D. WOLTIL Financial Services and
- ------------------------------ Chief Financial Officer March 27, 1997
Robert D. Woltil and Director (Principal
Financial Officer
Vice President and
/s/ WILLIAM C. WARRICK Corporate Controller
- ------------------------------ (Principal Accounting March 27, 1997
William C. Warrick Officer
/s/ JOHN E. BINGAMAN
- ------------------------------ Director March 20, 1997
John E. Bingaman
/s/ ZEV KARKOMI
- ------------------------------ Director March 27, 1997
Zev Karkomi
/s/ ROBERT A. LEVIN
- ------------------------------ Director March 27, 1997
Robert A. Levin
/s/ MARTIN G. MAND
- ------------------------------ Director March 19, 1997
Martin G. Mand
/s/ WARREN C. SCHELLING
- ------------------------------ Director March 27, 1997
Warren C. Schelling
/s/ LOIS SILVERMAN
- ------------------------------ Director March 27, 1997
Lois Silverman
/s/ JAMES R. TOLBERT
- ------------------------------ Director March 27, 1997
James R. Tolbert
/s/ MARK G. WIMER
- ------------------------------ Director March 27, 1997
Mark G. Wimer
/s/ R. JAMES WOOLSEY
- ------------------------------ Director March 27, 1997
R. James Woolsey
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Sun Healthcare Group, Inc.:
We have audited the accompanying consolidated balance sheets of SUN
HEALTHCARE GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1996 and 1995, and the related consolidated statements of earnings (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sun Healthcare Group, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
February 27, 1997
F-1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 14,880 $ 23,102
Restricted cash..................................................................... 2,236 1,914
Accounts receivable, net of allowance for doubtful accounts of $16,877 and $11,035
in 1996 and 1995, respectively.................................................... 282,268 236,797
Other receivables................................................................... 33,430 29,976
Prepaids and other assets........................................................... 17,618 18,300
Deferred tax asset.................................................................. 12,716 27,098
------------ ------------
Total current assets.............................................................. 363,148 337,187
------------ ------------
Property and equipment, net........................................................... 305,720 201,132
Restricted cash....................................................................... -- 8,132
Goodwill, net......................................................................... 432,505 421,660
Other assets, net..................................................................... 115,056 62,856
Deferred tax asset.................................................................... 12,997 11,536
------------ ------------
Total assets...................................................................... $ 1,229,426 $ 1,042,503
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 28,982 $ 10,417
Accounts payable.................................................................... 39,180 33,000
Accrued compensation and benefits................................................... 32,612 23,742
Workers' compensation accrual....................................................... 7,863 6,339
Payable to APTA shareholders........................................................ 23,545 --
Other accrued liabilities........................................................... 19,384 26,542
------------ ------------
Total current liabilities......................................................... 151,566 100,040
------------ ------------
Long-term debt, net of current portion................................................ 483,453 348,460
Other long-term liabilities........................................................... 14,813 17,052
Deferred income taxes................................................................. 4,760 2,634
------------ ------------
Total liabilities................................................................. 654,592 468,186
------------ ------------
Minority interest..................................................................... 2,697 5,275
Commitments and contingencies......................................................... -- --
Stockholders' equity:
Preferred stock of $.01 par value, authorized 5,000,000 shares, none issued......... -- --
Common stock of $.01 par value, authorized 100,000,000 shares, 51,142,729 and
47,916,367 shares issued and outstanding at December 31, 1996 and 1995,
respectively...................................................................... 511 479
Additional paid-in capital.......................................................... 611,434 568,054
Retained earnings................................................................... 22,313 777
Cumulative translation adjustment................................................... 3,718 (268)
------------ ------------
637,976 569,042
------------ ------------
Less:
Common stock held in treasury, at cost, 2,030,116 shares as of December 31,
1996............................................................................ 25,069 --
Grantor stock trust, at market, 3,019,993 shares at December 31, 1996............. 40,770 --
------------ ------------
Total stockholders' equity...................................................... 572,137 569,042
------------ ------------
Total liabilities and stockholders' equity...................................... $ 1,229,426 $ 1,042,503
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-2
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Total net revenues........................................................ $ 1,316,308 $ 1,135,508 $ 673,354
Cost and expenses:
Operating............................................................... 1,107,821 929,493 552,662
Corporate general and administrative.................................... 62,085 51,468 31,633
Provision for losses on accounts receivable............................. 14,970 14,623 27,632
Depreciation and amortization........................................... 33,817 27,734 11,797
Interest, net........................................................... 25,899 21,829 10,548
Conversion expense...................................................... -- 3,256 2,275
Merger expenses......................................................... -- 5,800 --
Strike costs............................................................ -- 4,006 --
Investigation and litigation costs...................................... 19,250 5,505 --
Impairment loss......................................................... -- 59,000 --
------------ ------------ ----------
Total costs and expenses.............................................. 1,263,842 1,122,714 636,547
------------ ------------ ----------
Earnings before income taxes and extraordinary loss....................... 52,466 12,794 36,807
Income taxes.............................................................. 30,930 33,132 14,688
------------ ------------ ----------
Net earnings (loss) before extraordinary loss........................... 21,536 (20,338) 22,119
Extraordinary loss from early extinguishment of debt, net of income tax
benefit of $2,372....................................................... -- (3,413) --
------------ ------------ ----------
Net earnings (loss)....................................................... $ 21,536 ($ 23,751) $ 22,119
------------ ------------ ----------
------------ ------------ ----------
Pro forma data:
Historical earnings before income taxes and extraordinary loss.......... $ 12,794 $ 36,807
Pro forma income taxes.................................................. 33,362 17,246
------------ ----------
Pro forma net earnings (loss) before extraordinary loss................. (20,568) 19,561
Extraordinary loss...................................................... (3,413) --
------------ ----------
Pro forma net earnings (loss)........................................... ($ 23,981) $ 19,561
------------ ----------
------------ ----------
Net earnings (loss) per common and common equivalent share:
Net earnings (loss) before extraordinary loss........................... $ 0.46 ($ 0.43) $ 0.61
Extraordinary loss...................................................... -- (0.07) --
------------ ------------ ----------
Net earnings (loss)..................................................... $ 0.46 ($ 0.50) $ 0.61
------------ ------------ ----------
------------ ------------ ----------
Weighted average number of common and common equivalent shares
outstanding............................................................. 46,840 47,419 31,830
------------ ------------ ----------
------------ ------------ ----------
See accompanying notes to consolidated financial statements.
F-3
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ---------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................................................. $ 21,536 $ (23,751) $ 22,119
Adjustments to reconcile net earnings (loss) to net cash provided by (used for)
operating activities--
Extraordinary loss............................................................ -- 5,785 --
Conversion expense............................................................ -- 3,256 2,275
Litigation settlement......................................................... (4,750) -- --
Depreciation and amortization................................................. 33,817 27,734 11,797
Provision for losses on accounts receivable................................... 14,970 14,623 27,632
Impairment loss............................................................... -- 59,000 --
Other, net.................................................................... (2,032) (2,220) (908)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (57,059) (90,887) (76,929)
Other current assets........................................................ (6,696) 970 (4,521)
Other current liabilities................................................... 3,262 (6,334) (10,029)
Income taxes payable........................................................ 23,764 18,610 (7,758)
----------- ---------- -----------
Net cash provided by (used for) operating activities.......................... 26,812 6,786 (36,322)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net....................................................... (76,223) (73,497) (37,862)
Transfer of restricted cash..................................................... -- -- 16,054
Acquisitions, net of cash acquired.............................................. (65,405) (48,167) (128,378)
Purchase of minority interest in Ashbourne PLC.................................. (10,174) (25,874) --
Purchase of minority interest in OmniCell Technologies, Inc..................... (25,332) -- --
Net proceeds from sale of SunSurgery Corporation................................ 24,828 -- --
Proceeds from operations and sale of assets held for sale....................... (3,810) 36,878 (2,186)
Proceeds from sale and leaseback of property and equipment...................... 34,603 105,534 --
Other assets expenditures....................................................... (20,676) (22,648) (3,507)
----------- ---------- -----------
Net cash used for investing activities........................................ (142,189) (27,774) (155,879)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt borrowings....................................................... 137,155 185,299 145,055
Long-term debt repayments....................................................... (4,273) (115,730) (88,163)
Transfer of restricted cash..................................................... -- -- 667
Repurchase of 11 3/4% Senior Subordinated Notes due 2002........................ -- (89,370) --
Conversion of Mediplex 6 1/2% Convertible Subordinated Debentures due 2003...... -- (16,859) (10,681)
Net proceeds from issuance of common stock...................................... 1,582 2,976 216,608
Purchases of treasury stock..................................................... (25,069) -- --
Other financing activities...................................................... (1,776) (1,429) --
Distribution of prior S corporation earnings.................................... -- (333) (8,889)
----------- ---------- -----------
Net cash provided by (used for) financing activities.......................... 107,619 (35,446) 254,597
----------- ---------- -----------
Effect of exchange rate on cash and cash equivalents.............................. (464) 798 --
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents.............................. (8,222) (55,636) 62,396
Cash and cash equivalents at beginning of year.................................... 23,102 78,738 16,342
----------- ---------- -----------
Cash and cash equivalents at end of year.......................................... $ 14,880 $ 23,102 $ 78,738
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes to consolidated financial statements.
F-4
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ PAID-IN RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK
----------- ----------- ----------- ----------- ------------- -----------
(IN THOUSANDS)
Balance at December 31, 1993.................. 21,066 $ 210 $ 57,697 $ 12,454 -- --
Distribution of prior S corporation
earnings.................................... -- -- 218 (5,954) -- --
Reclassification of retained earnings as
additional paid-in capital to reflect change
in tax status of CareerStaff................ -- -- 454 (454) -- --
Common stock offerings........................ 10,662 107 205,402 -- -- --
Common stock issued pursuant to the
acquisition of Mediplex and related
transactions................................ 11,250 112 213,629 -- -- --
Common stock issued in connection with other
acquisitions................................ 14 -- 150 -- -- --
Additional consideration recorded for the
excess of the fair value over the exercise
price of the Mediplex stock options assumed
in connection with the acquisition.......... -- -- 14,473 -- -- --
Issuance of common stock for employee
benefits.................................... 1,051 11 11,088 -- -- --
Conversion of 6 1/2% Convertible Subordinated
Debentures due 2003......................... 978 10 18,503 -- -- --
Foreign currency translation adjustment....... -- -- -- -- 220 --
Net earnings.................................. -- -- -- 22,119 -- --
----------- ----- ----------- ----------- ------ -----------
Balance at December 31, 1994.................. 45,021 450 521,614 28,165 220 --
----------- ----- ----------- ----------- ------ -----------
Distribution of prior S corporation
earnings.................................... -- -- -- (333) -- --
Reclassification of retained earnings as
additional paid-in capital to reflect the
change in tax status of Golden Care, Inc.... -- -- 3,908 (3,908) -- --
Common stock issued in connection with
immaterial poolings......................... 690 7 174 604 -- --
Common stock issued in connection with other
acquisitions................................ 339 3 8,231 -- -- --
Additional consideration recorded for the fair
value of warrants issued in connection with
the Columbia acquisition.................... -- -- 1,095 -- -- --
Issuance of common stock for employee
benefits.................................... 283 3 2,973 -- -- --
Conversion of 6 1/2% Convertible Subordinated
Debentures due 2003......................... 1,583 16 30,059 -- -- --
Foreign currency translation adjustment....... -- -- -- -- (488) --
Net loss...................................... -- -- -- (23,751) -- --
----------- ----- ----------- ----------- ------ -----------
Balance at December 31, 1995.................. 47,916 479 568,054 777 (268) --
----------- ----- ----------- ----------- ------ -----------
Purchase of treasury stock.................... -- -- -- -- -- (25,069)
Common stock issued in connection with
acquisitions................................ 71 1 960 -- -- --
Issuance of common stock in connection with
establishment of the Grantor Stock Trust.... 3,050 30 37,670 -- -- --
Issuance of common stock from the Grantor
Stock Trust................................. -- -- -- -- -- --
Adjustment to market value of common stock
held by the Grantor Stock Trust............. -- -- 3,445 -- -- --
Issuance of common stock for employee
benefits.................................... 106 1 1,206 -- -- --
Tax benefit of stock options exercised........ -- -- 99 -- -- --
Foreign currency translation adjustment....... -- -- -- -- 3,986 --
Net earnings.................................. -- -- -- 21,536 -- --
----------- ----- ----------- ----------- ------ -----------
Balance at December 31, 1996.................. 51,143 $ 511 $ 611,434 $ 22,313 $ 3,718 ($ 25,069)
----------- ----- ----------- ----------- ------ -----------
----------- ----- ----------- ----------- ------ -----------
GRANTOR
STOCK
TRUST TOTAL
--------- ---------
Balance at December 31, 1993.................. -- $ 70,361
Distribution of prior S corporation
earnings.................................... -- (5,736)
Reclassification of retained earnings as
additional paid-in capital to reflect change
in tax status of CareerStaff................ -- --
Common stock offerings........................ -- 205,509
Common stock issued pursuant to the
acquisition of Mediplex and related
transactions................................ -- 213,741
Common stock issued in connection with other
acquisitions................................ -- 150
Additional consideration recorded for the
excess of the fair value over the exercise
price of the Mediplex stock options assumed
in connection with the acquisition.......... -- 14,473
Issuance of common stock for employee
benefits.................................... -- 11,099
Conversion of 6 1/2% Convertible Subordinated
Debentures due 2003......................... -- 18,513
Foreign currency translation adjustment....... -- 220
Net earnings.................................. -- 22,119
--------- ---------
Balance at December 31, 1994.................. -- 550,449
--------- ---------
Distribution of prior S corporation
earnings.................................... -- (333)
Reclassification of retained earnings as
additional paid-in capital to reflect the
change in tax status of Golden Care, Inc.... -- --
Common stock issued in connection with
immaterial poolings......................... -- 785
Common stock issued in connection with other
acquisitions................................ -- 8,234
Additional consideration recorded for the fair
value of warrants issued in connection with
the Columbia acquisition.................... -- 1,095
Issuance of common stock for employee
benefits.................................... -- 2,976
Conversion of 6 1/2% Convertible Subordinated
Debentures due 2003......................... -- 30,075
Foreign currency translation adjustment....... -- (488)
Net loss...................................... -- (23,751)
--------- ---------
Balance at December 31, 1995.................. -- 569,042
--------- ---------
Purchase of treasury stock.................... -- (25,069)
Common stock issued in connection with
acquisitions................................ -- 961
Issuance of common stock in connection with
establishment of the Grantor Stock Trust.... (37,700) --
Issuance of common stock from the Grantor
Stock Trust................................. 375 375
Adjustment to market value of common stock
held by the Grantor Stock Trust............. (3,445) --
Issuance of common stock for employee
benefits.................................... -- 1,207
Tax benefit of stock options exercised........ -- 99
Foreign currency translation adjustment....... -- 3,986
Net earnings.................................. -- 21,536
--------- ---------
Balance at December 31, 1996.................. ($ 40,770) $ 572,137
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
F-5
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(a) NATURE OF BUSINESS
Sun Healthcare Group, Inc., through its direct and indirect subsidiaries
("Sun" or the "Company"), is a provider of long-term, subacute and related
specialty healthcare services including rehabilitation and respiratory therapy
services and pharmaceutical services. Long-term and subacute care and outpatient
therapy services are provided through Company-operated facilities. Therapy
services and pharmaceutical services are provided both in Company-operated and
in other nonaffiliated facilities located in the United States. The Company also
provides long-term care and pharmaceutical services in the United Kingdom and
outpatient rehabilitation therapy services in Canada.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its greater than 50% owned subsidiaries. Investments in affiliates, in which
the Company owns 20% to 50%, are carried on the equity method. Investments in
companies owned less than 20% are carried at cost. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) CASH EQUIVALENTS
The Company considers all highly liquid, unrestricted investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents are stated at cost.
(d) NET REVENUES
Net revenues consist of patient revenues, therapy services revenues,
temporary therapy staffing services revenues and pharmaceutical services
revenues. Net revenues are recognized as services are provided. Net patient
revenues are recorded net of provisions for discount arrangements with
commercial payors and contractual allowances with third-party payors, primarily
Medicare and Medicaid. Net revenues realizable under third-party payor
agreements are subject to change due to examination and retroactive adjustment.
Estimated third-party payor settlements are recorded in the period the related
services are rendered. Differences between the net amounts accrued and
subsequent settlements are recorded in operations at the time of settlement, of
which the majority is settled in two to three years.
The Company has submitted to the Health Care Financing Administration
("HCFA") various requests for exceptions to the Medicare established routine
cost limitations for reimbursement ("RCLs"). These exceptions are permitted
under the Medicare regulations to allow providers to treat higher acuity
patients. Included in net revenues are amounts related to exceptions to the RCLs
of $12,268,000, $8,862,000 and $103,000 for the years ended December 31, 1996,
1995 and 1994 respectively. These amounts are net of adjustments to record
management's estimate of amounts that will ultimately be approved by HCFA.
Accounts receivable include requests for exceptions to the RCLs of $19,119,000
and $11,115,000 at December 31, 1996 and 1995, respectively. Amounts realizable
are subject to final settlement of the respective cost reports. Differences
between the net amounts accrued and subsequent settlements are recorded in
operations at the time of settlement.
F-6
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
(e) ACCOUNTS RECEIVABLE
The Company receives payment for services rendered from Federal and state
governments under the Medicare and Medicaid programs and private pay payors,
including third party insurers, workers' compensation plans, healthcare
providers and individuals. The following table summarizes the percent of
accounts receivable by payor category as of December 31:
1996 1995
----- -----
Government...................................................................... 44% 51%
Private and other............................................................... 56 49
--- ---
100 100
--- ---
--- ---
Management does not believe that there are any credit risks associated with
receivables from governmental agencies. Private and other receivables consist of
receivables from a large number of payors involved in diverse activities and
subject to differing economic conditions, which do not represent any
concentrated credit risks to the Company. In certain instances, however, the
collection of amounts from healthcare providers for therapy services has slowed
because payment is primarily dependent upon such facilities' receipt of payment
from fiscal intermediaries which, in some instances, have been delayed because
fiscal intermediaries are conducting reviews of such facilities' request for
reimbursement.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals or improvements
are capitalized, whereas ordinary maintenance and repairs are expensed as
incurred. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets as follows: buildings and
improvements -- 5 to 40 years; leasehold improvements -- the shorter of the
estimated useful lives of the assets or the life of the lease; equipment -- 3 to
20 years.
The Company capitalizes certain costs associated with developing and
acquiring healthcare facilities and related outpatient programs. Capitalized
costs include direct incremental investigation, negotiation, development,
acquisition and preconstruction costs; indirect and general expenses related to
such activities are expensed as incurred. Preconstruction costs include the
direct costs of securing control of the development site, obtaining the
requisite certificate of need and other approvals, as well as the direct costs
of preparing for actual development and construction. The capitalized costs are
transferred to construction in progress and depreciable asset categories as
construction is begun and completed, respectively. The Company capitalizes
interest directly related to the development and construction of new facilities
as a cost of the related asset.
(g) GOODWILL/IMPAIRMENT LOSS
The excess of the purchase price over the fair value of the net assets of
the businesses acquired by the Company is amortized using the straight-line
method over periods ranging from 20 to 40 years. Accumulated amortization of
such costs was $28,889,000 and $18,721,000 as of December 31, 1996 and 1995,
respectively.
The Company periodically evaluates the carrying value of goodwill along with
any other related long-lived assets in relation to the future undiscounted cash
flows of the underlying businesses to assess recoverability. The Company adopted
Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
on December 31, 1995. Under SFAS 121, an impairment loss is recognized if the
sum of the expected long-
F-7
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
term cash flows is less than the carrying amount of the goodwill and other
assets being evaluated. The difference between the carrying amount of the
goodwill and other assets being evaluated and the estimated fair market value of
the assets represents the impairment loss. The Company determines fair value
using certain multiples of earnings before interest, taxes, depreciation and
amortization based on current prices for comparable assets.
The impairment loss, as determined by SFAS 121, of $59,000,000 recorded by
the Company in 1995 primarily relates to the goodwill associated with six of the
forty facilities acquired in the Mediplex acquisition. The impairment loss at
these six facilities was the result of the following circumstances: (i) three
facilities were organized by the Service Employees International Union
subsequent to the acquisition resulting in significantly higher labor costs;
(ii) two facilities experienced significant declines in private pay census and
revenues due to, in one instance, funding reductions in certain programs
providing private pay patients and, in the other instance, the opening of two
new facilities by competitors; and (iii) the remaining facility received lower
than expected Medicaid rates from the State of Connecticut and due to the high
acuity of the patients treated at the facility, reimbursement was not adequate.
If the Company had not elected early adoption of SFAS 121 during 1995, the
impairment loss would have been based solely on the difference between the
assets carrying value and cumulative long-term cash flows which would have
resulted in a loss of $48,900,000. The operations of the impaired facilities are
not material to the consolidated earnings or cash flows of the Company, and
therefore, management does not expect future operating results of the impaired
facilities to have a material adverse effect on the Company's financial
condition or results of operations. However, the impaired facilities are
experiencing marginal or negative cash flows. As they are leased under long-term
operating leases, the Company expects that this trend will continue until it can
implement measures to turn around their performance or to dispose of the
facilities.
(h) OTHER ASSETS
Costs incurred in obtaining debt financing are amortized as interest expense
over the terms of the related indebtedness. The Company amortizes preopening
costs (start-up costs related to new facilities, specialty units within a
facility, new rehabilitation regions and pharmacies) over a period ranging from
one year (for costs not reimbursed by third-party payors) to five years (for
costs reimbursed by third-party payors, including the Medicare and Medicaid
programs). Other assets also includes equity and cost-based investments (see
Note 2).
(i) WORKERS' COMPENSATION INSURANCE
Workers' compensation coverage is effected through self-insurance or
retrospective and high deductible insurance policies and other hybrid policies
which vary by the states in which the Company operates. Provisions for estimated
settlements are provided in the period of the related coverage. Differences
between the amounts accrued and subsequent settlements are recorded in
operations in the year of settlement.
(j) INVESTIGATION AND LITIGATION COSTS
In 1996, the Company reached an agreement in principle to settle certain
class-action lawsuits brought by shareholders for $24,000,000 and recognized, as
a reduction of the settlement cost, a $9,000,000 claim from its directors and
officers liability insurance carrier for its claim submitted in connection with
the settlement. In addition, in 1996 the Company recorded additional charges and
expenses of $4,250,000 related to monitoring and responding to the continuing
investigation by the U.S. Department of Health
F-8
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
and Human Services' Office of Inspector General ("OIG") and responding to the
remaining shareholder litigation filed after the announcement of the OIG
investigation. In 1995, the Company recorded charges and expenses of $5,505,000
related to monitoring and responding to the continuing OIG investigation and
legal fees resulting from shareholder litigation (see Note 14). The 1995 charges
also included costs incurred by the Company in connection with financing
activities which were not concluded due to negative publicity resulting from the
OIG investigation. The charges do not contain any estimated amounts for
settlement of the OIG investigation or remaining shareholder litigation matters.
(k) STRIKE COSTS
During 1995, the Company recorded charges and expenses of $4,006,000 related
to averting a strike and negotiating new contracts for certain unionized nursing
homes in Connecticut.
(l) INCOME TAXES
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes.
Prior to converting to C corporations, CareerStaff and Golden Care had
elected S corporation status whereby income taxes are paid by the stockholders
rather than by the entities. Accordingly, there is no provision for income taxes
in the financial statements for these entities to the extent such income or loss
was includable by the stockholders in their personal income tax returns (see
Note 9).
(m) FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the cumulative foreign currency translation adjustment account in stockholders'
equity.
(n) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. Financial Accounting Standards
Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
was issued in 1995 and the Company has adopted the disclosure requirements of
SFAS 123 (see Note 12).
F-9
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL REPORTING POLICIES
(CONTINUED)
(o) NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common and common equivalent share is based upon the
weighted average number of common shares outstanding during the period including
the common stock transactions of CareerStaff and Golden Care plus the effect, if
dilutive, of the number of incremental shares of common stock contingently
issuable upon exercise of stock options.
Fully diluted net earnings per share in periods of earnings, if dilutive, is
determined on the assumption that the 6% Debentures and the 6 1/2% Debentures
were converted as of the dates of issuance and acquisition on March 1, 1994, and
June 23, 1994, respectively. Net earnings is adjusted for the interest on the
debentures, net of interest related to additional assumed borrowings to fund the
cash consideration on conversion of the 6 1/2% Debentures and the related income
tax benefits. In periods of loss, fully diluted net earnings per share is based
upon the weighted average number of common shares outstanding during the period.
(p) FINANCIAL STATEMENT PREPARATION AND PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in the 1995 and 1994 consolidated financial statements and
notes have been reclassified to conform to the 1996 presentation.
(2) MERGERS AND ACQUISITIONS
On December 15, 1996, a wholly owned subsidiary of the Company acquired all
of the capital stock of APTA Healthcare PLC ("APTA"), which as of the date of
acquisition provided healthcare services to patients through 32 nursing
facilities in the United Kingdom. Pursuant to the acquisition, the Company will
pay L13,733,000 ($23,545,000 as of December 31, 1996) which is the consideration
due to former stockholders of APTA. The acquisition was accounted for as a
purchase and became unconditional according to United Kingdom law on December
15, 1996 and, therefore, the results of APTA's operations have been included in
the Company's consolidated financial statements from the date of acquisition on
December 15, 1996. The fair market value of assets acquired, including goodwill
of $17,900,000, was $72,700,000 and liabilities assumed totaled $49,200,000. The
acquisition of APTA is immaterial to the results of the Company and, therefore,
pro forma information is not provided. Also in 1996, the Company purchased a
9.9% investment in OmniCell Technologies, Inc. ("OmniCell") for $25,332,000.
In 1995, the Company acquired a total minority interest of 20% in Ashbourne
PLC, an operator of nursing homes in the United Kingdom, for $25,874,000. In
1996, the Company acquired an additional minority interest of 9% in Ashbourne
PLC for $10,174,000. Subsequent to December 31, 1996, the Company acquired the
remaining shares of Ashbourne PLC for approximately L67,300,000 ($110,100,000),
excluding acquisition expenses and the cost of purchasing Ashbourne management
options.
On June 21, 1995, a wholly owned subsidiary of the Company merged with and
into CareerStaff Unlimited, Inc. ("CareerStaff"). CareerStaff provides temporary
staffing of physical, occupational and speech therapists to the healthcare
industry. Under the terms of the merger agreement, the Company issued 6,080,600
shares of its common stock in exchange for all the outstanding common stock of
F-10
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) MERGERS AND ACQUISITIONS (CONTINUED)
CareerStaff. The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements have been restated to include
the accounts and operations of CareerStaff for periods prior to the merger.
On May 5, 1995, a wholly owned subsidiary of the Company merged with and
into Golden Care, Inc. ("Golden Care"). Golden Care provides respiratory therapy
services to long-term and subacute care facilities. Under the terms of the
merger agreement, the Company issued 2,106,904 shares of its common stock in
exchange for all of the outstanding common stock of Golden Care. In connection
with the merger, Golden Care terminated its S corporation status and recorded a
deferred income tax provision of $1,487,000. The merger was accounted for as a
pooling of interests and, accordingly, the Company's financial statements have
been restated to include the accounts and operations of Golden Care for periods
prior to the merger.
In connection with the mergers of the Company with CareerStaff and Golden
Care, the Company recognized $5,800,000 of merger costs. These costs include
transaction costs and advisory fees and transitional costs related to
consolidating operations.
Separate results of the combining entities for periods prior to combination
are as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------
1995(1) 1994
------------ ----------
(UNAUDITED)
Net Revenues:
Sun......................................................................... $ 1,086,985 $ 603,337
CareerStaff................................................................. 45,116 55,258
Golden Care................................................................. 4,022 14,759
Less: Intercompany revenues................................................. (615) --
------------ ----------
$ 1,135,508 $ 673,354
------------ ----------
------------ ----------
Net Earnings (Loss):
Sun......................................................................... $ (26,644) $ 13,859
CareerStaff................................................................. 2,319 3,881
Golden Care................................................................. 574 4,379
------------ ----------
$ (23,751) $ 22,119
------------ ----------
------------ ----------
Pro Forma Net Earnings (Loss) (see Note 9):
Sun......................................................................... $ (26,644) $ 13,859
CareerStaff................................................................. 2,319 3,094
Golden Care................................................................. 344 2,608
------------ ----------
$ (23,981) $ 19,561
------------ ----------
------------ ----------
- ------------------------
(1) Sun results for the twelve months ended December 31, 1995 include the
results of CareerStaff and Golden Care and the elimination of the
intercompany revenues for the period following the consummation of each of
the mergers.
In November 1995, the Company acquired 75% of the common stock of Columbia
Health Care Inc. ("Columbia") for $8,500,000. The Company has agreed to purchase
the remaining shares in three to five years based on a multiple of Columbia's
earnings. In addition, the Company issued warrants to former
F-11
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) MERGERS AND ACQUISITIONS (CONTINUED)
owners of Columbia to purchase 500,000 shares of the Company's common stock with
an exercise price of $15.375 per share which had a value of $1,095,000 at the
date of acquisition. As of December 31, 1996, the warrants were exercisable and,
if unexercised, would expire in approximately four years. The Columbia
acquisition was accounted for as a purchase. The effects of the Ashbourne PLC
and the Columbia acquisitions, individually and in the aggregate, are immaterial
to the results of the Company and, therefore, pro forma information is not
provided.
On June 23, 1994, the Company, through a wholly owned subsidiary, acquired
all of the outstanding capital stock of Mediplex, which as of June 23, 1994
provided long-term and subacute healthcare services to patients through 36
inpatient facilities, six ambulatory surgery centers and related outpatient
programs. Pursuant to the acquisition, the Company issued 11,249,544 shares of
the Company's common stock and paid approximately $106,482,000 in cash to the
stockholders of Mediplex. The acquisition was accounted for as a purchase and,
accordingly, the results of Mediplex's operations have been included in the
Company's consolidated financial statements from the date of acquisition. The
fair market value of assets acquired, including goodwill of $426,542,000, was
$761,548,000 and liabilities assumed totaled $397,560,000.
Concurrent with the execution of the acquisition agreement between the
Company and Mediplex, the Company entered into a restructuring agreement (the
"Meditrust Restructuring") with Meditrust, a healthcare real estate investment
trust that is Mediplex's principal landlord and lender, to obtain the consent of
Meditrust to the Mediplex acquisition as required under the terms of the
existing leases and mortgages between Mediplex and Meditrust. Pursuant to the
Meditrust Restructuring, the Company entered into a guaranty agreement relating
to all leases and loans with Meditrust, restructured the terms of all existing
leases and entered into new leases for certain facilities, restructured certain
Mediplex debt arrangements, purchased three facilities for $115,000,000 of which
$41,000,000 was paid in cash and $74,000,000 was financed through mortgages,
received $11,000,000 pursuant to a mortgage entered into on a rehabilitation
hospital and received $41,570,000 through four sale and leaseback transactions.
Also, concurrent with the acquisition of Mediplex, certain Mediplex assets were
sold to and certain Mediplex liabilities were assumed by the former Chairman of
the Board, Chief Executive Officer and principal stockholder of Mediplex. The
consideration received by the Company for these assets was $23,486,000 in cash
and 1,137,683 shares of the Company's common stock. These related transactions
were included in the purchase accounting for the acquisition of Mediplex.
As a result of the Mediplex acquisition, the Company acquired four
psychiatric facilities, four substance abuse treatment facilities, certain
outpatient clinics and three transitional living facilities, including three
former substance abuse or psychiatric care facilities which had been closed by
Mediplex in 1992 and 1993 (See Note 5). Prior to the Mediplex acquisition, these
facilities had experienced declines in revenues and occupancy rates. In
addition, certain of these facilities were not in geographic areas consistent
with the Company's regional management structure. In view of the operating
trends and the Company's desire to focus on its primary lines of business,
management decided to dispose of these facilities and units and developed a plan
of disposition, which was approved by the Board of Directors in the third
quarter of 1994. Accordingly, in connection with the acquisition of Mediplex,
these assets were recorded at their estimated net realizable value and
additional goodwill of approximately $16,000,000 has been recorded to provide
for the estimated costs related to the disposal and operating results during the
holding period.
In September 1994, the Company, through its wholly owned subsidiary, Sun
Healthcare Group International Ltd. ("SHGI"), acquired for approximately
$12,400,000, a 68% interest in Exceler Health
F-12
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) MERGERS AND ACQUISITIONS (CONTINUED)
Care Group PLC ("Exceler"), an operator of long-term care nursing homes
throughout the United Kingdom. Simultaneously, Exceler acquired all of the
outstanding shares of Forest Health Care Limited ("Forest") for approximately
$7,100,000. The acquisition was accounted for by the purchase method of
accounting. The sellers of Forest received an additional $2,400,000 during 1995
as required under the terms of the purchase agreement. In February 1995, the
Company purchased the remaining 32% interest in Exceler for approximately
$4,700,000 in cash and deferred purchase payments of $474,000 which was paid in
1995 and $1,066,000 which was paid in 1996.
(3) DISPOSITION
In June 1996, the Company completed the sale of all of the outstanding stock
of SunSurgery Corporation, its ambulatory surgery subsidiary, for approximately
$27,900,000 in cash and the assumption of $5,600,000 in debt by the buyer. As of
the date of sale, SunSurgery Corporation had approximately $3,100,000 in cash
which was retained by the buyer. The sale resulted in no material gain or loss
to the Company.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Land............................................................................ $ 21,983 $ 12,358
Buildings and improvements...................................................... 148,530 79,868
Leasehold improvements.......................................................... 52,630 33,433
Equipment....................................................................... 76,812 55,031
Construction in progress........................................................ 34,097 37,353
---------- ----------
Total....................................................................... 334,052 218,043
Less accumulated depreciation and amortization.................................. (28,332) (16,911)
---------- ----------
Property and equipment, net................................................. $ 305,720 $ 201,132
---------- ----------
---------- ----------
In 1996, the Company sold three of its long-term and subacute care
facilities for $11,934,000 including the assumption of debt totaling $3,168,000
and leased them back under fifteen year leases. Also in 1996, the Company,
through its United Kingdom subsidiary, sold ten of its long-term care facilities
for $25,837,000 and leased them back under twelve year leases. These
transactions produced no material gain or loss.
In 1995, the Company sold five of its long-term and subacute care facilities
for $69,988,000 and leased them back under ten year leases. Also in 1995, the
Company, through its United Kingdom subsidiary, sold fifteen of its long-term
care facilities for $35,546,000 and leased them back under twelve year leases.
These transactions produced no material gain or loss.
(5) ASSETS HELD FOR SALE
As discussed in Note 2, as a result of the acquisition of Mediplex, the
Company acquired certain facilities providing psychiatric, substance abuse and
transitional living services. On September 30, 1995, the Company sold five of
the operating psychiatric care and substance abuse treatment facilities, all of
the related outpatient facilities and a transitional living facility for a sales
price of $39,900,000 consisting of
F-13
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) ASSETS HELD FOR SALE (CONTINUED)
cash and the assumption of indebtedness secured by one of the facilities. The
sale of the transitional living facility was completed in 1996 at a net cost to
the Company of $3,810,000. As part of the sale, the Company provided a five-year
$12,500,000 working capital line of credit to the buyer, which is secured by the
accounts receivable of the facilities sold and is restricted to a borrowing base
determined by the amount of accounts receivable of the facilities. Under the
terms of the working capital line of credit, principal is due in full on
September 30, 2000 and interest accrues at either LIBOR plus 2.5% or Prime plus
1.5%. As of December 31, 1996, $12,500,000 had been advanced on the working
capital line of credit. In 1995, the Company subleased two operating
transitional living facilities and sold the working capital of these facilities
to the current administrator of one of these facilities, who has assumed
responsibility for approximately 60% of the Company's obligations under the
present leases and will pay the Company a total of $13,400,000 over the term of
such leases. Also in 1995, the Company completed the sale of two of the closed
facilities for $2,000,000 and $2,500,000, respectively. As of December 31, 1996,
the Company continues to own an interest in a substance abuse facility which was
closed in 1992.
The results of operations of these facilities, including the gain on the
sale of certain facilities, were as follows (in thousands):
PERIOD JUNE 24,
YEAR ENDED 1994 THROUGH
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
Net revenues..................................................... $ 63,236 $ 38,281
------- -------
Loss from operations before income taxes......................... 3,527 1,936
Income tax benefit............................................... 1,425 762
------- -------
Loss from assets held for sale................................... $ 2,102 $ 1,174
------- -------
------- -------
F-14
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Revolving Line of Credit (see below)............................................ $ 279,300 $ 177,600
Convertible Subordinated Debentures due 2004, interest at 6% per annum.......... 83,300 83,300
Convertible Subordinated Debentures due 2003, interest at 6 1/2% per annum,
includes unamortized premium of $2,728 and $3,142 as of December 31, 1996 and
1995, respectively............................................................. 25,137 25,566
Senior Subordinated Notes due 2002, interest at 11 3/4% per annum, includes
unamortized premium of $126 and $131 as of December 31, 1996 and 1995,
respectively................................................................... 6,287 6,292
Mortgage notes payable due at various dates through 2005, interest at rates from
10% to 14%, collateralized by various facilities............................... 34,939 35,375
Mortgage notes payable in pound sterling and due at various dates through 2017,
interest at 1% to 4% plus the FHBR rate ("Finance House Base Rate"),
collateralized by various facilities in the United Kingdom..................... 31,543 10,332
Revolving line of credit with a bank due 1997, payable in pound sterling with
interest at a rate of 1.75% plus the FHBR rate, collateralized by the assets of
various facilities............................................................. 20,309 4,582
Industrial Revenue Bonds due 2016, interest at 10.25%, collateralized by a
rehabilitation hospital........................................................ 4,000 4,060
Notes payable to a bank due 1998, interest at prime rate less .25%,
collateralized by the assets of the ambulatory surgery centers................. -- 5,096
Obligations under capital lease agreements, imputed interest at rates ranging
from 5.4% to 12.47%; due through 1999, collateralized by the assets of various
facilities and leased equipment................................................ 24,270 2,937
Other long-term debt............................................................ 3,350 3,737
---------- ----------
Total long-term debt............................................................ 512,435 358,877
Less current portion............................................................ (28,982) (10,417)
---------- ----------
Long-term debt, net of current portion.......................................... $ 483,453 $ 348,460
---------- ----------
---------- ----------
Annual maturities for the next five years at December 31, 1996, are as
follows (in thousands):
1997.............................................................. $ 28,982
1998.............................................................. 8,805
1999.............................................................. 5,526
2000.............................................................. 5,293
2001.............................................................. 225,156
Thereafter........................................................ 238,673
---------
$ 512,435
---------
---------
In October 1996, the Company entered into a Fourth Amended and Restated
Credit Agreement (the "Credit Facility") with certain banks, including
NationsBank of Texas, N.A. as administrative lender. The
F-15
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT (CONTINUED)
Credit Facility provides up to $490,000,000 in a revolving line of credit and
letters of credit. The Credit Facility expires on October 28, 2001 and is
collateralized by a pledge of the stock of the majority of the Company's
subsidiaries. Borrowings bear interest at either the prevailing prime rate or
the LIBOR rate plus 0.5% to 1.5% depending on the Company's consolidated debt to
cash flow coverage ratio. The Credit Facility, among other things, (i) requires
the Company to maintain certain financial ratios, (ii) restricts the Company's
ability to incur debt and liens, make investments, liquidate or dispose of
assets, merge with another corporation, create or acquire subsidiaries, and make
acquisitions, and (iii) prohibits the payment of dividends, the acquisition of
treasury stock and the prepayment or modification of certain debts of the
Company. The Company had $279,300,000 of outstanding borrowings and $18,272,000
of outstanding standby letters of credit under the Credit Facility at December
31, 1996.
On March 1, 1994, the Company issued $83,300,000 aggregate principal amount
of 6% Convertible Subordinated Debentures due 2004 (the "6% Debentures") which
are convertible into shares of the Company's common stock at a conversion price
of $21.84 per share, subject to adjustment under certain conditions. The Company
received net proceeds of approximately $80,600,000 from the offering. Part of
the net proceeds was used to pay a portion of the cash consideration for the
acquisition of Mediplex. The 6% Debentures are redeemable by the Company at par,
in whole or in part, after March 1, 1997.
Holders of the 6 1/2% Convertible Subordinated Debentures due 2003 (the
"6 1/2% Debentures") are entitled under the indenture to receive the Mediplex
acquisition consideration in respect of each share of Mediplex common stock into
which the 6 1/2% Debentures would have been convertible at the time of the
acquisition of Mediplex. The Company has agreed to be a co-obligor of the 6 1/2%
Debentures. In January 1995, $39,449,000 of the 6 1/2% Debentures were
converted. Pursuant to the conversion terms under the indenture, the Company
paid $13,603,000 and issued 1,582,905 shares of the Company's common stock to
the converting holder. In addition, the Company paid accrued interest plus a
conversion fee of $3,256,000 to the converting holder, which was expensed in the
first quarter of 1995, to induce conversion. In August 1994, $24,377,000 of the
6 1/2% Debentures were converted into 978,136 shares of the Company's common
stock. Pursuant to the conversion terms under the indentures, the Company paid
$8,406,000 to the converting holder. In addition, the Company paid accrued
interest plus a conversion fee of $2,275,000 to the converting holder to induce
conversion, which was expensed in the third quarter of 1994. Conversion of the
remaining $22,409,000 of outstanding 6 1/2% Debentures would require the
issuance of an additional 899,170 shares of the Company's common stock and a
payment of $7,727,000 in cash pursuant to the conversion terms under the
indenture relating to the 6 1/2% Debentures.
In January 1995, the Company completed a tender offer for $78,698,000 of the
11 3/4% Senior Subordinated Notes due 2002 (the "11 3/4% Notes") at a price of
$1,120 per $1,000 of principal amount of the notes. The Company recorded an
extraordinary loss, net of related tax benefits, of $3,413,000 as a result of
the extinguishment of such debt. Concurrent with the tender offer, the Company
deleted by amendment certain covenants contained in the original indenture that
restricted the Company from fully integrating Mediplex into its operations. In
addition, the amendments modified certain provisions relating to mergers and
consolidations and events of default. In conjunction with the amendments, the
Company became a co-obligor on the 11 3/4% Notes.
The Company has $32,712,000 of mortgages with Meditrust as of December 31,
1996, which contain less restrictive covenants than the Credit Facility and
which include cross default provisions with all of such mortgages and leases
also financed by Meditrust. The Company also is the obligor on an outstanding
letter of credit with a bank of $3,921,000 as of December 31, 1996, to guarantee
outstanding debt obligations of
F-16
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT (CONTINUED)
$3,850,000 for a partnership through which the Company acquired a 50% interest.
The partnership owns a long-term care facility which is leased to a third-party
operator.
In connection with the acquisition of Mediplex, the Company acquired,
through Mediplex, an interest rate hedge swap agreement with a commercial bank,
having a total notional principal amount of $100,000,000 and expiring in 1999.
This agreement called for the payment of variable rate interest by the Company
in return for the assumption by the other contracting party of a fixed rate
cost. For the period beginning June 23, 1994 and ending June 30, 1995, the
Company received a fixed rate of interest of 6.60% and paid interest at the 90
day LIBOR rate (5.0% for the three months ended October 14, 1994, 5.625% for the
three months ended January 17, 1995, and 6.25% for the three months ended April
12, 1995 and for the period ended June 30, 1995). The Company terminated the
transaction on June 30, 1995 and received cash proceeds of $1,680,000 in
connection with such termination. The resulting gain is being amortized over the
original hedge period as an adjustment to interest expense.
(7) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company has various noncancelable operating leases for facilities with
initial lease terms generally ranging from 5 to 23 years and renewal options of
5 to 40 years. Certain of the lease agreements provide for payment escalations
coincident with increases in certain economic indices.
Future minimum lease payments under noncancelable operating leases at
December 31, 1996 are as follows (in thousands):
1997.............................................................. $ 90,078
1998.............................................................. 89,654
1999.............................................................. 90,604
2000.............................................................. 91,182
2001.............................................................. 86,978
Thereafter........................................................ 463,344
---------
$ 911,840
---------
---------
Several leases contain contingent rental provisions based on operating
results. Rent expense totaled $91,666,000, $73,727,000 and $43,626,000 in 1996,
1995 and 1994, respectively, including contingent rentals of approximately
$131,000, $182,000 and $254,000 during 1996, 1995 and 1994, respectively.
The Company leases or subleases 58 facilities from affiliates of two
directors of the Company as of December 31, 1996, which is included in the
information above. The aggregate lease expense for these facilities was
approximately $16,703,000, $13,800,000 and $12,800,000 in 1996, 1995 and 1994,
respectively. Future minimum lease commitments related to these facilities total
approximately $175,000,000 at December 31, 1996. The Company's management
believes the terms of all of the foregoing leases are as favorable to the
Company as those that could have been obtained from nonrelated parties.
F-17
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(b) CONSTRUCTION COMMITMENTS
The Company has capital expenditure commitments, as of December 31, 1996,
under various contracts, including approximately $10,400,000 in the United
States and L7,300,000 ($12,500,000 as of December 31, 1996) in the United
Kingdom. These include contractual commitments to improve existing facilities
and to develop and construct one and seven new long-term and subacute care
facilities in the United States and United Kingdom, respectively.
(c) FINANCING COMMITMENTS
The Company has agreed to lend $47,000,000, through a revolving subordinated
credit agreement ("Revolving Credit Agreement") to a developer of assisted
living facilities for the development, construction and operation of assisted
living facilities. The advances are subject to certain conditions including
availability of mortgage financing for 50% of the cost of each project and
approval of each project by the Company. At December 31, 1996, five assisted
living facilities were under development which would require funding by the
Company totaling approximately $24,300,000, of which $9,000,000 had been
advanced. The developer is in the process of obtaining mortgage financing. If
mortgage financing is not obtained, the Company will be obligated to fund 100%
of these five projects for approximately $51,700,000. The Company's advances
under the Revolving Credit Agreement will be subordinate to the mortgage
financing. A subsidiary of the Company has an option to purchase each assisted
living facility after it becomes operational.
(d) LITIGATION
The Company is a party to various legal actions and administrative
proceedings and subject to various claims arising in the ordinary course of
business. The Company does not believe that the ultimate disposition of these
matters will have a material adverse effect on the financial condition results
of operations of the Company (see Notes 1(j) and 14).
(e) OTHER
The Company recently learned that a fiscal intermediary and a Medicaid
agency in one of the states in which the Company operates may be examining cost
reports filed by a predecessor operator of several facilities acquired in the
Mediplex acquisition. If, as a result of any such examination, it is concluded
that overpayments to the predecessor operator were made, the Company, as the
current operator of such facilities, may be held financially responsible for any
such overpayments. However, at this time the Company is unable to predict the
outcome of any such examination.
F-18
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
Income tax expense (benefit) on earnings before extraordinary loss consists
of the following for the year ended December 31 (in thousands):
1996 1995 1994
--------- --------- ---------
Current:
Federal.............................................................. $ 12,790 $ (212) $ 16,829
State................................................................ 4,835 (102) 3,362
--------- --------- ---------
17,625 (314) 20,191
--------- --------- ---------
Deferred:
Federal.............................................................. 11,037 27,744 (4,894)
State................................................................ 2,268 5,702 (609)
--------- --------- ---------
13,305 33,446 (5,503)
--------- --------- ---------
Total.............................................................. $ 30,930 $ 33,132 $ 14,688
--------- --------- ---------
--------- --------- ---------
Actual tax expense differs from the "expected" tax expense on earnings
before extraordinary loss, computed by applying the U.S. Federal corporate
income tax rate of 35% to pretax net earnings before extraordinary loss of the
Company as follows for the year ended December 31 (in thousands):
1996 1995 1994
--------- --------- ---------
Computed "expected" tax expense........................................ $ 18,363 $ 4,478 $ 12,882
Adjustments in income taxes resulting from:
Amortization of goodwill............................................. 3,045 3,235 1,492
Impairment loss...................................................... -- 15,452 --
Increase in valuation allowance...................................... 7,615 3,038 --
Conversion fee....................................................... -- 1,139 796
Merger expenses...................................................... -- 1,199 --
S corporation earnings not taxable to the Company
(at Federal rates)................................................. -- (230) (2,251)
State income tax expense, net of Federal income tax benefit.......... 4,617 3,332 1,730
Loss on sale of subsidiary stock..................................... (2,458) -- --
Recognition of deferred income taxes for former S corporations....... -- 1,487 --
Other................................................................ (252) 2 39
--------- --------- ---------
$ 30,930 $ 33,132 $ 14,688
--------- --------- ---------
--------- --------- ---------
F-19
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) were comprised of the following at
December 31 (in thousands):
1996 1995
---------- ----------
Deferred tax assets:
Provision for losses on accounts receivable................................... $ 8,045 $ 14,851
Accrued liabilities........................................................... 3,629 8,788
Property and equipment........................................................ 3,270 10,650
Intangible assets............................................................. 8,154 8,190
Carryforward of deductions limited by Internal Revenue Code Section 382....... 9,222 6,380
Write-down of assets held for sale and reserve for estimated costs of disposal
and future operating losses................................................. 5,714 7,989
Deferred income............................................................... 2,275 2,771
Alternative minimum tax credit................................................ 425 899
Shareholder settlement........................................................ 7,571 --
Capital loss carryforward..................................................... 1,573 --
State net operating loss carryforwards........................................ 5,156 --
Other......................................................................... 523 263
---------- ----------
55,557 60,781
---------- ----------
Less valuation allowance:
Federal....................................................................... (24,843) (18,526)
State......................................................................... (3,810) (2,512)
---------- ----------
(28,653) (21,038)
---------- ----------
Total deferred tax asset........................................................ 26,904 39,743
---------- ----------
Deferred tax liabilities:
Changes in certain subsidiaries' methods of accounting for income taxes from
cash to accrual basis....................................................... (1,191) (1,109)
Property and equipment attributable to United Kingdom operations.............. (4,760) (2,634)
---------- ----------
(5,951) (3,743)
---------- ----------
Deferred tax asset, net......................................................... $ 20,953 $ 36,000
---------- ----------
---------- ----------
Various subsidiaries have state net operating loss ("NOL") carryforwards
totaling $94,292,000 with expiration dates through the year 2011. In addition,
the Company has a capital loss carryforward of approximately $4,000,000 which
will expire in 2001. Because there is a risk that certain of these NOL and
capital loss carryforwards may expire unutilized, a valuation allowance has been
established against them.
In connection with the deferred tax assets acquired in the acquisition of
Mediplex, the Company recorded an $18,000,000 valuation allowance. Accordingly,
any tax benefits recognized in future periods attributable to this portion of
the valuation allowance will be allocated to reduce goodwill. The $7,615,000
increase in the valuation allowance in 1996 relates to realization of tax
deductible shareholder settlement costs and capital loss carryforwards.
Upon merging with the Company on May 5, 1995, Golden Care terminated its S
Corporation status for Federal and state income tax purposes. In connection with
this termination, the Company recorded a deferred income tax provision and
liability of $1,487,000.
F-20
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) PRO FORMA INCOME TAXES--(UNAUDITED)
For financial reporting purposes, a pro forma provision for income taxes has
been reflected in the consolidated statements of earnings to present taxes on
the results of operations of CareerStaff for the period from January 1, 1994
through June 22, 1994, and Golden Care for the period January 1, 1995 through
May 5, 1995 and for the year ended December 31, 1994 on the basis that is
required upon their change in tax status from S corporation to C corporation.
These amounts ($230,000 and $2,558,000 in 1995 and 1994, respectively) are equal
to the required Federal and state income tax provisions that would have been
recorded if these entities had not elected S corporation status and were subject
to and liable for Federal and state income taxes as C corporations prior to each
of the companies' termination of their S corporation status. CareerStaff
terminated its S corporation status for Federal and state income tax purposes on
June 22, 1994. Golden Care terminated its S corporation status upon merging with
the Company on May 5, 1995. In connection with Golden Care's termination of its
S Corporation status, the Company recorded a deferred income tax provision and
liability of $1,487,000 in the second quarter of 1995. The Company distributed a
total of $333,000 and $8,889,000 in 1995 and 1994, respectively, of prior S
corporation earnings to stockholders for certain of these tax obligations.
(10) SUPPLEMENTARY INFORMATION RELATING TO STATEMENTS OF CASH FLOWS
Supplementary information for the consolidated statements of cash flows is
set forth below (in thousands):
1996 1995 1994
--------- --------- ---------
Cash paid during the year ended December 31 for:
Interest, net of $2,472, $2,839 and $3,705 capitalized during 1996,
1995 and 1994, respectively........................................ $ 26,821 $ 26,951 $ 10,942
Income taxes......................................................... 7,608 12,150 22,446
The Company's acquisitions during 1996 and 1995, the Company's acquisition
of Mediplex on June 23, 1994, the related transactions and other acquisitions
during 1994 and other related transactions and acquisitions involved the
following (in thousands):
1996 1995 1994
---------- --------- -----------
Fair value of assets acquired....................................... $ 145,652 $ 66,575 $ 785,694
Liabilities assumed................................................. (55,741) (9,079) (443,575)
Payable to APTA shareholders........................................ (23,545) -- --
Fair value of stock and warrants issued............................. (961) (9,329) (213,741)
---------- --------- -----------
Cash payments made, net of cash received from others................ $ 65,405 $ 48,167 $ 128,378
---------- --------- -----------
---------- --------- -----------
In January 1995, the Company issued 1,582,905 shares of its common stock
upon the conversion of $39,449,000 principal amount of 6 1/2% Debentures and in
August 1994, the Company issued 978,136 shares of its common stock upon the
conversion of $24,377,000 principal amount of 6 1/2% Debentures (see Note 6).
F-21
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31 are as follows (in thousands):
1996 1995
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
Cash and cash equivalents.................................... $ 14,880 $ 14,880 $ 23,102 $ 23,102
Long-term debt, including current portion.................... (512,435) (510,400) (358,877) (352,843)
The cash and cash equivalents carrying amount approximates fair value
because of the short maturity of these instruments. The fair value of the
Company's long-term debt was estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities.
(12) CAPITAL STOCK
(a) SALE OF COMMON SHARES
SUN
In connection with the Company's acquisition of Mediplex in June 1994, the
Company issued 4,472,420 shares of its common stock in a public offering
resulting in net proceeds of $83,605,000. In December 1994, the Company
completed a public stock offering of 5,365,000 shares of its common stock
resulting in net proceeds of $111,878,000.
CAREERSTAFF
Prior to the Company's merger with CareerStaff, CareerStaff in June 1994
completed an initial public stock offering of 824,600 equivalent shares of Sun's
common stock resulting in net proceeds of approximately $9,526,000.
(b) COMMON STOCK REPURCHASE
In the first quarter of 1996, the Company repurchased 2,030,116 shares of
its outstanding common stock at a cost, including commissions, of $25,069,000.
(c) STOCK OPTION PLANS
STOCK INCENTIVE PLANS
The Company has stock option plans for certain employees, officers, and
consultants of the Company which provide for the grant of nonqualified and
incentive stock options. The Board of Directors or a committee appointed by the
Board of Directors determines the vesting schedule and the option price which is
generally not to be less than the fair market value per share of the Company's
common stock at the date of grant. Options granted prior to March 1996 generally
vest at the end of three years and expire ten years from the date of grant.
Options granted during and after March 1996 generally vest ratably over three
years and expire ten years from the date of grant. At December 31, 1996, options
for 2,829,099 shares were outstanding, options for 350,500 shares were vested
and 2,845,000 shares were available for future grants under the stock option
plans for officers, certain employees, and consultants. Exercise prices of
outstanding options to purchase shares of the Company's common stock range from
$9.50 to $24.00.
F-22
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CAPITAL STOCK (CONTINUED)
DIRECTOR STOCK OPTION PLANS
The Company has stock option plans for nonemployee directors, which provide
for the grant of nonqualified options. Each nonemployee director serving as a
director at the time of the Company's initial public offering received at the
time of the initial public offering an initial grant of options for 20,000
shares and annual grants for each of three years thereafter of options for 7,500
shares. Each grant had an exercise price equal to the initial public offering
price of $11.00 per share, a vesting period of one year and an expiration date
ten years after the date of grant. Nonemployee directors who began serving after
the Company's initial public offering receive an initial grant of options for
5,000 shares and annual grants of options for 1,000 shares for each year
thereafter at a price not less than the fair market value of the Company's
common stock at the date of grant. Beginning in 1997, all nonemployee directors
will receive an annual grant of options for 1,000 shares at a price not less
than fair market value of the Company's common stock at the date of grant. The
grants of options for 1,000 and 5,000 shares vest ratably over four years
beginning after the first anniversary of the date of grant and expire ten years
after the date of grant. At December 31, 1996, options for 80,500 shares were
outstanding, options for 61,250 shares were vested and 177,000 shares were
available for future grant under the stock option plans for nonemployee
directors. Exercise prices of outstanding options to purchase shares of common
stock range from $9.50 to $15.75.
1997 STOCK INCENTIVE PLAN
In the first quarter of 1997, the Board of Directors adopted the 1997 Stock
Incentive Plan (the "Plan"). Awards made under the Plan may be in the form of
stock options, stock appreciation rights, stock awards, performance share
awards, or other stock-based awards. The Plan is intended to replace the
existing stock option plans for executives, and awards currently outstanding
under those plans were not affected. The Plan reserves 4,500,000 shares for
awards. Subsequent to December 31, 1996, the Company awarded an aggregate of
776,000 shares of restricted stock to nine senior executives, which will be
expensed over the vesting period. Approximately 105,000 of the restricted shares
vested immediately. The remaining restricted stock awards vest ratably over the
remaining four to five years. These restricted stock awards are subject to
defeasance if the Plan is not approved by the shareholders.
MEDIPLEX OPTION PLANS
In connection with the acquisition of Mediplex, the Company assumed and
converted the outstanding Mediplex stock options under existing plans into
options to purchase a total of 1,704,500 shares of the Company's common stock
with exercise prices ranging from $6.75 to $18.50. As of December 31, 1996,
options to purchase 355,228 shares of common stock, of which 301,478 were
exercisable, were outstanding with exercise prices ranging from $7.75 to $17.63.
The difference between the fair market value of the Company's common stock at
the date of the acquisition and the exercise price of the assumed options was
accounted for as additional consideration in the acquisition. The fair market
value approximated the intrinsic value of the Company's common stock and the
difference between the two valuations had the intrinsic value been used would
not have been material to net earnings or to net equity as of the date of the
acquisition.
CAREERSTAFF OPTION PLANS
In connection with the CareerStaff merger, the Company assumed and converted
the outstanding CareerStaff stock options granted in 1995 and 1994 under
existing plans into options to purchase a total of 302,386 shares of the
Company's common stock with exercise prices ranging from $12.96 to $22.47. As of
F-23
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CAPITAL STOCK (CONTINUED)
December 31, 1996, all of the outstanding options to purchase a total of 82,802
shares of the Company's common stock were exercisable at exercise prices ranging
from $12.96 to $22.47.
The following is a summary of the status of the Company's Stock Incentive
Plans, the Director Stock Option Plans and the assumed Mediplex and CareerStaff
Option Plans as of December 31, 1996, 1995 and 1994, and changes during the
years ending on those dates is presented below (shares in thousands):
1996 1995 1994
-------------------------- -------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------------- ----------- ------------- --------- -------------
Outstanding at beginning of year......... 3,648 $ 16.12 3,007 $ 15.79 737 $ 12.27
Granted
Price equals fair value................ 441 13.74 1,508 16.82 1,863 20.13
Price is less than fair value.......... 15 11.00 23 11.00 23 11.00
Options assumed in connection with the
acquisition of Mediplex................. -- -- -- -- 1,705 10.42
Exercised................................ (106) 11.09 (283) 12.78 (1,051) 10.41
Cancelled................................ (650) 16.54 (607) 17.07 (270) 15.46
----- ----- ---------
Outstanding at year-end.................. 3,348 15.91 3,648 16.12 3,007 15.79
----- ----- ---------
----- ----- ---------
Options exercisable at year-end.......... 796 11.53 628 11.62 337 10.93
----- ----- ---------
----- ----- ---------
Options available for future grant....... 3,022 330 1,148
----- ----- ---------
----- ----- ---------
Weighted average fair value of options
granted during the year................. $ 5.41 $ 7.04
----- -----
----- -----
The fair value of each option granted in 1996 and 1995 is estimated at the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: (i) zero dividend yield; (ii) expected volatility
of 41%; (iii) risk-free interest rates of 5.37% and 6.22% for the years ended
December 31, 1996 and 1995, respectively, and (iv) expected life of four years.
Had compensation cost for the Company's 1996 and 1995 options grants been
determined consistent with SFAS 123 (see Note 1(n)) which establishes fair value
as the measurement basis for stock-based awards, the Company's net earnings and
net earnings per share for 1996 and 1995 would approximate the pro forma amounts
below (in thousands, except per share data):
1996 1995
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
Net earnings (loss)........................................... $ 21,536 $ 19,548 $ (23,981) $ (25,229)
Net earnings (loss) per share................................. $ 0.46 $ 0.42 $ (0.50) $ (0.53)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to options granted prior
to 1995, and additional option grants in future years are anticipated.
F-24
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CAPITAL STOCK (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING CONTRACTUAL EXERCISE OUTSTANDING AT EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/96 LIFE PRICE 12/31/96 PRICE
- ------------------------------------- ------------- --------------------- ------------- --------------- -------------
$ 7.75 - $10.13...................... 745 5.5 $ 9.68 294 $ 9.90
11.00 - 15.84...................... 897 7.7 12.88 462 12.06
16.07 - 19.00...................... 979 7.8 18.30 34 16.69
20.50 - 24.00...................... 727 7.9 22.81 6 22.50
----- ---
3,348 7.3 15.91 796 11.53
----- ---
----- ---
OPTIONS ISSUED IN CONNECTION WITH THE GOLDEN CARE MERGER
The Company issued options to purchase a total of 234,100 shares of the
Company's common stock with a total exercise price of $500,000 as part of the
consideration in the Company's merger with Golden Care. These options represent
10% of the total shares of the Company's common stock issued in connection with
the Golden Care merger. These options replaced options granted to an employee in
1994 under an employment agreement in which former Golden Care stockholders
granted an option to an employee to acquire 10% of their holdings. All such
options vested as of the date of the merger.
(d) GRANTOR STOCK TRUST
In the first quarter of 1996, the Company sold 3,050,000 newly issued shares
of the Company's common stock to a newly established Grantor Stock Trust
("Trust") for approximately $37,700,000. The Trust was created to fund future
obligations under certain of the Company's benefit plans. The sale of the shares
was recorded as an increase in stockholders' equity with a corresponding
reduction for the value of the shares held by the Trust. As employee benefits
are satisfied, the number and value of shares held by the Trust is reduced and
stockholders' equity correspondingly increases. As of December 31, 1996, the
Trust held 3,019,993 shares of the Company's common stock.
The Trust delivered a promissory note for approximately $37,700,000 to the
Company. The cash portion of the purchase price of approximately $31,000
represents the par value of the shares of the Company's common stock sold to the
Trust. Amounts owed by the Trust will be repaid periodically with cash received
from the Company or will be forgiven by the Company thereby enabling the release
of shares from the Trust to satisfy the Company's obligations for certain
employee benefit plans.
(13) PREFERRED STOCK PURCHASE RIGHTS
On June 2, 1995, the Board of Directors declared a dividend of one preferred
stock purchase right ("Right") for each outstanding share of common stock of the
Company for stockholders of record on June 15, 1995 and for all future issuances
of common stock. The Rights are currently not exercisable or transferable apart
from the common stock and have no voting rights. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock, par value $0.01 per share. The Rights become
exercisable ten business days following the date a person or group of affiliated
persons acquires 15% or more of the Company's common stock, or announces a
tender or exchange offer which would result in the beneficial ownership by a
person or group of affiliated person of
F-25
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) PREFERRED STOCK PURCHASE RIGHTS (CONTINUED)
15% or more of the outstanding Company's common stock. The Rights also become
exercisable if any person, who is the beneficial owner of 15% or more of the
Company's common stock as of the date of record, acquires an additional 1% or
more of the outstanding Company's common stock. The Rights may be redeemed by
the Company at a price of $.001 per Right before their expiration on June 2,
2005.
In the event that the Company is acquired in a merger or other business
combination or certain other events occur, provision shall be made so that each
holder of a Right, excluding the Rights beneficially owned by the acquiring
persons, shall have the right to receive, upon exercise thereof at the then
current exercise price, that number of shares of common stock of the surviving
company which at the time of such transaction will have a market value of two
times the exercise price of the Right.
(14) OTHER EVENTS
(a) GOVERNMENT INVESTIGATION
The Company is the subject of a pending Federal investigation by the OIG and
the United States Department of Justice. At this time, the Company understands
that the investigation includes a review of whether the Company's rehabilitation
therapy subsidiary properly provided and/or billed for concurrent therapy
services and whether it provided unnecessary or unordered services to residents
of skilled nursing facilities. The Company understands that the investigation
also includes a review of whether its long-term care subsidiary properly
disclosed its relationship with the Company's rehabilitation therapy subsidiary
and properly sought reimbursement for services provided by that subsidiary.
The Company is unable to determine at this time when the investigation will
be concluded or what its precise scope might be. If there have been improper
practices or the investigation is broader in scope than the Company currently
understands it to be, depending on the nature and extent of such impropriety,
the investigation could result in the imposition of civil, administrative, or
criminal fines, penalties, or restitutionary relief, and may have a negative
impact on the Company. Based on its current understanding of the investigation,
however, the Company does not believe that the outcome of the investigation will
have a material adverse effect on the Company's financial condition or results
of operations.
(b) LITIGATION
Prior to the Company's acquisition of CareerStaff, a holder of CareerStaff's
common stock filed a lawsuit (the "CareerStaff Litigation") as a purported class
action against CareerStaff and the directors of CareerStaff alleging breach of
fiduciary duty in entering into a merger agreement with the Company and against
the Company alleging that the Company aided and abetted the alleged breach of
fiduciary duty by the CareerStaff directors. The CareerStaff Litigation was
voluntarily dismissed without prejudice on May 8, 1996.
On June 30, 1995, two civil class-action complaints were filed against the
Company and certain of its current and former directors and officers in the
United States District Court for the District of New Mexico. Two more
complaints, based on the same underlying events, were filed on August 30, 1995.
On October 6 and October 10, 1995, two additional complaints were filed, also
based on the same underlying events. These six complaints were consolidated by a
court order dated November 27, 1995 and an amended class action complaint,
captioned IN RE SUN HEALTHCARE GROUP, INC. LITIGATION (the "Complaint"), was
filed in the United States District Court for the District of New Mexico on
January 26, 1996. The Complaint was purportedly brought on behalf of all persons
who either purchased shares of the Company's common stock between October 26,
1994 and June 27, 1995, or who exchanged their shares of common stock of
F-26
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) OTHER EVENTS (CONTINUED)
CareerStaff for shares of the Company's common stock pursuant to a merger
agreement between CareerStaff and the Company. The Complaints allege that
defendants misrepresented or failed to disclose material facts about the OIG
investigation and about the Company's operations and financial results, which
plaintiffs contend artificially inflated the price of the Company's securities.
In October 1996, the Company reached an agreement in principle to settle
these class action lawsuits which resulted in the Company recording a
$24,000,000 pretax charge relating to the settlement. The settlement is subject
to the execution of definitive documentation and court approval. The Company
will receive $9,000,000 from its director and officers liability insurance
carrier for its claims submitted in connection with the settlement.
On or about January 23, 1996, two former stockholders of Golden Care filed a
lawsuit (the "Golden Care Litigation") against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of Indiana. Plaintiffs allege, among other things, that the Company did
not disclose material facts concerning the OIG investigation and that the
Company's financial results were misstated. The Complaint purports to state
claims, INTER ALIA, under Federal and state securities laws and for breach of
contract, including a breach of the registration rights agreement pursuant to
which Sun agreed to register the shares for resale by such former Golden Care
stockholders. Plaintiffs purport to seek recission, unspecified compensatory
damages, punitive damages and other relief. By Order dated October 11, 1996, the
court granted in part and denied in part defendants' motion to dismiss. The
Company believes it has meritorious defenses to the Complaint. There can be no
assurance that the Golden Care Litigation will not have an impact on the
Company's accounting for the merger.
The Company believes the Golden Care Litigation will not have a material
adverse impact on its financial condition or results of operations, although the
unfavorable resolution of any of these actions in any reporting period could
have a material adverse impact on the Company's results of operations for that
period.
(15) SUMMARIZED FINANCIAL INFORMATION
The Company acquired Mediplex on June 23, 1994 and became a co-obligor with
Mediplex with respect to the 6 1/2% Debentures and the 11 3/4% Debentures
subsequent to the acquisition (see Notes 2 and 6). Summarized financial
information of Mediplex is provided below (in thousands):
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Current assets.................................................................. $ 103,629 $ 130,794
Noncurrent assets............................................................... 429,555 461,592
Current liabilities............................................................. 11,910 34,823
Noncurrent liabilities.......................................................... 83,370 91,150
Due to parent................................................................... 205,306 168,222
F-27
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
The results of operations of Mediplex subsequent to the date of acquisition
by Sun are labeled "Company," and the financial position and results of
operations of Mediplex for the period prior to the acquisition by Sun are
labeled "Predecessor."
PREDECESSOR
COMPANY COMPANY COMPANY JANUARY 1,
YEAR ENDED YEAR ENDED JUNE 24, 1994 TO 1994 JUNE 23,
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 1994
----------------- ----------------- ----------------- -------------
(IN THOUSANDS)
Net revenues............................. $ 457,748 $ 448,254 $ 205,300 $ 221,640
-------- -------- -------- -------------
Costs and expenses....................... 438,799 436,930 217,572 208,455
Impairment loss.......................... -- 52,621 -- --
-------- -------- -------- -------------
Earnings (loss) before intercompany
charges, income taxes and extraordinary
loss.................................... 18,949 (41,297) (12,272) 13,185
Intercompany charges(1).................. 50,133 35,005 -- --
-------- -------- -------- -------------
Earnings (loss) before income taxes and
extraordinary loss...................... (31,184) (76,302) (12,272) 13,185
Income taxes (benefit)................... (9,757) (7,432) (8,909) 3,645
-------- -------- -------- -------------
Net earnings (loss) before extraordinary
loss.................................... (21,427) (68,870) (3,363) 9,540
Extraordinary loss, net of income tax
benefit................................. -- (3,413) -- --
-------- -------- -------- -------------
Net earnings (loss)...................... $ (21,427) $ (72,283) $ (3,363) $ 9,540
-------- -------- -------- -------------
-------- -------- -------- -------------
- ------------------------
(1) Through various intercompany agreements entered into by Sun and Mediplex,
Sun provides management services, licenses the use of its trademarks and
acts on behalf of Mediplex to make financing available for its operations.
Sun charged Mediplex for management services totaling $29,003,000 and
$20,478,000 for the years ended December 31, 1996 and 1995, respectively. On
September 30, 1995, Sun and Mediplex finalized licensing agreements and
financing agreements which were effective January 1, 1995. Royalty fees
charged to Mediplex for the years ended December 31, 1996 and 1995, for the
use of Sun trademarks were $6,681,000 and $4,725,000, respectively.
Intercompany interest charged to Mediplex for the years ended December 31,
1996 and 1995, for advances from Sun was $14,449,000 and $9,802,000,
respectively. During 1994, Sun did not charge Mediplex for these same
services.
F-28
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited consolidated quarterly financial information follows
(in thousands, except per share data):
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER(3) QUARTER(4)
----------- ----------- ----------- -----------
Total net revenues............................................ $ 320,291 $ 325,452 $ 340,508 $ 330,057
Earnings (loss) before income taxes........................... 25,565 27,276 4,231 (4,606)
Net earnings (loss)........................................... 15,339 16,366 (5,562) (4,607)
Net earnings (loss) per share
Fully diluted(2)............................................ $ 0.31 $ 0.34 $ (0.12) $ (0.10)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(5) QUARTER(6) QUARTER QUARTER(7)
----------- ----------- ----------- -----------
Total net revenues............................................ $ 256,734 $ 278,980 $ 289,273 $ 310,521
Earnings (loss) before income taxes and extraordinary loss.... 20,013 19,306 27,359 (53,884)
Net earnings (loss) before extraordinary loss................. 10,826 8,741 16,415 (56,320)
Net earnings (loss) before extraordinary loss(1).............. 10,541 8,796 16,415 (56,320)
Extraordinary loss............................................ (3,413) -- -- --
----------- ----------- ----------- -----------
Net earnings (loss)(1)........................................ $ 7,128 $ 8,796 $ 16,415 $ (56,320)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net earnings (loss) per share
Fully diluted(1)(2)
Net earnings (loss) per share before extraordinary
loss(1)(2).............................................. $ 0.21 $ 0.18 $ 0.33 ($ 1.18)
Extraordinary loss........................................ (0.06) -- -- --
----------- ----------- ----------- -----------
Net earnings (loss)(1)(2)................................. $ 0.15 $ 0.18 $ 0.33 ($ 1.18)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- ------------------------
(1) A provision for pro forma income taxes has been reflected in the
consolidated quarterly financial information for periods in which certain
entities were not subject to Federal and state income taxes (See Note 9).
(2) Earnings per share are computed independently for each of the quarters
presented (See Note 1(o)).
(3) The third quarter of 1996 includes a $24,000,000 charge to settle certain of
the lawsuits brought by shareholders (see Note 14).
(4) The fourth quarter of 1996 includes a net $4,750,000 benefit which consists
of $9,000,000 the Company will receive from its director and officers
liability insurance carrier and a $4,250,000 charge related to continuing
litigations and investigation costs (see Note 14).
(5) The first quarter of 1995 includes a charge of $3,256,000 in connection with
a payment of an inducement fee to effect the conversion in January 1995 of
$39,449,000 of the 6 1/2 Debentures. This quarter also includes an
extraordinary charge of $3,413,000, net of the related tax benefit, in
connection with the tender offer of the 11 3/4 Notes. (See Note 6).
F-29
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(6) The second quarter of 1995 includes $5,800,000 of transaction related merger
costs incurred in connection with the merger of the Company with CareerStaff
and Golden Care (see Note 2).
(7) The fourth quarter of 1995 includes a $59,000,000 impairment loss recorded
by the Company which primarily relates to goodwill associated with six of
the forty facilities acquired in the acquisition of Mediplex (see Note
1(g)). The quarter also includes a charge of $4,006,000 relating to averting
a strike and negotiating new contracts for certain unionized homes in
Connecticut and a charge of $5,505,000 relating to monitoring and responding
to the investigation by the OIG and legal fees resulting from the
shareholder litigation. (See Notes 1(j) and 1(k)).
(17) GEOGRAPHIC SEGMENT INFORMATION
The Company operates predominantly in the long-term care segment of the
healthcare industry. The Company is a provider of long-term, subacute and
related ancillary care services to nursing home patients.
In addition to the services provided in the United States, the Company
provides services in the United Kingdom and Canada.
A summary of the Company's operations by geographic area is presented below
(in thousands):
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
UNITED UNITED
STATES KINGDOM CANADA CONSOLIDATED
------------ --------- --------- ------------
Net revenues.................................................... $ 1,255,323 $ 42,156 $ 18,829 $1,316,308
Operating profits............................................... 74,894 2,179 (382) 76,691
Equity in earnings of Ashbourne................................. 1,674
Interest expense, net........................................... 25,899
------------
Consolidated earnings before income taxes....................... 52,466
------------
------------
Total assets.................................................... 1,033,804 168,578 27,044 1,229,426
Capital expenditures............................................ 56,962 18,699 562 76,223
Depreciation and amortization................................... 30,436 1,851 1,530 33,817
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
UNITED UNITED
STATES KINGDOM CANADA CONSOLIDATED
------------ --------- --------- ------------
Net revenues.................................................... $ 1,108,436 $ 26,240 $ 832 $1,135,508
Operating profits............................................... 30,430 3,561 (181) 33,810
Equity in earnings of Ashbourne................................. 813
Interest expense, net........................................... 21,829
------------
Consolidated earnings before income taxes....................... 12,794
------------
------------
Total assets.................................................... 952,191 76,607 13,705 1,042,503
Capital expenditures............................................ 61,901 11,565 31 73,497
Depreciation and amortization................................... 25,771 1,854 109 27,734
Revenues from foreign operations and identifiable assets of foreign
operations were immaterial to the Company in 1994.
F-30
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) SUBSEQUENT EVENTS
On February 18, 1997, the Company signed definitive agreements with each of
Retirement Care Associates, Inc. ("Retirement Care") and Contour Medical, Inc.
("Contour"), under which the Company agreed to acquire Retirement Care and its
approximately 65% owned subsidiary, Contour. The agreements call for the Company
to issue 0.6625 shares of common stock in exchange for each outstanding share of
Retirement Care common stock (subject to adjustment as provided in the
agreement) and for the Company to pay $8.50 per share in cash, stock or a
combination of cash and stock (at the election of the Company) for the remaining
35% of Contour not presently owned by Retirement Care. The acquisition of
Retirement Care is expected to be accounted for as a pooling of interests and
the acquisition of Contour is expected to be accounted for as a purchase.
F-31
SCHEDULE II
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
----------------------------
COLUMN B ADDITIONS COLUMN E
----------- ---------------------------- COLUMN D -----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO ----------- BALANCE AT
- ------------------------------------------------ BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE (1) DESCRIBE PERIOD
- ------------------------------------------------ ----------- ----------- --------------- ----------- -----------
(IN THOUSANDS)
Year ended December 31, 1996:
Allowance for doubtful accounts................. $ 11,035 $ 14,970 $ 1,394 ($ 10,522) $ 16,877
----------- ----------- ------ ----------- -----------
----------- ----------- ------ ----------- -----------
Year ended December 31, 1995:
Allowance for doubtful accounts................. $ 9,508 $ 14,623 $ 743 ($ 13,839) $ 11,035
----------- ----------- ------ ----------- -----------
----------- ----------- ------ ----------- -----------
Year ended December 31, 1994:
Allowance for doubtful accounts................. $ 1,129 $ 27,632 $ 5,934 ($ 25,187) $ 9,508
----------- ----------- ------ ----------- -----------
----------- ----------- ------ ----------- -----------
- ------------------------
(1) Represents the allowance for doubtful accounts of acquired entities at the
date of acquisition.
F-32
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
2.1(1) Preincorporation Agreement dated as of April 13, 1993 between Sun and Andrew L.
Turner, Nora L. Turner and Elizabeth L. Keefer, as Trustee of Turner's
Children's Trust No. 3
2.2(2)(7) Agreement and Plan of Merger dated January 27, 1994, by and among Sun, Sun
Acquisition Corporation, The Mediplex Group, Inc., Abraham D. Gosman and Andrew
L. Turner, as amended. Filed without schedules attached.
2.3(2) Asset Sale Agreement dated January 27, 1994 by and among Mediplex, Abraham D.
Gosman and Sun
2.4(1) Plan or Reorganization and Merger Agreement by and between Honorcare Corporation.
Don A. Karchmer, Thomas E. Stewart, John E. Bingaman and James W. Campbell, Sun
and Sunrise
2.5(15) Agreement and Plan of Merger dated as of April 27, 1995 by and between Golden
Care, Inc., Golden Acquisition Corporation and Sun
2.6(15) First Amendment to Agreement and Plan of Merger dated as of May 4, 1995 by and
between Golden Care, Inc., Golden Acquisition Corporation and Sun
2.7(16) Agreement and Plan of Merger dated March 30, 1995 by and between Sun, Sun
Acquisition Corporation and CareerStaff Unlimited, Inc.
2.8(16) First Amendment to Agreement and Plan of Merger dated April 7, 1995 by and between
Sun, Sun Acquisition Corporation and CareerStaff Unlimited, Inc.
2.9(15) Second Amendment to Agreement and Plan of Merger dated May 11, 1995 by and between
Sun, Sun Acquisition Corporation and CareerStaff Unlimited, Inc.
2.10(13) Share Purchase Agreement dated as of November 30, 1995 among Sun, Columbia Health
Care Inc. and the Vendors named therein. Schedule 14: Form of Warrant
2.11(10) Investment and Shareholders' Agreement between Sun Healthcare Group, Inc., Sun
Healthcare Group International Ltd., Exceler Health Care Group PLC, Guernroy
Limited, John Ernest Moreton, The Alexanders and the Optionholders relating to
Exceler Health Care Group PLC, dated September 7, 1994
2.12(14) Deed of Amendment and Instrument relating to Exceler Health Care Group PLC dated
February 15, 1995
2.13(24) Agreement and Plan of Merger and Reorganization, dated as of February 17, 1997
among Sun Healthcare Group, Inc., Peach Acquisition Corporation and Retirement
Care Associates, Inc.
2.14(24) Agreement and Plan of Merger and Reorganization, dated as of February 17, 1997
among Sun Healthcare Group, Inc., Nectarine Acquisition Corporation and Contour
Medical, Inc.
3.1(1) Certificate of Incorporation of Sun
3.2(1)(9) Bylaws of Sun, as amended
3.3(21) Certificate of Amendment to Certificate of Incorporation of Sun dated April 15,
1993
3.4(6) Certificate of Amendment to Certificate of Incorporation of Sun dated June 23,
1994
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
4.1(3) Fiscal Agency Agreement dated as of March 1, 1994 between Sun and NationsBank of
Texas, N.A., as Fiscal Agent.
4.2(6) Amended and Restated Indenture, dated October 1, 1994, among Sun, The Mediplex
Group, Inc. and Fleet Bank of Massachusetts, N.A. as Trustee
4.3(6) Amended and Restated First Supplemental Indenture to Amended and Restated
Indenture, dated October 1, 1994, among Sun, The Mediplex Group, Inc. and Fleet
Bank of Massachusetts, N.A. as Trustee (6 1/2% Convertible Subordinated
Debentures due 2003)
4.4(17) Form of Rights Agreement, dated as of June 2, 1995, between Sun and Boatmen's
Trust Company, which includes the form of Certificate of Designations for the
Series A Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit
B and the form of Summary of Preferred Stock Purchase Rights as Exhibit C.
4.5(18) First Amendment to Rights Agreement, dated as of August 11, 1995, amending the
Rights Agreement, dated as of June 2, 1995, between Sun and Boatmen's Trust
Company
10.1(4) Lease Agreement dated as of August 31, 1996, by and between Karan Associates
("Lessee") and Campbell Care of Wylie, Inc., Assignment of Lease dated November
20, 1989 by and between Campbell Care of Wylie, Inc., and Honorcare Corporation
("Lessee"), with First Lease Addendum dated August 31, 1986, Second Addendum
dated January 9, 1987, Third Addendum dated November 30, 1989 and Fourth
Addendum dated July 12, 1993, and Assignment Agreement dated as of July 13,
1993, by and between Honorcare Corporation ("Assignor") and Sun Healthcare
Corporation ("Assignee") (Hillcrest Manor Nursing Center)
10.2(21) Lease Agreement for West Magic Care Center dated as of August 1, 1987, between
Skyview Associates ("Lessor") and Don Bybee and A. Keith Holloway ("Lessee")
10.3(1) Sublease, Assumption and Consent Agreement for Coronado Care Center dated as of
May 31, 1990, among Phoenix Nursing Home Limited Partnership ("Lessor"), Horizon
Healthcare Corporation ("Lessee/ Sublessor") and Sunrise ("Sublessee") pursuant
to a Lease dated December 18, 1987 between Lessor and Lessee (Lease attached as
Exhibit)
10.4(1) Lease Agreement for East Mesa Care Center dated as of September 30, 1990, between
East Mesa Associates Limited Partnership ("Lessor") and Sunrise ("Lessee")
10.5(1) Assignment and Assumption of Lease with Consent of Lessor for Torrington
Extend-A-Care Center dated as of November 1, 1990, between Beverly
Enterprises-Connecticut, Inc. ("Assignor/Lessee"), Turner Enterprises, Inc.
("Assignee"), Andrew L. Turner and Nora Turner ("Guarantors"), Harvey J. Angell
and Zev Karkomi ("Special Guarantors") and Beverly Investment Properties, Inc.
("Lessor") (Lease attached)
10.6(1) Lease Agreement for Mercer Island Care Center dated as of July, 1991, among Mercer
View Convalescent Center, Tenants-in-Common ("Lessor"), Sunrise ("Lessee") and
Andrew L. Turner and Nora Turner, husband and wife ("Guarantor")
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.7(1) Lease Agreement for Bayside Health and Rehabilitation Center dated as of July 26,
1991, between Bellingham Associates Limited Partnership ("Lessor") and Sunrise
("Lessee")
10.8(4) Lease Agreement for the Coronado Care Center addition, dated as of August 30,
1991, by and between Phoenix Nursing Home Limited Partnership II ("Lessor") and
Sunrise ("Lessee")
10.9(1) Lease Agreement for Whispering Pines Care Center and Valley Rehabilitation Center
dated as of October 31, 1991, between Belle Mountain Associates Limited
Partnership ("Lessor") and Sunrise ("Lessee")
10.10(1) Lease Agreement for Menlo Park Healthcare Center dated as of November 1, 1991,
between Oregon Associates Limited Partnership ("Lessor") and Sunrise ("Lessee")
10.11(1) Sublease Agreement for Hillside Living Center d/b/a Hillside Healthcare Center
dated as of March 1, 1992, between Elite Care Corporation ("Sublessor") and
Turner Enterprises, Inc. ("Sublessee") (Lease attached as Exhibit)
10.12(1) Sublease Agreement for Crown Manor Living Center d/b/a Crown Manor Healthcare
Center dated as of March 1, 1992, between Elite Care Corporation ("Sublessor")
and Turner Enterprises, Inc. ("Sublessee") (Lease attached as Exhibit)
10.13(1) Sublease Agreement for Colonial Manor Living Center d/b/a Colonial Manor
Healthcare Center dated as of March 1, 1992, between Elite Care Corporation
("Sublessor") and Turner Enterprises, Inc. ("Sublessee") (Lease attached as
Exhibit)
10.14(1) Sublease Agreement for Douglas Living Center d/b/a Douglas Healthcare Center dated
as of March 1, 1992, between Elite Care Corporation ("Sublessor") and Turner
Enterprises, Inc. ("Sublessee") (Lease attached as Exhibit)
10.15(1) Lease Agreement for Columbia View Nursing Home dated as of June 30, 1992, between
Columbia Associates Limited Partnership ("Lessor") and Turner Enterprises, Inc.
("Lessee")
10.16(1) Lease Agreement for Adams House Healthcare Center dated as of October 1, 1992,
between Adams Connecticut Associates Limited Partnership ("Lessor") and Turner
Enterprises, Inc. ("Lessee")
10.17(1) Lease Agreement for San Juan Care Center and Burton Care Center dated as of
October 31, 1992, by and between Zev Karkomi and Jerold Ruskin (collectively,
the "Lessors") and Sunrise ("Lessee")
10.18(1) Lease Agreement for Park Villa Convalescent Center dated as of April 1, 1993,
between LTC Properties, Inc. ("Lessor") and Sunrise ("Lessee")
10.19(4) Lease Agreement dated as of July 13, 1993, by and between Angelina Associates
("Lessor") and Honorcare Corporation ("Lessee"), with Assignment Agreement dated
as of July 13, 1993 by and between Honorcare Corporation ("Assignor") and Sun
Healthcare Corporation ("Assignee") (Angelina Facility)
10.20(4) Lease Agreement dated as of July 13, 1993, by and between July Associates IV
("Lessor") and Honorcare Corporation ("Lessee"), with Assignment Agreement dated
as of July 13, 1993, by and between Honorcare Corporation ("Assignor") and Sun
Healthcare Corporation ("Assignee") (Park Plaza)
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.21(4) Lease Agreement dated as of July 13, 1993, by and between Angelina Associates
("Lessor") and Honorcare Corporation ("Lessee"), with Assignment Agreement dated
as of July 13, 1993, by and between Honorcare Corporation ("Assignor") and Sun
Healthcare Corporation ("Assignee") (Wells)
10.22(4) Lease Agreement dated as of July 13, 1993, by and between Angelina Associates
("Lessor") and Honorcare Corporation ("Lessee"), with Assignment Agreement dated
as of July 13, 1993, by and between Honorcare Corporation ("Assignor") and Sun
Healthcare Corporation ("Assignee") (Pineywood)
10.23(4) Lease Agreement dated as of July 13, 1993, by and between Golden Age Associates
("Lessor") and Honorcare Corporation ("Lessee") (Golden Age)
10.24(4) Lease Agreement dated as of July 13, 1993, by and between July Associates III
("Lessor") and Honorcare Corporation ("Lessee") (High Plains)
10.25(8) Lease Agreement dated as of July 30, 1993 between Zev Karkomi, Thunderbird
Associated Limited Partnership and Sunrise Healthcare Corporation
10.26(8) Lease Agreement dated as of September 22, 1993, as amended, between Carlinville
Associates and Sunrise Healthcare Corporation
10.27(5) Lease Agreement dated October 1993, by and between Salem Associates, Ltd.
("Lessor") and Sunrise ("Lessee") (Doctors Nursing Home)
10.28(5) Lease Agreement dated as of December 6, 1993, by and between Massachusetts Nursing
Homes Limited Partnership ("Lessor") and Sunrise ("Lessee")
10.29(4) Lease Assignment and Transfer of Operations Agreement dated as of December 30,
1993, by and between HEA of New Mexico, Inc. and Sunrise (Lease attached)
(Country Life Manor)
10.30(4) Lease Agreement dated as of January 1, 1994, by and between October Associates
("Lessor") and Sunrise ("Lessee") (Stanton Nursing Home)
10.31(4) Lease Agreement dated as of January 1, 1994, by and between Whitewright Associates
("Lessor") and Sunrise ("Lessee") (Campbell Care of Whitewright)
10.32(4) Lease Agreement dated as of January 1, 1994, by and between October Associates
("Lessor") and Sunrise ("Lessee") (Valley Mills Care Center)
10.33(4) Lease Agreement dated as of January 1, 1994, by and between October Associates
("Lessor") and Sunrise ("Lessee") (Moody Care Center)
10.34(7) Lease Agreement dated as of April 26, 1994, by and between Sumner Nursing Home,
L.L.C. and Sunrise
10.35(6) Lease Agreement by and between Bellingham II Associates Limited Partnership and
Sunrise Healthcare Corporation, dated May 31, 1994
10.36(6) Amendment and Restatement of Facility Lease Agreement [Lenox Hill]-- Meditirust of
Lynn, Inc. and Mediplex Rehabilitation of Massachusetts, Inc., dated June 23,
1994
10.37(6) Amendment and Restatement of Facility Lease Agreement [Northampton]--New England
Finance Corporation and Mediplex Rehabilitation of Massachusetts, Inc., dated
June 23, 1994
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.38(6) Amendment and Restatement of Facility Lease Agreement [Woodcrest]-- Meditrust and
Mediplex of New Jersey, Inc., dated June 23, 1994
10.39(6) Amendment and Restatement of Facility Lease Agreement [Westport]-- Meditrust and
Mediplex of Connecticut, Inc., dated June 23, 1994
10.40(6) Amendment and Restatement of Facility Lease Agreement [Newton]-- Meditrust and
Mediplex of Massachusetts, Inc., dated June 23, 1994
10.41(6) Amendment and Restatement of Facility Lease Agreement [Wilmington]--Meditrust and
Mediplex of Massachusetts, Inc., dated June 23, 1994
10.42(6) Amendment and Restatement of Facility Lease Agreement [Stamford] by and between
G-WZ of Stamford, Inc. and Meditrust Mortgage Investments, Inc., dated June 23,
1994
10.43(6) Amendment and Restatement of Facility Lease Agreement [Cheshire]-- Meditrust and
Mediplex of Connecticut, Inc., dated June 23, 1994
10.44(6) Amendment and Restatement of Facility Lease Agreement [East Longmeadow]--Meditrust
and Quality Nursing Care of Massachusetts, Inc., dated June 23, 1994
10.45(6) Amendment and Restatement of Facility Lease Agreement [Wethersfield]--Meditrust
and Mediplex of Connecticut, Inc., dated June 23, 1994
10.46(6) Amendment and Restatement of Facility Lease Agreement [Danbury]-- Meditrust and
Mediplex of Connecticut, Inc., dated June 23, 1994
10.47(6) Amendment and Restatement of Facility Lease Agreement [Manatee]-- Meditrust and
Manatee Springs Nursing Center, Inc., dated June 23, 1994
10.48(6) Amendment and Restatement of Facility Lease Agreement [Camden]-- Plaza Medical
Nursing Facility and P.M.N.F. Management, Inc., dated June 23, 1994
10.49(6) Facility Lease Agreement [Washington]--Pacific Finance Corporation and Sunrise
Healthcare Corporation, dated June 23, 1994
10.50(6) Amendment and Restatement of Facility Lease Agreement [Darien]--New England
Finance Corporation and Mediplex of Connecticut, Inc., dated June 23, 1994
10.51(6) Amendment and Restatement of Facility Lease Agreement [Randolph]-- Meditrust and
Mediplex of Massachusetts, Inc., dated June 23, 1994
10.52(6) Amendment and Restatement of Facility Lease Agreement [Peabody]-- Meditrust and
Mediplex of Massachusetts, Inc., dated June 23, 1994
10.53(6) Amendment and Restatement of Facility Lease Agreement [Newington]-- Meditrust and
Mediplex of Connecticut, Inc., dated June 23, 1994
10.54(6) Amendment and Restatement of Facility Lease Agreement [Beverly]-- Meditrust and
Mediplex of Massachusetts, Inc., dated June 23, 1994
10.55(6) Facility Lease Agreement [Weymouth]--Meditrust of Massachusetts, Inc. and Mediplex
of Massachusetts, Inc., dated June 23, 1994
10.56(6) Amendment and Restatement of Facility Lease Agreement [Lexington]-- Meditrust and
Mediplex of Massachusetts, Inc., dated June 23, 1994
10.57(6) Amendment and Restatement of Facility Lease Agreement [Michigan]-- Meditrust
TriStates, Inc. and Mediplex of Ohio, Inc., dated June 23, 1994
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.58(6) Amendment and Restatement of Facility Lease Agreement [Christian Hill]--Meditrust
of Massachusetts, Inc. and Mediplex Rehabilitation of Massachusetts, Inc., dated
June 23, 1994
10.59(6) Amendment and Restatement of Facility Lease Agreement [Arkansas]-- Meditrust of
Benton, Inc. and Mediplex Management of Texas, Inc., dated June 23, 1994
10.60(6) Amendment and Restatement of Facility Lease Agreement [Holyoke]-- Meditrust of
Massachusetts, Inc. and Mediplex Rehabilitation of Massachusetts, Inc., dated
June 23, 1994
10.61(6) Amendment and Restatement of Facility Lease Agreement [Southern Connecticut],
dated June 23, 1994, between New England Finance Corporation and Mediplex of
Connecticut, Inc.
10.62(6) Amendment and Restatement of Facility Lease Agreement [Southbury], dated June 23,
1994, between New England Finance Corporation and Mediplex of Connecticut, Inc.
10.63(6) Facility Lease Agreement [Bowling Green], dated June 23, 1994, between Meditrust
of Kentucky, Inc. and Mediplex of Kentucky, Inc.
10.64(6) Facility Lease Agreement [Milford], dated June 23, 1994, between Meditrust of
Connecticut, Inc. and Mediplex of Connecticut, Inc.
10.65(6) Lease and Security Agreement by and between Nationwide Health Properties, Inc. and
Sunrise Healthcare Corporation, dated September 1, 1994
10.66(6) Lease Agreement by and between Sumner Hills L.L.C. and Sunrise Healthcare
Corporation, dated September 9, 1994
10.67(20) Lease Agreement for Wheeler Care Center, dated as of July 24, 1995, by and between
Wheeler Healthcare Associates, L.L.C., a Texas limited liability company
("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.68(20) Agreement with Respect to and Second Amendment of Lease Agreement, dated as of
September 1, 1995, by and between Massachusetts Nursing Homes Limited
Partnership ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.69(20) Third Amendment of Lease Agreement, dated as of September 1, 1995, by and between
Massachusetts Nursing Homes Limited Partnership ("Lessor") and Sunrise
Healthcare Corporation ("Lessee").
10.70(20) Lease Agreement for Clifton Care Center, dated as of September 13, 1995, between
Missouri Associates ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.71(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust
of Massachusetts, Inc. ("Lessor") and New Bedford Nursing Center, Inc.
("Lessee") (Guaranty of Sun attached as Exhibit).
10.72(20) Facility Sublease Agreement, dated as of September 30, 1995, by and between
Meditrust of New Jersey, Inc., as Sublessor, and West Jersey/ Mediplex
Rehabilitation Limited Partnership (Guaranty of Sun attached as Exhibit).
10.73(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust
of Massachusetts, Inc. ("Lessor") and Mediplex of Massachusetts, Inc. ("Lessee")
(Guaranty of Sun attached as Exhibit).
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.74(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust
of Massachusetts, Inc. ("Lessor") and Sundance Rehabilitation Corporation
("Lessee") (Guaranty of Sun attached as Exhibit).
10.75(20) Facility Lease Agreement, dated as of September 30, 1995, by and between Meditrust
of Massachusetts, Inc. ("Lessor") and Mediplex of Concord, Inc. ("Lessee")
(Guaranty of Sun attached as Exhibit).
10.76(20) Indemnity Agreement (New Bedford), dated as of September 30, 1995, by and among
New Bedford Nursing Center, Inc. ("Seller"), Sun and Meditrust of Massachusetts,
Inc. ("Buyer").
10.77(20) Indemnity Agreement (Marlton), dated as of September 30, 1995, by and among West
Jersey/Mediplex Rehabilitation Limited Partnership, as Assignor, Sun and
Meditrust of New Jersey, Inc., as Assignee.
10.78(20) Indemnity Agreement (Concord), dated as of September 30, 1995, by and among
Mediplex of Massachusetts, Inc. ("Seller"), and Meditrust of Massachusetts, Inc.
("Buyer").
10.79(20) Indemnity Agreement (Concord-1B), dated as of September 30, 1995, by and among
Sundance Rehabilitation Corporation ("Seller"), Sun and Meditrust of
Massachusetts, Inc. ("Buyer").
10.80(20) Indemnity Agreement (Concord-2A & 2B), dated as of September 30, 1995, by and
among Mediplex of Concord, Inc. ("Seller"), Sun and Meditrust of Massachusetts,
Inc. ("Buyer").
10.81(20) Indemnity Agreement (Oradell), dated as of September 30, 1995, by and among Bergen
Eldercare, Inc. ("Seller"), Sun and Meditrust of New Jersey, Inc. ("Buyer").
10.83(21) First Amendment to Lease Agreement for West Magic Care Center dated as of January
1, 1996, between Skyview Associates ("Lessor") and Sunrise Healthcare
Corporation ("Lessee")
10.84(21) Unconditional Guaranty of Lease dated as of January 1, 1996, between Sun
Healthcare Group, Inc. ("Guarantor") and Skyview Associates ("Lessor")
10.85* Lease Agreement for Heritage Heights dated as of March 1, 1996, by and between Tor
Associates ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.86* Unconditional Guaranty of Lease dated March 1, 1996, by and between Sun Healthcare
Group, Inc. ("Guarantor") and Tor Associates ("Lessor").
10.87(21) Omnibus Amendment to Facility Lease Agreements, dated as of March 28, 1996, by and
between certain subsidiaries of The Mediplex Group, Inc. and certain subsidiary
of Sun.
10.88(23) Second Amendment to Lease, dated as of June 1, 1996, by and between East Mesa
Associates Limited Partnership ("Lesser") and Sunrise Healthcare Corporation
("Lessee").
10.89(22) Lease Agreement dated July 1, 1996 between Oak/Jones, Inc. and Sunrise Healthcare
Corporation for Oaks Health & Rehabilitation Center.
10.90(22) Lease Agreement dated July 1, 1996 between Oak/Jones, Inc. and Sunrise Healthcare
Corporation for Jones Health & Rehabilitation Center.
10.91(23) First Amendment to Lease dated as of August 1, 1996, by and between Sumner Nursing
Home, L.L.C. ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.92(23) Sub-Sublease Agreement, dated as of August 22, 1996, by and between Yuba Nursing
Homes, Inc. ("Lessor") and Sunrise Healthcare Corporation ("Lessee").
10.93* Lease Agreement for Casa del Sol Nursing Home dated as of November 26, 1996, by
and between Raton Property Limited Company ("Lessor") and Sunrise Healthcare
Corporation ("Lessee").
10.94* Lease Agreement for Blue Mountain Convalescent Center dated as of November 30,
1996, by and between Washington Associates ("Lessor") and Sunrise Healthcare
Corporation ("Lessee").
10.95* Unconditional Guaranty of Lease dated as of November 30, 1996, by and between Sun
Healthcare Group, Inc. ("Guarantor"), and Washington Associates ("Lessor").
10.96* Lease Agreement for Magic Valley Manor dated as of November 30, 1996, by and
between Idaho Associates L.L.C. ("Lessor") and Sunrise Healthcare Corporation
("Lessee").
10.97* Lease Agreement for Payette Lakes Care Center dated as of November 30, 1996, by
and between Idaho Associates L.L.C. ("Lessor") and Sunrise Healthcare
Corporation ("Lessee").
10.98* Lease Agreement for Valley Rehabilitation and Living Center dated as of November
30, 1996, by and between Idaho Associates L.L.C. ("Lessor") and Sunrise
Healthcare Corporation ("Lessee").
10.99* Unconditional Guaranty of Lease dated as of November 30, 1996 given by Sun
Healthcare Group, Inc. ("Guarantor") to Idaho Associates, L.L.C. ("Lessor")
relating to Magic Valley Manor.
10.100* Unconditional Guaranty of Lease dated as of November 30, 1996 given by Sun
Healthcare Group, Inc. ("Guarantor") to Idaho Associates, L.L.C. ("Lessor")
relating to Payette Lakes Care Center.
10.101* Unconditional Guaranty of Lease dated as of November 30, 1996 given by Sun
Healthcare Group, Inc. ("Guarantor") to Idaho Associates, L.L.C. ("Lessor")
relating to Valley Rehabilitation and Living Center.
10.102(4) Form of Management Agreement between GF/Massachusetts, Inc. and Sunrise
10.103(6) Amendment and Restatement of Loan Agreement [Brookline] by and between Mediplex of
Massachusetts, Inc. and Meditrust Mortgage Investments, Inc., dated June 23,
1994
10.104(6) Amendment and Restatement of Loan Agreement [Columbus] by and between Mediplex
Rehabilitation of Massachusetts, Inc. and Meditrust Mortgage Investments, Inc.,
dated June 23, 1994
10.105(6) Loan Agreement [Denver] by and between Mediplex of Colorado, Inc. and Valley View
Psychiatric Services, Inc. and Meditrust Mortgage Investments, Inc., dated June
23, 1994
10.106(21) Omnibus Amendment to Loan Agreements, dated as of March 28, 1996, by and between
certain subsidiaries of The Mediplex Group, Inc. and certain subsidiaries of
Sun.
10.107(22) Fourth Amended and Restated Credit Agreement among Sun Healthcare Group, Inc., The
Mediplex Group, Inc., certain lenders, certain co-agents, and NationsBank of
Texas, N.A., as Administrative Lender, dated October 29, 1996.
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------------- ---------------------------------------------------------------------------------- --------------
10.108* First Amendment to Fourth Amended and Restated Credit Agreement among Sun
Healthcare Group, Inc., The Mediplex Group, Inc., certain lenders, certain
co-agents, and NationsBank of Texas N.A., as Administrative Lender, dated
December 2, 1996.
10.109(14) First Amendment to Sun 1992 Director Stock Option Plan
10.110(1) Sun 1993 Combined Incentive and Nonqualified Stock Option Plan
10.111(1) Sun 1993 Directors Stock Option Plan
10.112(14) Amendments to Sun 1993 Combined Incentive and Nonqualified Stock Option Plan
10.113(21) Sun 1995 Non-Employee Directors' Stock Option Plan
10.114(21) Sun Employee Stock Purchase Plan
10.115(21) 1996 Combined Incentive and Nonqualified Stock Option Plan
10.116(1) Tax Indemnity Agreement between Sun, Sundance Rehabilitation Corporation, Turner
Enterprises, Inc. and Andrew L. Turner and Nora L. Turner
10.117(1) Form of Indemnity Agreement between Sun and each of Sun's Directors before July 3,
1996
10.118* Form of Indemnity Agreement between Sun and each of Sun's Directors from and after
July 3, 1996
10.119(1) Employment Agreement between Sun and Andrew L. Turner
10.120(1) Agreement as of May 5, 1993, between Sundance Rehabilitation Corporation and
Andrew L. Turner
10.121(4) Employment Agreement between Sun and John E. Bingaman
10.122(6) Termination of Employment Agreement and Consulting Agreement by and between Sun
Healthcare Group and John E. Bingaman
10.123* Severance Agreement between Sun and Andrew L. Turner dated January 1, 1997
10.124* Form of Severance Agreement entered into between Sun and Julie Collins, Susan
LaBelle, Robert Levin, Robert Murphy, Warren Schelling, Mark Wimer and Robert
Woltil
11.1* Computation of Earnings Per Share
21.1* Subsidiaries of the Registrant
23.1* Consent of Arthur Andersen LLP
27.1* Financial Data Schedule
- ------------------------
* Filed herewith.
(1) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-62670) on Form S-1.
(2) Incorporated by reference from exhibits to the Company's Form 8-K dated
January 27, 1994.
(3) Incorporated by reference from exhibits to the Company's Form 8-K dated
March 11, 1994.
(4) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.
(5) Incorporated by reference from exhibits to the Company's Form 10-Q/A-1 for
the quarter ended September 30, 1993.
(6) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended September 30, 1994.
(7) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-77522) on Form S-1.
(8) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-77272) on Form S-4.
(9) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-77870) on Form S-1.
(10) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-82296) on Form S-1.
(11) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-85194) on Form S-1.
(12) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-90248) on Form S-1.
(13) Incorporated by reference from exhibits to the Company's Registration
Statement (No. 33-96240) on Form S-3.
(14) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(15) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended March 31, 1995.
(16) Incorporated by reference to the Company's Form 8-K filed April 12, 1995.
(17) Incorporated by reference from exhibits to the Company's Form 8-A filed
June 6, 1995.
(18) Incorporated by reference from exhibits to the Company's Form 8-A/A-1
filed August 17, 1995.
(19) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended September 30, 1995.
(20) Incorporated by reference from exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(21) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended March 31, 1996.
(22) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended June 30, 1996.
(23) Incorporated by reference from exhibits to the Company's Form 10-Q for the
quarter ended September 30, 1996.
(24) Incorporated by reference from exhibits to the Company's Form 8-K dated
February 17, 1997.