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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, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
For the transition period from to
Commission file number 0-49663
SUN HEALTHCARE GROUP, INC.
Delaware |
85-0410612 |
18831 Von Karman, Suite 400
Irvine, CA 92612
(949) 255-7100
(Address and telephone number of Registrant)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Warrants to purchase Common Stock, $.01 par value per share
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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes [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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The aggregate market value of the Registrant's Common Stock held by nonaffiliates, based on the last sales price of such shares on the Over-the-Counter Bulletin Board on June 30, 2003, was approximately $12.8 million.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
On March 1, 2004, Sun Healthcare Group, Inc. had 14,559,818 outstanding shares of Common Stock.
Documents Incorporated by Reference: None
1
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
FORM 10-K
Page |
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PART I |
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Item 1. |
Business |
5 |
Item 2. |
Properties |
19 |
Item 3. |
Legal Proceedings |
21 |
Item 4. |
Submission of Matters to a Vote of Security Holders |
22 |
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Item 5. |
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
23 |
Item 6. |
Selected Financial Data |
23 |
Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of |
26 |
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
43 |
Item 8. |
Financial Statements and Supplementary Data |
43 |
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
43 |
Item 9A. |
Controls and Procedures |
43 |
PART III |
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Item 10. |
Directors and Executive Officers of the Registrant |
44 |
Item 11. |
Executive Compensation |
47 |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders' Matters |
50 |
Item 13. |
Certain Relationships and Related Transactions |
53 |
Item 14. |
Principal Accounting Fees and Services |
53 |
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Item 15. |
Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
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Signatures |
55 | |
SunBridge®, SunDance®, SunPlus®, CareerStaff Unlimited® and related names are registered trademarks of Sun Healthcare Group, Inc. and its subsidiaries.
___________________
2
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
References throughout this document to the Company include Sun Healthcare Group, Inc. and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission's "Plain English" guidelines, this Annual Report on Form 10-K has been written in the first person. In this document, the words "we," "our," "ours" and "us" refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.
Information provided in this Form 10-K contains "forward-looking" information as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). All statements regarding our expected future financial position, results of operations, cash flows, liquidity, financing plans, lease restructuring initiative, business strategy, budgets, projected costs and capital expenditures, competitive position, growth opportunities, plans and objectives of management for future operations and words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may" and other similar expressions are forward-looking statements. The forward-looking statements are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. We caution investors that any forward-looking state ments made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, those set forth below and elsewhere herein. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors:
- |
the financial performance of our facilities is dependent in part on Medicare and Medicaid reimbursements which could materially and adversely decrease in the future; |
- |
we continue to be self-insured for workers' compensation, health insurance and general and professional liability, and our costs associated with such insurances continue to increase; |
- |
government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations, could have an adverse impact to us; |
- |
we have liabilities and other claims asserted against us, including patient care liabilities (See "Item 3 - Legal Proceedings"); |
- |
the Bureau of Medi-Cal Fraud and Elder Abuse ("the BMFEA") continues to allege that we have violated the terms of the October 2001 Permanent Injunction and Final Judgment (See "Item 3 - Legal Proceedings"); |
- |
we are regularly scrutinized by other governmental agencies with respect to the operation of our healthcare facilities (See "Item 3 - Legal Proceedings"); |
- |
we operate in a competitive environment; |
- |
it is difficult to recruit and retain qualified employees in the long-term care industry; and
|
3 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES |
|
- |
the financial performance of our facilities is dependent in part on the occupancy percentages of the facilities, and there can be no assurance that our average occupancy percentage will remain at or above 90% (See "Item 2 - Properties"). |
See "Item 1 - Business" for a discussion of various circumstances affecting us, in particular, governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. The risks and uncertainties described above and under "Item 1 - Business" are not the only ones facing us. You should carefully consider the risks described herein before making any investment decisions to buy securities of Sun Healthcare Group, Inc. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of the foregoing risks or the risks described below actually occur, our business, financial position, results of operations and cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward-looking state ments will, in fact, transpire and, therefore, caution investors not to place undue reliance on them.
4
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PART I
Item 1. Business
Operations
General. We are one of the largest providers of long-term, subacute and related specialty healthcare services in the United States. We currently operate through various direct and indirect subsidiaries that engage in the following five principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, (iii) medical staffing services, (iv) home health services and (v) laboratory and radiology services. The following is a description of our current business segments and divested operations. Financial information for each of the business segments is set forth in "Note 16 - Segment Information" in our consolidated financial statements.
Inpatient Services. Our long-term and subacute care facilities provide inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. We provide 24-hour nursing care in these facilities by registered nurses, licensed practical nurses and certified nursing aides. As of March 1, 2004, we operated 108 long-term care facilities (consisting of 98 skilled nursing facilities, seven assisted living facilities and three specialty acute care hospitals) in 14 states with 11,007 licensed beds through our wholly owned subsidiary, SunBridge Healthcare Corporation and other subsidiaries (collectively, "SunBridge").
Our specialty acute rehabilitation hospitals provide a range of inpatient and outpatient services for people with traumatic brain injuries, strokes, arthritis, and other disabling conditions. Our assisted living facilities serve the elderly who do not need the level of nursing care provided by long-term or subacute care facilities, but who do need some assistance with the activities of daily living.
In an effort to improve our financial position and address our liquidity issues, in January 2003, we initiated efforts to restructure the portfolio of leases under which we operate most of our long-term care facilities. During the period January 1, 2003 to March 1, 2004, we divested 129 of our under-performing facilities. We have reached agreement with substantially all of the landlords of the divested facilities. We cannot predict the extent to which the remaining landlords of the divested and anticipated-to-be-divested facilities with whom we have not yet reached agreement will seek to assert leasehold or other damages; however, we do not anticipate that the total of any claims that may be asserted by those landlords will have a material adverse impact on our financial position. We have substantially completed the restructuring we commenced in January 2003.
Rehabilitation Therapy Services.
We provide rehabilitation therapy services primarily through SunDance Rehabilitation Corporation ("SunDance"). SunDance provides a broad array of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. As of March 1, 2004, SunDance provided rehabilitation therapy services to 455 facilities in 38 states, 354 of which were operated by nonaffiliated parties. SunDance also operates four outpatient rehabilitation clinics and one certified outpatient rehabilitation clinic (CORF) in Colorado. We also provide rehabilitative and special education services to pediatric clients as well as rehabilitation therapy services for adult home healthcare clients in the greater New York City metropolitan area through HTA of New York, Inc.Medical Staffing Services.
We are a nationwide provider of temporary medical staffing primarily through CareerStaff Unlimited, Inc. ("CareerStaff"). As of March 1, 2004, CareerStaff derived approximately 12% of its revenues from schools and governmental agencies, 40% from hospitals and other providers and 48% from skilled nursing facilities. CareerStaff provides (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians and (iv) related medical personnel. As of March 1, 2004, CareerStaff had 37 division offices which provided medical staffing services in major metropolitan areas, and one division office which specialized in the placement of temporary traveling therapists in smaller cities and rural areas.5
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Home Health
. As of March 1, 2004, we provided skilled nursing care, rehabilitation therapy and home infusion services to adult and pediatric patients in California and Ohio through SunPlus Home Health Services, Inc. ("SunPlus"). SunPlus also operates three licensed infusion therapy pharmacies in California.Laboratory and Radiology. Through SunAlliance Healthcare Services, Inc. ("SunAlliance"), we provide mobile radiology and medical laboratory services to skilled nursing facilities in Arizona, California, Colorado and Massachusetts.
Divested Operations. On November 7, 2003, Shared Healthcare Systems, Inc. ("SHS"), a majority- owned subsidiary, sold its software development assets to Accu-Med Services of Washington LLC, a wholly-owned subsidiary of Omnicare, Inc., for approximately $5.0 million in proceeds at closing and up to $0.5 million to be paid in cash in December 2004.
On July 15, 2003, we sold the assets of our pharmaceutical services operations, including substantially all of the assets of SunScript Pharmacy Corporation, to Omnicare, Inc. ("Omnicare") for $90.0 million, of which $75.0 million was received in cash at closing with up to $15.0 million in additional purchase price, payable to us on or before July 15, 2005 subject to fulfillment of the conditions described below. We simultaneously entered into agreements pursuant to which Omnicare would provide pharmacy services to our inpatient facilities (the "Pharmacy Agreements"). The $15.0 million additional purchase price is subject to reduction in the event that prior to payment: (i) we reject or modify one or more Pharmacy Agreements in a bankruptcy proceeding; (ii) the new operator of any of our divested facilities does not assume the same contract with Omnicare; and/or (iii) we breach the Pharmacy Agreements.
Emergence from Chapter 11 Bankruptcy Proceedings
On October 14, 1999 (the "Filing Date"), we commenced chapter 11 bankruptcy proceedings. On February 6, 2002, the Bankruptcy Court approved our Plan of Reorganization that was filed with the Bankruptcy Court on November 7, 2001. On February 28, 2002, we emerged from proceedings under the Bankruptcy Code pursuant to the terms of our Plan of Reorganization. (See "Note 1 - Nature of Business - Reorganization" in our consolidated financial statements.)
Under the chapter 11 proceedings commenced in 1999, certain claims against us in existence prior to the Filing Date were stayed while we continued our operations as a debtor-in-possession. These claims are reflected in the December 31, 2001 consolidated balance sheet as "liabilities subject to compromise." The payment of certain prepetition claims after the Filing Date (principally employee wages and benefits and payments to critical vendors and utilities) that were approved by the Bankruptcy Court reduced "liabilities subject to compromise." As part of our emergence from chapter 11 proceedings, all of the "liabilities subject to compromise" were discharged, reinstated or paid.
We have determined that, generally, the fair market value of the collateral was less than the principal amount of our secured prepetition debt obligations; accordingly, we discontinued accruing interest on many of those obligations as of the Filing Date.
6
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Overview of Current Financial Condition and Results
For the year ended and as of December 31, 2003, our net income was $0.4 million and our working capital deficit was $57.4 million. Our working capital position was significantly improved as a result of the net proceeds of $52.3 million received from our private placement of our common stock and warrants in February 2004, even after paying off the outstanding loan balance under our revolving senior loan agreement. We anticipate that our working capital position will be further improved by, among other things, refinancing $21.2 million of mortgage debt that matures on May 1, 2004, which is classified as a current liability. We are currently in negotiation to refinance these mortgages and expect the $21.2 million to be refinanced and/or retired in part, with the remaining balance reclassified as long- term debt.
As of March 1, 2004, we had cash and cash equivalents of approximately $40.1 million, no outstanding balance under our revolving loan agreement and approximately $31.0 million of funds available for borrowing under our revolving loan agreement. We believe that our existing cash reserves and availability for borrowing under our loan agreement will provide sufficient funds for our operations, capital expenditures and regularly scheduled debt service payments through the next twelve months.
We have reached agreement with substantially all of our landlords regarding the disposition of past due rent on our divested or to be divested facilities. On March 1, 2004, we entered into an Amended and Restated Master Lease Agreement with Omega Healthcare Investors, Inc. and various of its affiliates ("Omega"). Prior to our portfolio restructuring, we leased 51 facilities from Omega. Pursuant to the new Master Lease, we will continue to operate 30 facilities (including 23 long-term care facilities, two rehabilitation hospitals, and five behavioral facilities). Approximately $7.8 million of accrued past due rent as of March 1, 2004 and future rent obligations that would otherwise have become due under the existing master leases will be combined into "deferred base rent". That deferred base rent will bear interest at a floating rate equal to 375 basis points over the one year LIBOR rate, subject to a floor of 6% per annum. Interest will not be pa yable until January 2008, at which time interest thereafter accruing will be payable monthly in arrears. Omega has the right to convert the deferred base rent and accrued interest into 800,000 shares of our common stock, subject to anti-dilution adjustments for sales of shares we make at less than fair market value at the time of sale. We have the right to pay cash in an amount equal to the value of the stock in lieu of issuing the stock to Omega. If the average value of the common stock issuable to Omega under the new Master Lease exceeds 140% of the deferred base rent and interest accrued thereon over a period of 30 business days, we can require Omega to convert the deferred base rent into our common stock.
General Information
Sun Healthcare Group, Inc. was incorporated in 1993. Our principal executive offices are located at 18831 Von Karman, Suite 400, Irvine, CA 92612, and our telephone number is (949) 255-7100. We maintain a website at www.sunh.com. Through the "About Our Company," "Investor Information" and "SEC Filings" links on our website, we make available free of charge, as soon as reasonably practicable after such information has been filed or furnished to the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act.
7
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Revenues from Medicare, Medicaid and Other Sources
Revenue Sources. We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long-term care facilities that utilize our specialty medical services. The sources and amounts of our inpatient services revenues are determined by a number of factors, including the number of licensed beds and occupancy rates of our facilities, the acuity level of patients and the rates of reimbursement among payors. The following table sets forth the total revenues and percentage of revenues by payor source for our continuing operations, on a consolidated and on an inpatient operations only basis, for the years indicated (in thousands):
|
For the Year |
For the Ten Months Ended
|
For the Two Months Ended
|
For the Year
|
||||
2003 |
2002 |
2002 |
2001 |
|||||
Sources of Revenues |
||||||||
Medicaid |
$ 299,526 |
35.9% |
$ 244,951 |
36.1% |
$ 135,442 |
44.9% |
$ 940,110 |
45.3% |
Medicare |
213,129 |
25.6% |
176,660 |
26.0% |
76,577 |
25.4% |
536,113 |
25.8% |
Private pay and other (1) |
321,388 |
38.5% |
257,433 |
37.9% |
89,827 |
29.7% |
599,011 |
28.9% |
Total |
$ 834,043 |
100% |
$ 679,044 |
100% |
$ 301,846 |
100% |
$2,075,234 |
100% |
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===== |
======== |
==== |
|
For the Year
|
For the Ten Months Ended
|
For the Two Months Ended
|
For the Year
|
||||
2003 |
2002 |
2002 |
2001 |
|||||
Sources of Revenues |
||||||||
Medicaid |
$ 283,212 |
49.4% |
$ 232,249 |
48.6% |
$ 113,615 |
49.9% |
$ 809,756 |
50.3% |
Medicare |
161,742 |
28.2% |
137,764 |
28.8% |
66,725 |
29.3% |
484,276 |
30.1% |
Private pay and other (1) |
128,003 |
22.4% |
107,794 |
22.6% |
47,566 |
20.8% |
315,356 |
19.6% |
Total |
$ 572,957 |
100% |
$ 477,807 |
100% |
$ 227,906 |
100% |
$1,609,388 |
100% |
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________________ |
|
(1) |
Includes revenues from the provision of rehabilitation therapy and medical staffing services to nonaffiliated long-term and subacute facilities and not directly charged to Medicaid or Medicare. Nonaffiliated sources may themselves derive all or a portion of their revenues from Medicaid and/or Medicare. |
Changes in the mix of patients among the Medicaid, Medicare and private pay categories, and among different types of private pay sources, could significantly affect our revenues and results of operations. In addition, we cannot be certain that the facilities operated by us, or the provision of services and products by us, now, or in the future, will initially meet or continue to meet the requirements for participation in the Medicare and Medicaid programs. A loss of Medicare or Medicaid certification or a change in our reimbursement under Medicare or Medicaid could reduce our revenues and adversely affect our results of operations and cash flows.
Medicare is available to nearly every United States citizen 65 years of age and older and it is a broad program of health insurance designed to help the nation's elderly meet hospital, hospice, home health and other health care costs. Health insurance coverage extends to certain persons under age 65 who qualify as disabled and those having end-stage renal disease. Medicare includes three related health insurance programs: (i) hospital insurance ("Part A"); (ii) supplementary medical insurance ("Part B"); and (iii) a managed care option for beneficiaries who are entitled to Part A and enrolled in Part B ("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently administered by fiscal intermediaries (for Part A and some Part B services) and carriers (for Part B) under the direction of the Centers for Medicare and Medicaid Services ("CMS") (formerly the Health Care Finance Admini stration), a division of the Department of Health and Human Services ("HHS").
8
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
The following table sets forth the approximate average amounts of Medicare Part A revenues per patient, per day, recorded by our inpatient and hospital facilities for the years ended December 31:
Inpatient |
Hospital |
|
2003 |
$ 302.32 |
$ 910.80 |
2002 |
317.28 |
838.15 |
2001 |
319.11 |
739.88 |
Medicaid is a federal-state matching program, whereby the federal government, under a needs-based formula, matches funds provided by the participating states for medical assistance to "medically indigent" persons. The programs are administered by designated state agencies following federal and state rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates determined in accordance with each state's regulations. For skilled nursing facilities, most states pay prospectively determined per diem rates, and have some form of acuity adjustment. In addition to facility-based services, most states cover an array of medical ancillary services, including those services provided by institutional pharmacies. Payment methodologies for these services vary based upon state law and regulations permitted under federal rules.
Reduced Medicare Reimbursements.
Medicare reimburses our skilled nursing facilities under a prospective payment system ("PPS") for inpatient Medicare Part A covered services. PPS was adopted pursuant to the Balanced Budget Act of 1997 (the "1997 Act"). Under PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients, and such amount is determined by classifying each patient into one of 44 resource utilization groups ("RUG"). The nursing home industry came under financial pressure as a result of the implementation of PPS and other 1997 Act provisions. As a result, Congress enacted The Balanced Budget Refinement Act of 1999 ("BBRA") and the Medicare, Medicaid and SCHIP Benefits Improvement Act of 2000 ("BIPA") to provide some relief to the industry. The BBRA and BIPA required four Me dicare "add-on" payments: a 4.0% increase in per diem rates; a 16.7% increase in the nursing component of each RUG; a 20.0% increase for certain categories of high cost, medically complex patients; and a 6.7% increase for rehabilitation RUGs.On September 30, 2002, two of the add-on provisions of the Medicare payment regulations expired: the 4.0% add-on for all patient categories in the RUG system and the 16.7% add-on for nursing related costs. We estimate that our Medicare revenues decreased by approximately $23.8 million ($36.98 per patient day), for the twelve months ended December 31, 2003 as a result of the expiration of these add-ons. Approximately $9.3 million of these decreases related to the 127 inpatient facilities we divested over the same period. In addition to the elimination of the add-ons, CMS provided a 2.6% market basket increase in payments to skilled nursing facilities for the 2003 Federal fiscal year (October 1, 2002-September 30, 2003). We estimate that the market basket increase resulted in approximately $6.1 million ($9.49 per patient day) in increased revenue for the twelve months ended December 31, 2003. Approximately $2.4 million of these increases related to the 127 in patient facilities we divested over the same period. The net result of the expiration of the add-ons and the market basket increase is an estimated Medicare revenue decrease of approximately $17.7 million ($27.49 per patient day) for the twelve months ended December 31, 2003. Approximately $6.9 million of these decreases related to the 127 inpatient facilities we divested over the same period.
9
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
On August 4, 2003 CMS published a final rule in the Federal Register to update payment rates for federal fiscal year 2004 (October 1, 2003-September 30, 2004) by providing for a 3.0% increase of the annual update to the market basket and an additional 3.3% market basket increase to correct the underestimate of the market basket forecast in prior years. We estimate our Medicare revenues increased approximately $1.9 million ($19.75 per patient day) for the three months ended December 31, 2003 as a result of the combined increases. Approximately $0.1 million of these increases related to the 13 facilities we divested over the same period.
The remaining two add-on payments, the 6.7% increase for patients requiring intense rehabilitation and a 20.0% increase for patients requiring complex medical care, were scheduled to expire on the earlier of September 30, 2003 or at such time as CMS completes the case mix refinements. However, CMS published in the August 4, 2003 Federal Register its decision to extend the expiration date as research is not sufficiently advanced at the present time to implement refinements this year, thus leaving the current classification system in place for fiscal year 2004. The refinements are intended to ensure nursing homes are fairly and accurately reimbursed for taking care of medically complex patients. Although the add-ons will expire when these refinements are implemented, it is expected that the add-ons will be replaced by new payment rates that are not known at this time. If the add-ons expire and are not replaced by new payment rates, we estimate that our per ben eficiary per diems would decrease by approximately $24.87 per patient day. The loss of these add-ons would have a material adverse effect on our financial position, results of operations and cash flows. The actual revenue increase we experienced as a result of the two add-ons that did not expire was approximately $16.5 million for the year ended December 31, 2003. Approximately $6.8 million was related to the 127 inpatient facilities we divested over the same period.
Medicare Part B payments are generally adjusted annually, effective upon the calendar year beginning January 1 and ending December 31. The federal spending bill for fiscal 2003 allowed CMS to provide a 1.6% increase to the payment fee. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 authorized a 1.5% increase for fiscal year 2004. The increase would result in an estimated $0.7 million in additional revenue in 2004.
The 1997 Act also implemented a restriction applicable to Medicare Part B payments that would limit the amount of reimbursements we receive for rehabilitation therapy, referred to as therapy caps. BBRA and BIPA placed a moratorium on the therapy caps that expired on June 30, 2003. As a result of litigation in Federal District Court, CMS agreed to delay implementation of the therapy caps until September 1, 2003. However the Medicare Prescription Drug, Improvement and Modernization Act of 2003 re-enacted the moratorium on the therapy caps effective December 8, 2003 through December 31, 2005. For the period in which the moratorium was not in place (September 1, 2003-December 7, 2003) we estimate the application of the therapy cap reduced rehabilitation therapy services' revenue by $4.7 million and our inpatient services revenue by $0.4 million.
For the nine months ended September 30, 2003, our home health Medicare revenues decreased approximately $1.6 million due to decreased Medicare payment rates for the 2003 Federal fiscal year (October 1, 2002-September 30, 2003). Medicare payment rates increased 3.3% for the 2004 Federal fiscal year (October 1, 2003-September 30, 2004), which we estimate increased fourth quarter 2003 Medicare revenues by $0.3 million. Other annual estimated Medicare rate decreases of $0.2 million effective beginning April 2004 are possible when 2005 Medicare rates are issued. Additionally, as nonaffiliated healthcare providers that are serviced by our ancillary services operations, including our rehabilitative services, laboratory and radiology operations, are negatively affected by reduced reimbursements to their operations, we could experience negative trends in customer credit-worthiness, lengthened payment cycles, increased exposure to loss on accounts receivable and reductions in our ancillary services business.
10
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
In a notice of proposed rulemaking issued on February 10, 2003, CMS proposed a significant change for the reimbursement of Medicare Part A bad debts. The proposal would subject all providers to a 30% reduction in Medicare Part A bad debt reimbursement. CMS proposes to implement the reduction incrementally over a three year period to mitigate its impact: 10% for cost reporting years beginning October 1, 2003, 20% for cost reporting years beginning October 1, 2004, and 30% for cost reporting years beginning October 1, 2005 and thereafter. Based upon the estimated Medicare bad debts that we claimed on our 2002 cost reports for the 100 skilled nursing facilities in operation as of December 31, 2003, we estimate that our Medicare revenues will decrease by approximately $0.5 million ($1.18 per patient day) in 2004, $1.0 million ($2.37 per patient day) in 2005, and $1.5 million ($3.55 per patient day) in 2006 if the proposed changes are implemented.
Reduced Medicaid Reimbursements. The recent economic downturn has had a detrimental affect on state revenues. Historically, these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for nursing homes in the states in which we operate. However, through the efforts of state nursing associations, previously proposed reductions in several states in which we operate (California, Massachusetts and Washington) have not been instituted. In fact, we have seen rate increases in each of these states. It is not certain whether reductions will be imposed in the future for these or any other states we operate in.
Several states that we operate in (Georgia, New Hampshire, North Carolina and Washington) have sought to impose a provider tax against nursing homes as a method of increasing the federal matching funds paid to the State for Medicaid. The states could use the federal matching funds to increase Medicaid reimbursement rates for the nursing homes, although that is dependent upon the state's provider tax legislation. The states have submitted their provider tax applications to CMS, which is currently reviewing the applications. If CMS approves the applications, then it may result in Medicaid rate increases in those states. If CMS denies the applications then it could adversely affect our current Medicaid rates.
Other Reimbursement Matters. Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment by payors during the settlement process. Under cost-based reimbursement plans, 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. We recognize revenues from third-party payors and accrue estimated settlement amounts in the period in which the related services are provided. We estimate these settlement balances by making determinations based on our prior settlement experience and our understanding of the applicable reimbursement rules and regulations. The majority of Medicaid balances are settled two to three years following the provision of services. There can be no assurance that we will not be required to negatively adjust future earning s as a result of settlements with payors.
Federal and state governments continue to focus on methods to curb spending on health care programs such as Medicare and Medicaid. This focus has not been limited to skilled nursing facilities, but includes other services provided by us, such as therapy services. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on us. Efforts to impose reduced coverage, greater discounts and more stringent cost controls by government and other payors are expected to continue.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
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 our facilities and our therapy and pharmaceutical services businesses. There can be no assurance that payments under governmental 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 changes in reimbursement could have a material adverse effect on our financial condition, results of operations, and cash flows including the possible impairment of certain assets.
We receive approximately 38.5% of our revenues from private insurance, long-term care facilities that utilize our specialty medical services, self-pay facility residents, and other third party payors. These private third party payors are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization review and greater enrollment in managed care programs and preferred provider organizations. These private payors increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk.
Managed care organizations and other third party payors have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the population are increasingly served by a smaller number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent these organizations terminate us as a preferred provider and/or engage our competitors as a preferred or exclusive provider, this source of revenues would be lost. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation (i.e., a fixed amount per person) arrangements.
Federal and State Regulatory Oversight
Our subsidiaries are engaged in industries that are extensively regulated. In the ordinary course of business, our operations are continuously subject to state and federal regulatory scrutiny, supervision and control. This often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are, and may in the future 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. If a provider is ever found by a court of competent jurisdiction to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension or exclusion of the provider or individuals from participation in their program. If a facility is decertified by CMS or a state as a Medicare or Medicaid provider, the facility will not thereafter be reimbursed by the federal government for caring for residents that are covered by Medicare and Medicaid, and the facility would be forced to care for such residents without being reimbursed or to transfer such residents. There can be no assurance that the outcome of any pending or future proceedings or investigations will not have a material adverse effect on our results of operations and financial condition.
Long-term care facilities must comply with certain requirements to participate in the Medicare or Medicaid programs. Regulations promulgated pursuant to the Omnibus Budget Reconciliation Act of 1987 obligate facilities to demonstrate compliance with requirements relating to resident rights, resident assessment, quality of care, quality of life, physician services, nursing services, infection control, physical environment and administration. Regulations governing survey, certification and enforcement procedures to be used by state and federal survey agencies to determine facilities' level of compliance with the participation requirements for Medicare and Medicaid were adopted in 1995. These regulations require that surveys focus on residents' outcomes of care and state that all deviations from participation requirements are considered deficiencies. A facility may have deficiencies and still be in substantial compliance with the regulations. The regulations identify alternative remedies for facilities and specify categories of deficiencies for which they will be applied. The alternative remedies include, but are not limited to: civil monetary penalties of up to $10,000 per day; facility closure and/or transfer of residents in emergencies; denial of payment for new or all admissions; directed plans of correction; and directed in-service training. Failure to comply with certain standards as a condition to participate in the Medicare and Medicaid programs may result in termination of the provider's Medicare and Medicaid provider agreements.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Most states in which we operate have statutes which require that prior to the addition or construction of new nursing home beds, the addition of new services or certain capital expenditures in excess of defined levels, we first must obtain a Certificate of Need which certifies that the state has made a determination that a need exists for such new or additional beds, new services or capital expenditures. The certification process is intended to promote quality health care at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and facilities.
The Medicare and Medicaid anti-kickback statute prohibits the knowing and willful solicitation or receipt of any remuneration "in return for" referring an individual or for recommending or arranging for the purchase, lease or ordering of any item or service for which payment may be made under Medicare or a state healthcare program. In addition, the statute prohibits the offer or payment of remuneration "to induce" a person to refer an individual or to recommend or arrange for the purchase, lease or ordering of any item or service for which payment may be made under the Medicare or state healthcare programs.
False claims are prohibited pursuant to criminal and civil statutes. Criminal provisions prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid or failing to refund overpayments or improper payments; violation of these provisions are felonies punishable by up to five years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment; penalties for violations are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. Suits alleging false claims can be brought by individuals, including employees and competitors. Allegations have previously been made under the civil provisions of the statute in certain qui tam actions that we have filed false claims. We are not aware of any pending qui tam actions against us.
We believe that our facilities and service providers materially comply with applicable regulatory requirements. From time to time, however, we receive notice of noncompliance with various requirements for Medicare/Medicaid participation or state licensure. We review such notices for factual correctness, and based on such reviews, either take appropriate corrective action and/or challenge the stated basis for the allegation of noncompliance. Where corrective action is required, we work with the reviewing agency to create mutually agreeable measures to be taken to bring the facility or service provider into compliance. Under certain circumstances, the federal and state agencies have the authority to take adverse actions against a facility or service provider, including the imposition of monetary fines, bans on admissions, civil monetary penalties and the decertification of a facility or provider from participation in the Medicare and/or Medicaid programs or licensure revocation. From time to time federal and state survey agencies have imposed bans on admissions and civil monetary penalties against our facilities on the basis of alleged regulatory deficiencies and can decertify a facility from the Medicare and Medicaid programs. When appropriate, we vigorously contest such sanctions and in some cases have sought and obtained federal court injunctions against proposed sanctions. Challenging and appealing notices of noncompliance can require significant legal expenses and management attention. (See "Item 3 - Legal Proceedings.")
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
We believe that enforcement activities at both the federal and state levels and qui tam actions brought by private parties have increased in recent years. We may be required to expend substantial amounts to cooperate with, or to defend ourselves against, any investigations and proceedings. If we are found to have failed to comply with any of the anti-fraud provisions, including those discussed in the paragraphs above, we could be materially and adversely affected.
If a nursing facility is decertified from the Medicare and Medicaid programs, its Medicare and Medicaid reimbursement is interrupted pending recertification, a process that can take at least several months. In the interim, the facility may continue to provide care to its residents without Medicare and Medicaid reimbursement, or the government may relocate Medicare and Medicaid residents to other facilities. There can be no assurance that the federal government will not attempt to decertify facilities of ours from the Medicare and Medicaid programs in the future.
Corporate Integrity Agreement, Permanent Injunction and Compliance Process
We entered into a Corporate Integrity Agreement (the "CIA") with the OIG in July 2001 and it became effective on February 28, 2002. We implemented further internal controls with respect to our quality of care standards and Medicare and Medicaid billing, reporting and claims submission processes and engaged an independent third party to act as Quality Monitor and Independent Review Organization under the CIA. A breach of the CIA could subject us to substantial monetary penalties and exclusion from participation in Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on our financial condition, results of operations, and cash flows.
We also entered into a Permanent Injunction and Final Judgment ("PIFJ") with the state of California on October 3, 2001. The PIFJ requires specific staff training, physical plant inspection and modification, and reporting requirements that are in addition to requirements of the CIA. The PIFJ also requires us to issue to the State reports similar to those delivered to the OIG pursuant to the CIA. If California believes that we have breached the PIFJ, then we could be subject to substantial monetary penalties. Any such sanctions could have a material adverse effect on our financial condition, results of operations, and cash flows. (See "Item 3 - Legal Proceedings.")
Our compliance program, referred to as the "Compliance Process," was initiated in 1996. It has evolved as the requirements of federal and private healthcare programs have changed. Significant refinements were initiated in 2001 to parallel requirements of the OIG compliance guidelines, the CIA, and the PIFJ. There are seven principle elements to the Compliance Process, which integrate the CIA and PIFJ requirements:
Written Policies, Procedures and Standards of Conduct. Our subsidiaries have extensive policies and procedures ("P&Ps") modeled after applicable laws, regulations, government manuals and industry practices and customs. The P&Ps govern the clinical, reimbursement, and operational aspects of each subsidiary. To emphasize adherence to our P&Ps, we publish and distribute a Code of Conduct and each subsidiary publishes and distributes an employee handbook.
Designated Compliance Officer and Compliance Committee. In August 2000, we appointed a Corporate Compliance Officer. The responsibilities of the Corporate Compliance Officer include, among other things: (i) overseeing the Compliance Process; (ii) ensuring compliance with the CIA, PIFJ, and functioning as the liaison with the external monitors and federal government on matters related to the Compliance Process, CIA, and PIFJ; (iii) reporting to the Board of Directors and senior corporate managers on the status of the Compliance Process; and (iv) overseeing the coordination of a comprehensive education and training program which focuses on the elements of the Compliance Process.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
We also maintain a Corporate Compliance Committee, which includes the Chief Executive Officer, Chief Financial Officer, General Counsel, Senior Vice President of Human Resources, President and Executive Vice President of SunBridge, and the Corporate Compliance Officer. This Committee meets regularly to discuss compliance-related issues. Compliance matters are also reported to the Compliance Committee of the Board of Directors on a regular basis.
Effective Training and Education. We continue to develop and implement regular training and education programs for all employees. Every employee, director and officer is trained on the Compliance Process, Code of Conduct, and CIA. All California administrators are trained on the PIFJ, as required. Training also occurs for appropriate employees in applicable provisions of the Medicare and Medicaid laws, fraud and abuse prevention, clinical standards, and practices, and claim submission and reimbursement P&Ps. These training sessions explain the consequences both to the individual and to the Company for failure to comply with any of these requirements or to report breaches of those requirements.
Effective Lines of Communication. Employees are encouraged to report issues of concern without fear of retaliation using a Four Step Reporting Process, which includes the toll-free "Sun Quality Line." The Four Step Reporting Process encourages employees to discuss clinical, ethical, or financial concerns with supervisors and local management since these individuals will be most familiar with the laws, regulations, and policies that impact their concern. In addition, the Sun Quality Line is promoted as an always-available option that may be used for anonymous reporting if the employee so chooses. The telephone number for the Sun Quality Line is posted prominently in places that are accessible to employees in all of our facilities. Written non-retaliation and reporting policies have been developed and distributed to all employees to encourage communication and the reporting of incidents. Reports to the Sun Quality Line are internally reviewed an d proper follow-up is conducted. Appropriate actions are taken during and following investigations to correct any non-compliance, including but not limited to, corrective action plans, government reports and over-payment refunds.
Internal Monitoring and Auditing. Our Compliance Process, in accordance with the CIA, puts internal controls in place to meet the following objectives effectively:
● |
Claims, reimbursement submissions, cost reports and source documents are accurate; |
● |
Patient care, services, and supplies are provided as required by applicable standards and laws; |
● |
Clinical assessment and treatment documentation are accurate; and |
● |
CIA and PIFJ are implemented and obligations are met (e.g., background checks, training). |
We have designated the subsidiary presidents and each member of the operations management team, including SunBridge facility and hospital administrators, as Compliance Liaisons. Each Compliance Liaison is responsible for making certain that all requirements of the Compliance Process are completed at the operational level for which the Compliance Liaison is responsible.
Each business line also employs a number of professionals who monitor and audit compliance with P&Ps and other standards to ensure that the objectives listed above are met.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Enforcement of Standards. Our policies, the Code of Conduct and the employee handbook as well as all associated training materials clearly indicate that employees who violate our standards will be subjected to discipline. Sanctions range from oral warnings to suspensions, to termination of employment. Such sanctions have been applied in response to wrongful conduct as well as in instances where an employee has failed to adequately monitor the activities of others. While we have implemented such disciplinary policies, we have also adopted a pro-active approach to secure the integrity of our workforce and offset the need for punitive measures.
First, we have implemented employee background review practices that surpass industry standards. A seven-year historical study is completed on every prospective employee and includes the OIG/GSA Sanction List Review, Criminal Record Review, Credentials Verification, and Motor Vehicle Record Review (as required).
Second, as noted above, we devote significant resources to employee training. Our employees are required to participate in compliance training as well as other education endeavors aimed at understanding policies, procedures, standards and laws related to job responsibilities. We believe that understanding these parameters will prevent and provide for early detection of non-compliance.
Finally, we have adopted a performance management program intended to make certain that all employees are aware of what duties are expected of them and understand that compliance with policies, procedures, standards and laws related to job functions is required.
Responses to Detected Offenses and Development of Corrective Actions. Correction of detected misconduct or a violation of a Company policy is the responsibility of every manager. As appropriate, a manager is expected to develop and implement corrective action plans and monitor whether such actions are likely to keep a similar violation from occurring in the future.
HIPAA
In December 2000, the federal government released the final privacy rules of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The rules provide for, among other things, (i) giving consumers the right and control over the release of their medical information, (ii) the establishment of boundaries for the use of medical information, and (iii) penalties for violation of an individual's privacy rights. HIPAA provides for the imposition of civil or criminal penalties for the violation of these rules. We estimate that the efforts and resources we will expend to comply with the HIPAA privacy, security and transaction code set regulations will approximate $1.8 million in total, of which $0.9 million was incurred in the year ended December 31, 2003 and approximately $0.9 million is expected to be incurred for 2004.
These privacy regulations became effective in April 2003 and they apply to "protected health information," which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations limit a provider's use and disclosure of most paper, oral and electronic communications regarding a patient's past, present or future physical or mental health or condition, or relating to the provision of healthcare to the patient or payment for that healthcare.
HIPAA's security regulations were finalized in February 2003 and will become effective in April 2005. The security regulations specify administrative procedures, physical safeguards and technical services and mechanisms designed to ensure the privacy of protected health information. We are already complying with transaction standards where possible.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Additional Business Risks
We rely primarily on self-funded insurance programs for general and professional liability claims against us, and as of December 31, 2003, we had reserved $121.7 million for such claims but we had only pre-funded $5.0 million for such claims. In recent years, there has been a dramatic increase in the number and size of lawsuits filed against nursing home operators alleging negligence resulting in injury or death to residents of the homes. We currently have numerous patient care lawsuits pending against us, as well as other types of lawsuits, many of which relate to facilities that we no longer operate. Since January 2000, we have relied upon self-funded insurance programs for general and professional liability claims up to a base amount per claim and an aggregate per location, which amounts we are responsible for funding, and we obtained excess insurance policies for claims above those amounts. The programs had the following coverages that we wer e responsible for self-funding: (i) for events occurring from January 1, 2000 to December 31, 2002, $1.0 million per claim, and $3.0 million aggregate per location; (ii) for claims made in 2003, $10.0 million per claim with excess coverage above this level; and (iii) for claims made in 2004, $5.0 million per claim with excess coverage of $5.0 million in the aggregate above this level. There is a risk that the amounts funded to our programs of self-insurance may not be sufficient to respond to all claims asserted under those programs. In addition, in certain states in which we operate, state law prohibits insurance coverage for punitive damages arising from general and professional liability litigation, and we could be held liable for punitive damages in those states. (See "Item 3 - Legal Proceedings" and "Note 9 - Commitments and Contingencies".)
Our healthcare operations are extensively regulated and adverse determinations against us could result in severe penalties including loss of licensure and decertification. In the ordinary course of business, we are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, civil and criminal investigations, examinations, audits, site visits and surveys, some of which are, have been and/or may in the future be, non-routine. If we are found to have engaged in improper practices, we could be subject to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek our suspension or exclusion from participation in their program. The exclusion of a facility from participating in Medicare or Medicaid would have a material adverse effect on the facility's financial position, results of operations and cash flows. (See "Ite m 3 - Legal Proceedings.")
The reimbursement rates paid by Medicare and State Medicaid agencies are subject to reduction, and any reduction of those rates would directly impact our net earnings because we are not able to reduce operating expenses directly associated with our facilities to compensate for reductions in those revenues. We derive approximately 61.5% of our revenues for continuing operations from Medicare and Medicaid. Federal and state governments continue to focus on methods to curb spending on health care programs such as Medicare and Medicaid. This focus has not been limited to skilled nursing facilities, but includes other services provided by us, such as therapy services. For instance, the implementation of PPS in 1998 contributed to our commencing bankruptcy proceedings in 1999. (See " Item 1 - Business - Revenues from Medicare, Medicaid and Other Sources.")
If we are unable to collect our accounts receivable, our financial condition, results of operations, and cash flows will be adversely affected. Our total bad debt expense for our inpatient, rehabilitation services, medical staffing, home health and laboratory and radiology operations for the years ended December 31, 2003, 2002 and 2001 was $19.1 million, $15.2 million and $26.0 million, respectively, of which $6.3 million and $7.5 million related to discontinued operations at December 31, 2003 and 2002, respectively. Our total allowance for doubtful accounts was $67.1 million and $45.9 million at December 31, 2003 and 2002, respectively, of which $27.0 million and $1.6 million related to discontinued operations for the year ended December 31, 2003 and the ten months ended December 31, 2002, respectively. As part of our restructuring, we have divested many, and will divest additional, inpatient facilities and we will retain the rights to all accou nts receivable for those facilities that arose prior to the date of divestiture. Based on our prior experience, we expect that we will have a higher percentage of bad debts associated with the divested facilities than we do with operating facilities. Our financial condition, results of operations, and cash flows could be materially adversely affected by the inability to collect our accounts receivable.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
We continue to be affected by an industry-wide shortage of qualified facility personnel and increasing labor costs. We, and other providers in the long-term care industry, have had and continue to have difficulties in retaining qualified personnel to staff our long-term care facilities, particularly nurses, and in such situations we will use temporary employment agencies to provide additional personnel. The labor costs are generally higher for temporary employees than for full-time employees. In addition, many states have increased minimum staffing standards and CMS is also studying whether minimum staffing standards should be imposed on skilled nursing facilities. As minimum staffing standards are increased, we may be required to retain additional staffing. In addition, in recent years we have experienced increases in our labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel and to increase staffing levels in o ur long-term and subacute care facilities.
We are required to file, and maintain in effect, a registration statement with respect to the stock placed with investors in our February 2004 private placement and we will be subject to monetary penalties if we are unable to comply with those requirements
. In connection with our private placement of our common stock and warrants to purchase common stock to investors (the "Purchasers") in February 2004 for gross proceeds of approximately $56.2 million, we entered into Registration Rights Agreements with the Purchasers. Subject to certain exceptions, we are required to file a registration statement with the Securities and Exchange Commission (the "SEC") on or before April 5, 2004 to register the shares for sale by the Purchasers of the common stock and the common stock to be issued upon the exercise of the warrants issued to the investors in the private placement, and to seek the SEC's declaration of effectiveness on or before June 1 8, 2004. Subject to certain exceptions, in the event that (i) the registration statement is not filed by April 5, 2004, (ii) the registration statement is not declared effective by May 20, 2004 (or June 19, 2004 if the registration statement is reviewed by the SEC), or (iii) it ceases to be effective for an aggregate of 30 trading days after the registration statement is declared effective, then the Registration Rights Agreement requires us to pay liquidated damages to the Purchasers in an amount per 30-day period equal to one percent of the gross proceeds from the private placement. Therefore, if we are not in compliance with the above-described provisions of the Registration Rights Agreement, we will be required to pay the Purchasers liquidated damages of approximately $562,000 for each 30-day period that we are not in compliance. There can be no assurance that we will not be required to pay liquidated damages to the Purchasers pursuant to the Registration Rights Agreement.Our future success is dependent upon, among other things, the retention our executive management team. There can be no assurance that we will be able to retain our executive officers and other key employees. The loss of the services of any of our executive officers or key employees could disrupt our operations. (See "Item 10 - Directors and Executive Officers of the Registrant.")
Competition
The nature of competition within our industry varies by location. Our 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 us and provide services not offered by us, and some are operated by entities having greater financial and other resources and longer operating histories than us. 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 us. 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 us. We compete with other facilities based on key competitive factors such as our reputation for the quality and comprehensiven ess of care provided; the commitment and expertise of our staff; the innovativeness of our treatment programs; local physician and hospital support; marketing programs; charges for services; and the physical appearance, location and condition of our facilities. The range of specialized services, together with the price charged for services, are also competitive factors in attracting patients from large referral sources.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
We also compete with other companies in providing rehabilitation therapy services, medical staffing services and home health services and in employing and retaining qualified nurses, therapists and other medical personnel. Many of these competing companies have greater financial and other resources than us. We may encounter increased competition in the future that would adversely affect our financial condition, results of operations and cash flows.
Employees and Labor Relations
As of March 1, 2004, we had approximately 16,800 full-time and part-time employees. Of this total, there were 10,900 employees in our long-term and subacute care operations, 2,500 employees in the rehabilitation therapy services operations, 1,300 employees in the medical staffing business, 1,100 employees in the home health business, 300 employees at the corporate and regional offices and 700 employees in the laboratory and radiology business. As we divest inpatient facilities pursuant to our restructuring initiative, the number of employees in our long-term and subacute care operations will decrease accordingly.
Approximately 1,031 of our employees (6.1% of our employees) who work in long-term care facilities in Alabama, California, Georgia, Massachusetts, Ohio, Tennessee and West Virginia are covered by collective bargaining contracts. Collective bargaining agreements covering 515 of these employees (3.1% of our employees) will expire in 2004 and will be subject to renegotiation with the unions. The unions representing certain of our employees have from time to time gone on strike. There can be no assurance that the unions will not go on strike in the future or that such strikes will not have a material adverse effect on our financial condition, results of operations and cash flows.
Item 2. Properties
Inpatient Facilities. As of March 1, 2004, we operated 108 long-term care, subacute care and assisted living facilities. We operated 101 facilities pursuant to long-term operating leases or subleases, and we owned seven facilities. We consider our properties in general to be in good operating condition and suitable for the purposes for which they are being used. Our facilities that are leased are subject to long-term operating leases or subleases which require us, among other things, to fund all applicable capital expenditures, taxes, insurance and maintenance costs. The annual rent payable under most of the leases generally increases based on a fixed percentage or increases in the U.S. Consumer Price Index. Many of the leases contain renewal options to extend the term. Substantially all of our leasehold interests serve as collateral for our obligations under our Loan Agreements.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Our aggregate occupancy percentages for all of our long-term care, subacute care and assisted living facilities in the United States, on a same store basis, were 90.14%, 90.65% and 90.66% for the years ended December 31, 2003, 2002 and 2001, respectively. The percentages were computed by dividing the average daily number of beds occupied by the total number of available beds for use during the periods indicated. However, we believe that occupancy percentages, either individually or in the aggregate, should not be relied upon alone to determine the performance of a facility. Other factors include, among other things, the sources of payment, terms of reimbursement and the acuity level of the patients.
The following table sets forth certain information concerning the 108 long-term care, subacute care and assisted living facilities that we operated as of March 1, 2004, which consisted of 98 skilled nursing facilities, seven assisted living facilities and three specialty acute care hospitals. As part of our restructuring efforts, we expect to divest seven of the facilities in the table representing approximately 528 licensed and 498 available beds during 2004.
|
Number of |
Number of Facilities |
||
California |
1,978 |
23 |
1 |
24 |
Georgia |
1,111 |
7 |
3 |
10 |
New Hampshire |
1,058 |
9 |
- |
9 |
North Carolina |
1,031 |
8 |
- |
8 |
Massachusetts |
1,024 |
11 |
- |
11 |
Tennessee |
915 |
8 |
1 |
9 |
Alabama |
783 |
7 |
- |
7 |
West Virginia |
739 |
7 |
- |
7 |
Idaho |
709 |
6 |
1 |
7 |
Washington |
702 |
8 |
- |
8 |
Ohio |
575 |
4 |
1 |
5 |
Arizona |
161 |
1 |
- |
1 |
Maryland |
147 |
1 |
- |
1 |
Kentucky |
74 |
1 |
- |
1 |
Total |
11,007 |
101 |
7 |
108 |
=========== |
======== |
======== |
======== |
________________ |
(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, which is used in the computation of occupancy. Available beds for the 108 facilities were 10,621.
Rehabilitation Services. As of March 1, 2004, we leased office space in 19 locations in 11 states to operate our rehabilitation therapy business.
Medical Staffing Services. As of March 1, 2004, we leased office space in 26 locations in 17 states to operate our medical staffing business.
Home Health Services. As of March 1, 2004, we leased office space in 23 locations in two states to operate our home health business.
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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Laboratory and Radiology. As of March 1, 2004, we leased 23 locations in four states to operate our other businesses, including medical laboratory and mobile radiology (SunAlliance).
Corporate. We lease our executive offices in Irvine, California and we lease one and own three corporate office buildings in Albuquerque, New Mexico.
Item 3. Legal Proceedings
In February 2003, the BMFEA, which is a division of the Office of the Attorney General of the State of California, alleged that we had violated the terms of the PIFJ entered into during October 2001. Pursuant to the PIFJ, we are enjoined from engaging in violations of federal or state statutes or regulations governing the operation of health care facilities in the State of California. Among other things, the BMFEA alleged that our California facilities have had inadequate staffing, training and supervision. To remedy these alleged violations, the BMFEA had requested that we pay their costs of the investigation and to audit our operations in California, and, initially, requested a significant but unspecified cash penalty. The BMFEA investigation included onsite inspections, searches, interviews and examinations of our residents and facility personnel, service of document requests and, in one instance, service of a search warrant see king documents and further information regarding the operation of certain of our California facilities.
In January 2004, 11 current and one former employee of SunBridge Care and Rehab for Escondido-East were arraigned on charges brought by the California Department of Justice, alleging that the defendants permitted an elderly woman under their care to be placed in a situation in which her health was endangered in circumstances likely to produce great bodily harm or death. Ten of the twelve defendants were also charged with a misdemeanor count of falsifying paperwork with fraudulent intent. SunBridge Care and Rehab for Escondido-East is a skilled nursing facility in Escondido, California that is operated by Care Enterprises West, an indirect subsidiary of Sun Healthcare Group, Inc. Neither Sun Healthcare Group, Inc. nor Care Enterprises West has been charged with any wrongdoing. We have commenced an internal investigation of the California Department of Justice's allegations and continue our ongoin g efforts to work in cooperation with the California Department of Justice during the course of their investigation.
We do not know whether the BMFEA will ultimately assert that the Company is in violation of the PIFJ and, if so, what actions the BMFEA may take. There can be no assurance that there will not be an adverse outcome in this matter, or that additional charges will not be filed against the 12 employees, other employees, Care Enterprises West or any of its affiliates, or any officers and directors. We are unable to estimate any amount that the BMFEA may ultimately seek from us, or the cost to us resulting from an adverse outcome in this matter, although an adverse outcome in this matter could have a material adverse effect on our financial position, results of operations and cash flows.
In March and April 1999, class action lawsuits were filed against us and three individuals, who were at that time our officers, in the United States District Court for the District of New Mexico. These actions have been consolidated as In re Sun Healthcare Group, Inc. Securities and Litigation Master, File No. Civ. 99-269. The lawsuits allege, among other things, that we did not disclose material facts concerning the impact that changes to reimbursement for our skilled nursing facilities under Medicare's prospective payment system would have on our results of operations. The lawsuits seek compensatory damages and other relief for stockholders who purchased our common stock during the class-action period. Pursuant to an agreement among the parties, we were dismissed without prejudice in December 2000. In January 2002, the District Court dismissed the lawsuit with prejudice and entered judgment in favor of the remaining defendants. In February 2002, the plaintiffs filed a Motion to Amend the Judgment and to File an Amended Complaint. In April 2003, the plaintiffs' Motion was denied by the United States District Court for the District of New Mexico. In May 2003, the plaintiffs filed an appeal with the United States Court of Appeals for the Tenth Circuit. We intend to defend this matter vigorously.
21
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
We are a party to various other legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of our business, including claims that our services have resulted in injury or death to the residents of our facilities, claims relating to employment and commercial matters. We have experienced an increasing trend in the number and severity of litigation claims asserted against us. We believe that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years, resulting in an increased aggressiveness, due to the heightened awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which we have had significant operations, including California, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions. There can be no assurance that we will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.
We operate in industries that are extensively regulated. As such, in the ordinary course of business, we 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 are or have been and/or may in the future be non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, these industries are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is ever found by a court of competent jurisdiction to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension or exclusion of the provider or individual from participation in their program. We believe that there has been, and will con tinue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations and cash flows.
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 2003.
22
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We began issuing our common stock on February 28, 2002 as part of our Plan of Reorganization. Our common stock began trading under the symbol "SUHG.OB" on the Over-the-Counter ("OTC") Bulletin Board on April 2, 2002. The following table shows the high and low sale prices for the common stock as reported by the OTC Bulletin Board for the periods indicated:
High |
Low |
||
2003 |
|||
Fourth Quarter |
$ 10.00 |
$ 5.92 |
|
Third Quarter |
$ 8.64 |
$ 1.63 |
|
Second Quarter |
$ 2.61 |
$ 0.11 |
|
First Quarter |
$ 1.45 |
$ 0.15 |
2002 |
|||
Fourth Quarter |
$ 5.55 |
$ 1.00 |
|
Third Quarter |
$ 16.50 |
$ 5.00 |
|
Second Quarter |
$ 24.00 |
$ 13.00 |
|
First Quarter |
N/A |
N/A |
Our closing stock price on March 1, 2004 was $12.25. On January 20, 2004, we submitted an application to list our common stock on the Nasdaq National Market. No assurance can be given that the Sun Healthcare Group, Inc. common stock will become listed on the Nasdaq National Market.
There were approximately 4,744 holders of record of our common stock as of March 1, 2004. We have never paid nor declared any dividends on our common stock. Our Loan Agreement and certain other agreements restrict our ability to pay dividends. We did not repurchase any shares of our common stock during the fourth quarter of 2003.
Item 6. Selected Financial Data
The following selected consolidated financial data for the periods indicated have been derived from our 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 our consolidated financial statements and related notes thereto (in thousands, except per share data):
23
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Reorganized Company |
Predecessor Company |
||||||||||||
At or for the |
|||||||||||||
Year |
Ten Months Ended |
Two Months Ended |
|
||||||||||
December 31, |
December 31, 2002(2) |
February 28, 2002(3) |
|
|
|
||||||||
Total net revenues |
$ 834,043 |
$ 679,044 |
| |
$ 301,846 |
$ 2,075,234 |
$ 2,458,928 |
$ 2,529,039 |
||||||
(Loss) income before income taxes, |
|
|
|
|
| |
|
|
|
|
|
|
|
|
(Loss) income before discontinued |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Income (loss) on discontinued |
|
|
|
| |
|
|
|
|
|
||||
Cumulative effect of change in |
|
|
| |
|
|
|
|
|
|||||
Net income (loss) |
$ 354 |
$ (437,986 |
) |
| |
$ 1,485,371 |
$ (69,437 |
) |
$ (545,711 |
) |
$(1,089,458 |
) |
||
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Basic and diluted earnings per |
| |
||||||||||||
Net (loss) income before |
|
|
|
|
| |
|
|
|
|
|
|
|
|
Income (loss) on discontinued |
|
|
|
| |
|
|
|
|
|
||||
Cumulative effect of change in |
|
|
| |
|
|
|
|
|
|||||
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Net income (loss): |
$ 0.04 |
$ (43.80 |
) |
| |
$ 24.32 |
$ (1.14 |
) |
$ (9.04 |
) |
$ (18.62 |
) |
||
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Weighted average number of common |
| |
||||||||||||
Basic and Diluted |
10,050 |
10,000 |
| |
61,080 |
61,096 |
60,347 |
58,504 |
||||||
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Working Capital (Deficit) |
$ (57,377 |
) |
$ (66,412 |
) |
| |
$ 69,762 |
$ (13,259 |
) |
$ (138,901 |
) |
$ (17,282 |
) |
|
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Total Assets |
$ 300,398 |
$ 475,835 |
| |
$ 828,416 |
$ 649,804 |
$ 849,988 |
$ 1,438,488 |
||||||
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Liabilities subject to compromise |
|
|
| |
|
|
|
|
||||||
=========== |
========= |
| |
========= |
========= |
========= |
======== |
|||||||
Debt |
$ 78,878 |
$ 196,223 |
| |
$ 190,146 |
$ 78,235 |
$ 157,227 |
$ 145,541 |
||||||
=========== |
======= |
| |
======= |
======= |
======= |
====== |
|||||||
Stockholders' (deficit) equity |
$ (166,398 |
) |
$ (187,218 |
) |
| |
$ 237,600 |
$ (1,602,290 |
) |
$ (1,545,338 |
) |
$(1,023,000 |
) |
|
=========== |
========= |
| |
========= |
========= |
========= |
======== |
24
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(1) |
Results for the year ended December 31, 2003 include a non-cash charge of $2.8 million representing an impairment to our carrying values of lease intangibles and other long-lived assets (See "Note 7 - Impairment of Intangible and Long-Lived Assets" in our consolidated financial statements), a $14.7 million charge related to current year restructuring, a net gain on sale of assets of $3.9 million mainly due to the sale of land and buildings, a net loss of $20.6 million from discontinued operations and a net gain of $55.9 million from disposal of discontinued operations due to the sale of our pharmaceutical and software development operations, termination of 126 facility lease agreements, sale of one other facility and the reductions of the carrying amount of the assets associated with the above described facilities, which facilities and assets were determined not to be integral to our core business operations (See "Note 8 - Discontinued Operat ions and Assets Held for Sale" in our consolidated financial statements.) |
(2) |
Results for the ten month period ended December 31, 2002 include a non-cash charge of $279.0 million representing an impairment to our carrying values of goodwill and other long-lived assets for continuing operations (See "Note 7 - Impairment of Intangible and Long-Lived Assets" in our consolidated financial statements), a net gain on sale of assets of $8.7 million due to the termination of ten facility lease agreements and the reduction of the carrying amount of the assets associated with the above described facilities, which facilities and assets were determined not to be integral to our core business operations and a net loss of $135.1 million from discontinued operations, of which $128.8 million relates to the impairment to our carrying values of goodwill and other long-lived assets for discontinued operations (See "Note 8 - Discontinued Operations and Assets Held for Sale" in our consolidated financial statements). |
(3) |
Results for the two month period ended February 28, 2002 include a $1.5 billion non-cash gain on extinguishment of debt (See "Note 20 - Gain on Extinguishment of Debt" in our consolidated financial statements), a $1.5 million gain for reorganization items due to our chapter 11 filings (See "Note 18 - Emergence from Chapter 11 Bankruptcy Proceedings" in our consolidated financial statements), a net non-cash loss on discontinued operations of $7.6 million due to the anticipated termination of ten facility lease agreements and the reduction of the carrying amount of the assets associated with the above described facilities, which facilities and assets were determined not to be integral to our core business operations (See "Note 8 - Discontinued Operations and Assets Held for Sale" in our consolidated financial statements). |
(4) |
Results for the year ended December 31, 2001 include a non-cash charge of $18.8 million representing an impairment to our carrying values of goodwill and other long-lived assets (See "Note 7 - Impairment of Intangible and Long-Lived Assets" in our consolidated financial statements), a charge of $11.0 million due to legal and regulatory matters, a $1.1 million charge related to restructuring, a net non-cash gain on sale of assets of $0.8 million and a $42.9 million charge for reorganization items due to our chapter 11 filings (See "Note 18 - Emergence from Chapter 11 Bankruptcy Proceedings" in our consolidated financial statements) which included the losses for discontinued operations due to the prepetition termination of 45 facility lease agreements and the reduction of the carrying amount of the assets associated with the above described facilities, which facilities and assets were determined not to be integral to our core business op erations, (See "Note 8 - Discontinued Operations and Assets Held for Sale" in our consolidated financial statements).
|
25 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES |
|
(5) |
Results for the year ended December 31, 2000 include a non-cash charge of $191.3 million representing an impairment to our carrying values of goodwill and other long-lived assets, a net non-cash gain on sale of assets of $21.4 million, a $335.9 million charge for reorganization items due to our chapter 11 filings (See "Note 18 - Emergence from Chapter 11 Bankruptcy Proceedings" in our consolidated financial statements) which included the losses on discontinued operations due to the prepetition termination of 86 facility lease and management agreements and the reduction of the carrying amount of the assets associated with the above described facilities, which facilities and assets were determined not to be integral to our core business operations, a $1.1 million non-cash recovery of previously recorded cost for corporate and financial restructuring and a $2.5 million charge for legal and regulatory charges due to our chapter 11 filings (See "N ote 18 - Emergence from Chapter 11 Bankruptcy Proceedings" in our consolidated financial statements). |
(6) |
Results for the year ended December 31, 1999 include a non-cash charge of $457.4 million representing an impairment to our carrying values of goodwill and other long-lived assets, a $27.4 million charge for corporate and financial restructuring, a net non-cash charge of $78.7 million due to the prepetition termination of 44 facility lease and management agreements and the reduction of the carrying amount of the assets associated with the above described facilities, which facilities and assets were determined not to be integral to our core business operations, a $2.5 million loss on the termination of the interest rate swaps and a $48.1 million charge for reorganization items due to our chapter 11 filings (See "Note 18 - Emergence from Chapter 11 Bankruptcy Proceedings" in our consolidated financial statements). |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are one of the largest providers of long-term, subacute and related speciality healthcare services in the United States. We currently operate through various direct and indirect subsidiaries that engage in the following five principal business segments: (i) inpatient services, primarily skilled nursing facilities, (ii) rehabilitation therapy services, (iii) medical staffing services, (iv) home health services and (v) laboratory and radiology services. For continuing operations, during the year ended December 31, 2003, we received approximately 25.6% of our revenues from Medicare, 35.9% from Medicaid, and 38.5% from private insurance, self-pay residents, other third party payors and long-term care facilities that utilized our specialty medical services. As with other providers in the long-term care industry, we face challenges associated with reduced levels of reimbursement from Medicare and Medicaid, increasing costs associated with litigation and insurance, compliance with federal and state regulations, and the retention of qualified personnel to staff our long-term care facilities.
We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long-term care facilities that utilize our specialty medical services. The sources and amounts of our inpatient services revenues are determined by a number of factors, including the number of licensed beds and occupancy rates of our facilities, the acuity level of patients and the rates of reimbursement among payors.
26
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Federal and state governments continue to focus on methods to curb spending on health care programs such as Medicare and Medicaid. This focus has not been limited to skilled nursing facilities, but includes other services provided by us, such as therapy services. We cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on us. Efforts to impose reduced coverage, greater discounts and more stringent cost controls by government and other payors are expected to continue.
In an effort to improve our financial position and address our liquidity concerns, in January 2003, we initiated efforts to (i) reshape our portfolio of leases for our long-term care facilities to divest our under-performing facilities, decrease our exposure in any single state, exit high-cost general and professional liability states and better leverage our infrastructure; (ii) sell our pharmacy and software development operations to finance the restructuring efforts, and (iii) reduce our overhead and other expenses commensurate with the reduction in the size of our long-term care facility portfolio. Between January 1, 2003 and December 31, 2003, we divested 127 long-term care facilities, our SunScript pharmacy operations and our software development operations and reduced corporate general and administrative expenses by $32.3 million. As of March 1, 2004, we operated 108 long-term care facilities and we intend to divest seven of those facilities in 2004. With the exception of the anticipated transfer of the remaining seven facilities, we believe that the restructuring we commenced in January 2003 is substantially complete.
In February 2004, we completed a private placement of our common stock and warrants to purchase our common stock to accredited and institutional investors for net proceeds of approximately $52.3 million. As of March 1, 2004, we had cash and cash equivalents of approximately $40.1 million and approximately $31.0 million available to us for additional borrowings under our loan agreement. We believe that our existing cash reserves and availability under our loan agreement will provide sufficient funds for our operations, capital expenditures and regularly scheduled debt service payments through the next 12 months.
Critical Accounting Policies
Our discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures 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 may differ materially from these estimates. We believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.
Net revenues consist of long-term and subacute care revenues, rehabilitation therapy revenues, medical staffing services revenues, home health revenues and laboratory and radiology revenues. Net revenues are recognized as services are provided. 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. The methods of making such estimates are reviewed periodically, and differences between the net amounts accrued and subsequent settlements or estimates of expected settlements are reflected in current results of operations, when determined.
27
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(b) Accounts Receivable and Related Allowance
Our accounts receivable relate to services provided by our various operating divisions to a variety of payors and customers. The primary payors for services provided in long-term and subacute care facilities that we operate are the Medicare program and the various state Medicaid programs. The rehabilitation therapy service operations provide services to patients in nonaffiliated long-term, rehabilitation and acute care facilities. The billings for those services are submitted to the nonaffiliated facilities. Many of the nonaffiliated long-term care facilities receive a large majority of their revenues from the Medicare program and the state Medicaid programs.
Estimated provisions for doubtful accounts are recorded each period as an expense to the consolidated statements of operations. In evaluating the collectibility of accounts receivable, we consider a number of factors, including the age of the accounts, changes in collection patterns, the financial condition of our customers, the composition of patient accounts by payor type, the status of ongoing disputes with third-party payors and general industry conditions. Any changes in these factors or in the actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of the change.
The allowance for uncollectible accounts related to facilities that we have divested was based on a percentage of outstanding accounts receivable at the time of divestiture and was recorded in gain or loss on disposal of discontinued operations, net. As collections are recognized, the allowance will be adjusted as appropriate. This percentage was 40% in 2002 and was adjusted to 30% in the fourth quarter of 2003. The percentages were developed from historical collection trends of our divestitures.
The allowance for uncollectible accounts related to facilities that we currently operate is computed by applying a bad debt percentage to the individual accounts receivable aging categories based on historical collections. An adjustment is then recorded each month to adjust the allowance based on the analysis.
(c)
InsuranceWe self-insure for certain insurable risks, including general and professional liability, workers' compensation liability and employee health insurance liability through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary by the states in which we operate. There exists a risk that any of the insurance companies we use may become insolvent and unable to fulfill their obligation to defend, pay or reimburse us when that obligation becomes due. Provisions for estimated reserves, including incurred but not reported losses, are provided in the period of the related coverage. An independent actuarial analysis is prepared twice a year to determine the expected losses and reserves for estimated settlements for general and professional liability and workers' compensation insurance under the per claims retention level, including incurred but not reported losses. The methods of mak ing such estimates and establishing the resulting reserves are reviewed periodically, and any adjustments resulting there from are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves. As of December 31, 2003, we recorded pre-funded amounts restricted for the payment of general and professional liability and workers' compensation claims in restricted cash accounts classified in current and non-current assets. Upon evaluation by our independent actuaries of claim payment trends in conjunction with the twice a year evaluation of our reserves and claims exposures, the restricted cash balances are also reviewed and reconciled.
28
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(d) Impairment of Assets
Goodwill
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") established new rules on the accounting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized; however, they are subject to annual impairment tests as prescribed by the statement. Intangible assets with definite lives continue to be amortized over their estimated useful lives.
Pursuant to SFAS No. 142, we perform our annual goodwill impairment analysis during the fourth quarter for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and, with the exception of the long-term care facilities, provides services that are distinct from the other components of the operating segment. We determine impairment by comparing the net assets of each reporting unit to their respective fair values. We determine the estimated fair value of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by th e difference between the goodwill carrying value and the implied fair value.
Indefinite Life Intangibles
Pursuant to SFAS No. 142, we evaluate the recoverability of the trademarks by comparing the asset's respective carrying value to estimates of fair value. We determine the estimated fair value of each trademark through a discounted cash flow analysis.
Finite Life Intangibles
Pursuant to SFAS No. 142, we evaluate the recoverability of the favorable lease intangibles by comparing an asset's respective carrying value to estimates of undiscounted cash flows over the life of the lease. If the carrying value of the asset exceeded the undiscounted cash flows, an impairment loss was measured by comparing the estimated fair value of the asset, based on discounted cash flows, to its carrying value.
Long-Lived Assets
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment of long-lived assets (other than goodwill and indefinite lived intangibles) and for long-lived assets to be disposed of. SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121") and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. We adopted the provisions of SFAS No. 144 as of January 1, 2002. Similar to SFAS No. 121, SFAS No. 144 requires impairment losses to be recognized for lon g-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets' carrying amounts. The impairment loss is measured by comparing the estimated fair value of the asset, usually based on discounted cash flows, to its carrying amount. In accordance with SFAS No. 144, we assess the need for an impairment write-down when such indicators of impairment are present.
29
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
In estimating the undiscounted cash flows for our impairment assessment, we primarily used our internally prepared budgets and forecast information including adjustments for the following items: Medicare and Medicaid funding; overhead costs; capital expenditures; and patient care liability costs. A substantial change in the estimated future cash flows for any facilities could materially change the estimated fair values of those assets, possibly resulting in an impairment.
Results of Operations
We have changed the composition of our segments and therefore restated the previously reported segment information related to the Reorganized Company (see "Note 16 - Segment Information" in our consolidated financial statements.) The change since the last annual SEC filing includes new segments for Medical Staffing, Home Health, Laboratory and Radiology which previously were categorized in the Other segment and removal of the Pharmaceutical Services, International and Other segments as they have been sold. The following tables set forth the amount and percentage of certain elements of total net revenues for the following years ended December 31, (in thousands):
Reorganized Company |
Reorganized and Predecessor Company Combined |
Predecessor Company |
||||||||||||||
2003 |
2002 |
2001 |
||||||||||||||
Inpatient Services |
$ 572,957 |
68.7 |
% |
$ 705,713 |
72.0 |
% |
$ 1,609,388 |
77.6 |
% |
|||||||
Rehabilitation and Respiratory Therapy Services |
167,656 |
20.1 |
|
178,952 |
18.2 |
% |
175,159 |
8.4 |
% |
|||||||
Medical Staffing |
61,824 |
7.4 |
% |
51,891 |
5.3 |
% |
- |
- |
% |
|||||||
Home Health |
55,533 |
6.7 |
% |
45,134 |
4.6 |
% |
- |
- |
% |
|||||||
Laboratory and Radiology |
43,767 |
5.2 |
% |
41,367 |
4.2 |
% |
- |
- |
% |
|||||||
Pharmaceutical and Medical Supply |
- |
- |
% |
41,101 |
4.2 |
% |
257,579 |
12.4 |
% |
|||||||
International |
- |
- |
% |
- |
- |
% |
23,887 |
1.1 |
% |
|||||||
Other |
- |
- |
% |
29,815 |
3.0 |
% |
178,065 |
8.6 |
% |
|||||||
Corporate |
73 |
- |
% |
222 |
- |
% |
1,393 |
0.1 |
% |
|||||||
Intersegment eliminations |
(67,767 |
) |
(8.1 |
)% |
(113,305 |
) |
(11.5 |
)% |
(170,237 |
) |
(8.2 |
)% |
||||
Total Net Revenues |
$ 834,043 |
100.0 |
% |
$ 980,890 |
100.0 |
% |
$ 2,075,234 |
100.0 |
% |
|||||||
======= |
==== |
======= |
==== |
======= |
==== |
30
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Inpatient services revenues for long-term care, subacute care and assisted living services include revenues billed to patients for therapy, medical staffing, and laboratory and radiology provided by our affiliated operations. The following tables set forth a summary of the intersegment revenues for the years ended December 31, (in thousands):
|
Reorganized and Predecessor Company Combined |
|
|||
2003 |
2002 |
2001 |
|||
Inpatient Services |
$ (600 |
) |
$ (551 |
) |
$ (526) |
Rehabilitation and Respiratory Therapy Services |
59,543 |
93,568 |
99,549 |
||
Medical Staffing |
7,216 |
4,078 |
- |
||
Laboratory and Radiology |
1,608 |
6,396 |
- |
||
Pharmaceutical and Medical Supply |
- |
8,325 |
62,209 |
||
Other |
- |
1,489 |
9,005 |
||
Total Affiliated Revenue |
$ 67,767 |
$ 113,305 |
$ 170,237 |
||
====== |
===== |
===== |
The following table sets forth the amount of net segment (loss) income for the following years ended December 31, (in thousands):
|
Reorganized and Predecessor Company
|
|
|||||
|
2003 |
2002 |
| |
2001 |
|||
| |
|||||||
Inpatient Services |
$ 16,754 |
$ (2,010 |
) |
| |
$ (20,006 |
) |
|
Rehabilitation and Respiratory Therapy Services |
14,575 |
24,616 |
| |
12,691 |
|||
Medical Staffing |
1,285 |
4,588 |
| |
- |
|||
Home Health |
3,765 |
3,531 |
| |
- |
|||
Pharmaceutical and Medical Supply Services |
- |
2,719 |
| |
4,235 |
|||
Laboratory and Radiology |
633 |
2,160 |
| |
- |
|||
International Operations |
- |
- |
| |
(249 |
) |
||
Other Operations |
- |
808 |
| |
(9,469 |
) |
||
Net segment income (loss) before Corporate |
37,012 |
36,412 |
| |
(12,798 |
) |
||
| |
|||||||
Corporate |
(57,817 |
) |
(75,646 |
) |
| |
16,663 |
|
Net segment (loss) income |
|
|
|
|
| |
|
|
======== |
======== |
| |
======== |
Inpatient Services. The improvement in net segment income of $18.8 million in 2003 over 2002 was primarily driven by our restructuring efforts and the divestiture of 127 facilities during 2003.
Rehabilitation and Respiratory Therapy Services. The decrease in net income for this segment resulted primarily from:
31
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Medical Staffing. The year over year decrease in this segment was primarily driven by two factors:
Home Health. Driven by increases in home care visits seen industry-wide in 2003, this segment performed well when compared to 2002. Two agencies were opened in 2003 also attributed to the slight increase in net income.
Laboratory and Radiology. The unfavorable comparison of 2003 to 2002 net income for this segment is attributable primarily to:
Corporate. The decrease in net losses in 2003 from 2002 for this segment were primarily the result of the restructuring initiatives we undertook in 2003 with personnel reductions that resulted in lower salaries and wages and general and administrative costs.
The following table reconciles net segment (loss) income to consolidated income (loss) before income taxes and discontinued operations:
|
Reorganized and Predecessor Company |
|
|||||
2003 |
2002 |
| |
2001 |
||||
| |
|||||||
Net segment (loss) income |
$ (20,805 |
) |
$ (39,234 |
) |
| |
$ 3,865 |
|
Loss on asset impairment |
(2,774 |
) |
(279,022 |
) |
| |
(18,825 |
) |
Legal and regulatory matters, net |
- |
- |
| |
(11,000 |
) |
||
Restructuring costs, net |
(14,676 |
) |
- |
| |
(1,064 |
) |
|
Gain on sale of assets, net |
3,897 |
8,714 |
| |
825 |
|||
Gain on extinguishment of debt, net |
- |
1,498,360 |
| |
- |
|||
Reorganization gain (costs), net |
- |
1,483 |
| |
(42,917 |
) |
||
(Loss) income before income taxes and discontinued |
|
|
|
| |
|
|
|
========== |
========= |
| |
========== |
Corporate expenses include amounts for interest and corporate general and overhead expenses including those provided to our subsidiaries. In 2001, we allocated certain corporate expenses of $85.1 million to our other segments through overhead cost sharing arrangements and intersegment interest charges based on segment net revenues. Interest was charged based upon average net asset balances at rates determined by management. In 2002, we discontinued this process for segment reporting.
32
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
In accordance with SOP 90-7, items of expense or income that are incurred or realized by us because we were in reorganization are classified as reorganization costs in our consolidated statements of operations. As a result, net segment (loss) income do not include interest earned subsequent to the Filing Date on cash accumulated because we are not paying our prepetition obligations. Interest earned prior to the Filing Date is included in net segment (loss) income. Debt discounts and deferred issuance costs that were written-off after the Filing Date in accordance with SOP 90-7 are not included in the net segment (loss) income. The amortization of debt discounts and deferred issuance costs prior to the Filing Date are included in net segment (loss) income. Gain on sale of assets and professional fees related to the reorganization incurred subsequent to the Filing Date are excluded from net segment income (loss) which is c onsistent with their treatment prior to the Filing Date.
The following discussions of the "Year Ended December 31, 2003 compared to the Year Ended December 31, 2002" and the "Year Ended December 31, 2002 compared to the Year Ended December 31, 2001" are based on the financial information presented in "Note 16 - Segment Information" in our consolidated financial statements.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Results of Operations
Due to the number of Inpatient Services facilities divested during 2003, a "same store" basis is included for comparison purposes. A same store basis includes only facilities operated for the full period in the comparison of the operations activity, which represents 109 facilities.
We reported a net income for the year ended December 31, 2003 of $0.4 million compared to a net income of $1,047.4 million for the prior year. The net income for the year ended December 31, 2003 included the following:
- |
net income from discontinued operations of $35.4 million, primarily driven by the gain on sale of our pharmacy operations in July 2003; |
- |
a gain from the sale of assets of $3.9 million related primarily to the sale of land and buildings of our software development company that was sold in November 2003; offset by |
- |
restructuring costs of $14.7 million related to our reorganization efforts, primarily to the reshaping of our portfolio of skilled nursing facilities; and |
- |
an asset impairment charge of $2.8 million. |
The net income for the prior year included a gain on extinguishment of debt of $1,498.4 million related to our emergence from bankruptcy in early 2002, an asset impairment charge of $407.8 million, a $20.0 million charge for patient care liability costs related to our inpatient services operation, a favorable adjustment of $6.0 million related to workers' compensation insurance costs primarily related to our inpatient services operation, and a $8.7 million gain on sale of assets, net, primarily due to the reversal of prepetition liabilities related to disposed facilities.
Net Revenues
Our net revenues were $834.0 million during the year ended December 31, 2003 compared to $980.9 million for the prior year. The decrease in net revenues of approximately $146.9 million for the year ended December 31, 2003, as compared to the prior year, primarily consisted of the following:
33
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
- |
a $132.8 million decrease within our pharmaceutical services operations, primarily due to the classification within operations revenues for January and February 2002 that, for the ten months ended December 31, 2002 and for the year ended December 31, 2003, are included in discontinued operations; and |
- |
a decrease of $11.3 million in our rehabilitation services operations as a result of the inpatient facility divestitures. These decreases were partially offset by: |
- |
an increase of $21.9 million due to increased revenues from facilities in our same store inpatient services operations which we operated during the year ended December 31, 2003 and 2002; |
- |
an increase of $7.2 million due to the acquisition of one skilled nursing facility in March 2003; and |
- |
an increase of $1.5 million in our home health operations due to organic growth in existing offices. |
The increase in net revenues of $21.9 million from our inpatient services operations on a same store basis for the year ended December 31, 2003, as compared to the year ended December 31, 2002, was primarily due to the following:
- |
an increase in Medicaid revenues of $18.9 million primarily due to higher reimbursement rates; |
- |
an increase of $1.3 million in commercial revenue primarily due to higher census; and |
- |
a $1.6 million net increase in Medicare revenues, which was comprised of a $24.1 million decrease in Medicare rates, an increase of $16.0 million due to improved Medicare mix, a market basket increase of $6.2 million and higher Medicare Part B revenues of $0.3 million. |
Operating Salaries and Benefits
Operating salaries and benefits for the year ended December 31, 2003 were $528.0 million as compared to $620.0 million for the year ended December 31, 2002. The decrease of $92.0 million was primarily the result of personnel cost reductions that occurred commensurate with the inpatient facility divestitures.
Self-Insurance for Workers' Compensation and General and Professional Liability
With an increase of $0.4 million for the year ended December 31, 2003 as compared to the year ended December 31, 2002, costs related to workers' compensation and general and professional liability insurance costs remained essentially flat year over year; however, the 2002 expenses were inflated with a net $14.0 million charge recorded in third quarter of 2002 for prior year policy exposures.
Rent Expense
We reported rent expense of $49.6 million in 2003 as compared to $68.4 million in 2002. For the year ended December 31, 2003, rent expense for our inpatient services operation was approximately $41.2 million compared to $60.0 million for the same period ended December 31, 2002 due primarily to lease terminations and divestitures of inpatient facilities during 2003. On a same store basis in the year over year comparison, rent expense decreased $2.3 million to $40.8 million compared to $43.1 million in 2002 due to the renegotiation of leases of during the restructuring of our portfolio of skilled nursing facilities in 2003.
34
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Other Operating Expenses, Other Corporate General and Administrative Expenses and Provision for Losses on Accounts Receivable
We reported other operating expenses, other corporate general and administrative expenses and provision for losses on accounts receivable of $214.4 million for the year ended December 31, 2003 compared to $256.6 million for the same period in 2002. The decrease of approximately $42.2 million consisted of the following:
- |
a decrease of $38.4 million and $5.8 million in our inpatient services operation and our rehabilitation therapy services operations, respectively, due to the cost reductions as a result of our restructuring; |
- |
a decrease of $8.7 million in non-operating corporate overhead due to our reorganization efforts; offset by |
- |
an increase of $7.4 million and $3.3 million in our home health, laboratory and radiology and medical staffing operations, respectively, due to growth and expansion in 2003. |
The decrease in other operating and administrative expenses and provision for losses of $38.4 million from our inpatient services operations included an increase in our same store operations of $2.0 million for the year ended December 31, 2003 as compared to the same period in 2002. The $2.0 million increase was comprised of:
- |
an increase of $3.0 million, net, in legal costs associated with increases in patient care liability cases and other litigation; and |
- |
an increase of $3.9 million in liability insurance costs due to increased patient care liability cases industry-wide. |
These increases were offset in part, by the following: |
|
- |
a decrease of $10.7 million in contract labor costs due to our efforts to offer competitive wages and benefits to attract permanent staff; and |
- |
an decrease of $0.7 million of wages and benefits due to stabilization of our workforce. |
Interest Expense, Net
Interest expense, net, increased to $16.9 million for the year ended December 31, 2003, as compared to $15.2 million for the same period in 2002, a $1.7 million increase. $2.4 million of the increase was due primarily to the recognition of interest expense at a higher effective interest rate for our term loan offset by a $0.7 million decrease related to lower interest charges incurred due to lower carrying values on our debt instruments during 2003 as compared to 2002. While we were under bankruptcy protection through the two months ended February 28, 2002, we did not record interest on essentially all of our prepetition debt. Had we not been under bankruptcy protection, our interest expense, net, for the year ended December 31, 2002 would have been $38.9 million.
35
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Depreciation and Amortization
Depreciation and amortization expense decreased to $7.5 million for the year ended December 31, 2003, as compared to $21.9 million for the same period in 2002. The decrease was attributable to decreases in property carrying amounts as a result of the impairment recorded in the fourth quarter of 2002.
Income Taxes
We recorded a provision for income taxes of approximately $1.3 million, of which $0.6 million was related to discontinued operations, for the year ended December 31, 2003, primarily related to state income taxes. We increased our valuation allowance on our deferred tax assets by $93.3 million during 2003 to $708.8 million as of December 31, 2003. This valuation allowance is required under the guidance in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes, " due to our historical operating performance and our cumulative net losses. Our realization of the deferred tax benefits primarily associated with our net operating losses ("NOL") is dependent upon our achieving sufficient future pre-tax income. Under federal income tax law, we have up to 20 years to generate sufficient taxable income to realize the deferred benefits from NOLs. Given the size of our pre-tax loss, a valuation allowance is considered appropriate under the a ccounting standards.
At December 31, 2003, we have Federal NOL carryforwards of $1.0 billion with expiration dates from 2004 through 2023. Various subsidiaries have state NOL carryforwards totaling $939.5 million with expiration dates through the year 2023. In addition, we have capital loss carryforwards of $272.6 million, of which $10.1 million will expire in 2004 and $260.4 million will expire in 2006 and $2.1 million will expire in 2007. Our alternative minimum tax credit carryforward of $4.3 million has no expiration date. Our $7.2 million of other tax credit carryforwards will expire in years 2004 through 2022.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Results of Operations
We reported a net income for the year ended December 31, 2002 of $1,047.4 million compared to a net loss of $69.4 million for the prior year. The net income for the year ended December 31, 2002 included the following:
- |
a gain on extinguishment of debt of $1,498.4 million; |
- |
an asset impairment charge of $407.8 million, $128.8 million of which has been classified into loss from discontinued operations according to SFAS No. 144; |
- |
a $20.0 million charge for patient care liability costs related to our inpatient services operation; |
- |
a $2.8 million increase in reimbursement reserve accounts due to the Medicaid reserves related to our inpatient services operation; |
- |
an $8.7 million gain on sale of assets, net primarily due to the reversal of accrued prepetition liabilities related to disposed facilities; and |
- |
a gain from reorganization activities of $1.5 million resulting from the reversal of losses that were booked in connection with the anticipated divestiture of long-term care facilities that we subsequently determined to not divest. |
36
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Net income for 2001 included $42.9 million for reorganization costs, net, related to our bankruptcy and restructuring activities, a loss on asset impairments of $18.8 million and a restructuring charge of $1.1 million. In 2001, we recorded our settlement with the US government, which resulted in a charge of $11.0 million. In connection with the settlement, we reversed $52.1 million of net excess reserves related to routine cost limit exception payments. The reversal of the reserves is reflected as a component of net patient revenue in the 2001 consolidated statement of operations.
Net Revenues
After adjusting for the impact of SFAS No. 144 for the loss from discontinued operations, our net revenues for the year ended December 31, 2002 were $980.9 million compared to $2,075.2 million for the prior year. The decrease in net revenues of approximately $1,094.3 million for the year ended December 31, 2002, as compared to the prior year, primarily consisted of the following:
- |
a decrease of $919.1 million due to the SFAS No. 144 reclassification for 2002 of discontinued operations, primarily in our inpatient services operations; |
- |
decreases of $122.4 million, $23.9 million and $17.7 million due to dispositions in our inpatient, international and ancillary operations, respectively; and |
- |
a decrease of $34.8 million from facilities in our inpatient services operations which we operated during each year ended December 31, 2002 and 2001 ("same store operations"); offset in part by |
- |
an increase of $14.2 million caused by an increase in non affiliated revenue due to the divestiture of inpatient facilities; |
- |
a net increase of $3.6 million in our other operations segment, which is comprised of our temporary medical staffing operations, our mobile radiology, medical laboratory and home healthcare services and our software subsidiary; and |
- |
an increase of $1.3 million in our pharmaceutical and medical supply services operations. |
The unfavorable $34.8 million variance from inpatient services on a same store basis, reflects the impact of the aforementioned favorable adjustment of $52.1 million included in 2001 revenues. Without this adjustment in 2001, inpatient services' revenue on a same store basis increased by $17.3 million, primarily as a result of the following:
- |
an increase of $12.2 million in Medicare revenue due to slightly higher Medicare rates that existed for all but the last three months of 2002; |
- |
an increase of $7.1 million in Medicaid revenues driven by a slight increase in Medicaid census and rates, offset in part by |
- |
a decrease of $2.0 million in private, commercial and other revenue caused by a decrease in census. |
37
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Operating Salaries and Benefits
Operating salaries and benefits for the year ended December 31, 2002 were $620.0 million as compared to $1,114.5 million for the year ended December 31, 2001. The decrease of $494.5 million was primarily the result of lease terminations and facility divestitures in our inpatient services operations. For the ten months ended December 31, 2002, costs associated with divested facilities have been reclassified into discontinued operations. For the year ended 2001, these costs were included in results of operations.
Self-Insurance for Workers' Compensation and General and Professional Liability
We reported self-insurance costs of $38.0 million for the year ended December 31, 2002 as compared to $113.0 million for the year ended December 31, 2001. The decrease of $75.0 million is primarily related to the lease terminations and facility divestitures in our inpatient services operations and the impact of the reclassification of such costs in the ten month period ended December 31, 2002 for discontinued operations per SFAS No. 144.
Rent Expense
We reported rent expense of $68.4 million in 2002 as compared to $171.5 million in 2001. Excluding the impact of SFAS No. 144, on a same store basis in the year over year comparison, rent expense decreased $4.3 million to $43.1 million compared to $47.4 million in 2001 due to the renegotiation of leases and facility divestitures during the restructuring of our portfolio of skilled nursing facilities in 2002.
Other Operating Expenses, Other Corporate General and Administrative Expenses and Provision for Losses on Accounts Receivable
We reported other operating expenses, other general and administrative expenses and provision for losses on accounts receivable of $256.6 million during the year ended December 31, 2002 compared to $627.1 million during the prior year. The decrease in expenses of $370.5 million primarily consisted of the following:
- |
decreases of $137.6 million, $23.0 million and $20.0 million due to dispositions in our inpatient, international and ancillary operations, respectively; |
- |
a decrease of $8.7 million in our other segment primarily caused by the capitalization of certain costs for our software development subsidiary, which has achieved technical feasibility for its main software product; and |
- |
a decrease $8.9 related to our efforts to reduce overhead and streamline general and administrative costs, primarily salaries. |
These decreases were offset in part by: |
|
- |
an increase of $31.4 million due to same store operations in our inpatient services operations; |
- |
an increase of $14.2 million caused by an increase in non-affiliated revenue due to the divestiture of inpatient facilities; |
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES |
|
- |
a higher cost of goods sold of $3.6 million at our pharmacy operation caused by a higher mix of branded prescriptions of $9.9 million; and |
- |
an increase of $3.2 million in our rehabilitation and respiratory therapy services operations primarily driven by higher salaries expense. |
The increase in other operating expenses for same store operations was due to the following items:
- |
an increase of $5.0 million in purchased services; and |
- |
an increase of $4.9 million in paid time off expense. |
These increases were offset in part by: |
|
- |
decreased supplies expense of $6.7 million as a result of more monitoring of our purchasing activity; and |
- |
lower contract labor of $4.8 million due to more effective controls and more competitive wages. |
Interest Expense, net
Interest expense of $7.7 million, after the reclassification of $8.4 million to loss from discontinued operations as required by SFAS No. 144, was recorded in the year ended December 31, 2002 compared to $12.6 million in the prior year. The increase of $3.5 million in interest was due primarily to the recognition of interest for all of our debt instruments. While we were under bankruptcy protection for two months in 2002 we did not record interest expense on essentially all of our prepetition debt. Had we not been under bankruptcy protection in 2002, our interest expense, net for the year 2001 would have been $155.4 million.
Depreciation and Amortization
Depreciation and amortization expense was flat compared to the prior year with $32.9 million for 2002, excluding the impact of SFAS No. 144 that required the reclassification of $11.0 million to loss from discontinued operations in 2002, compared to $32.8 million for 2001.
Income Taxes
We recorded a provision for income taxes of approximately $0.6 million for the year ended December 31, 2002, primarily related to state income taxes. We increased our valuation allowance on our deferred tax assets by $139.4 million during 2002 to $615.5 million as of December 31, 2002. This valuation allowance is required under the guidance in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes, " due to our historical operating performance and our cumulative net losses. Our realization of the deferred tax benefits primarily associated with our net operating losses ("NOL") is dependent upon our achieving sufficient future pre-tax income. Under federal income tax law, we have up to 20 years to generate sufficient taxable income to realize the deferred benefits from NOLs. Given the size of our pre-tax loss, a valuation allowance is considered appropriate under the accounting standards.
39
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
For the year ended and as of December 31, 2003, our net income was $0.4 million and our working capital deficit was $57.4 million. Our working capital position was significantly improved as a result of the net proceeds of $52.3 million received from our private placement of our common stock and warrants in February 2004, even after paying off the outstanding loan balance under our revolving senior loan agreement. We anticipate that our working capital position will be further improved by, among other things, refinancing $21.2 million of mortgage debt that matures on May 1, 2004, which is classified as a current liability. We are currently in negotiation to refinance these mortgages and expect the $21.2 million to be refinanced and/or retired in part with the remaining balance reclassified as long- term debt.
As of March 1, 2004, we had cash and cash equivalents of approximately $40.1 million, no outstanding balance under our revolving loan agreement and approximately $31.0 million of funds available for borrowing under our revolving senior loan agreement. We believe that our existing cash reserves and availability for borrowing under our loan agreement will provide sufficient funds for our operations, capital expenditures and regularly scheduled debt service payments through the next twelve months.
We have reached agreement with substantially all of our landlords regarding the disposition of past due rent on our divested or to be divested facilities. On March 1, 2004, we entered into an Amended and Restated Master Lease Agreement with Omega Healthcare Investors, Inc. and various of its affiliates ("Omega"). Prior to our portfolio restructuring, we leased 51 facilities from Omega. Pursuant to the new Master Lease, we will continue to operate 30 facilities (including 23 long-term care facilities, two rehabilitation hospitals, and five behavioral facilities). Approximately $7.8 million of accrued past due rent as of March 1, 2004 and future rent obligations that would otherwise have become due under the existing master leases will be combined into "deferred base rent". That deferred base rent will bear interest at a floating rate equal to 375 basis points over the one year LIBOR rate, subject to a floor of 6% per annum. Interest will not be payab le until January 2008, at which time interest thereafter accruing will be payable monthly in arrears. Omega has the right to convert the deferred base rent and accrued interest into 800,000 shares of our common stock, subject to anti-dilution adjustments for sales of shares we make at less than fair market value at the time of sale. We have the right to pay cash in an amount equal to the value of the stock in lieu of issuing the stock to Omega. If the average value of the common stock issuable to Omega under the new Master Lease exceeds 140% of the deferred base rent and interest accrued thereon over a period of 30 business days, we can require Omega to convert the deferred base rent into our common stock.
As of September 5, 2003, we entered into a Loan and Security Agreement with CapitalSource Finance LLC, as collateral agent, and certain other lenders (the "Revolving Loan Agreement"). The Revolving Loan Agreement is a $75.0 million two-year revolving line of credit that is secured by our accounts receivable, inventory, equipment and other assets, and the stock of our subsidiaries. Pursuant to the Revolving Loan Agreement, we are paying interest (i) for Base Rate Loans at the greater of (a) prime plus 1.0% or (b) 5.25%, and (ii) for LIBOR Loans at the greater of (a) the London Interbank Offered Rate plus 3.75% or (b) 5.25%. The effective interest rate as of December 31, 2003 on borrowings under the Revolving Loan Agreement was approximately 5.25%. The weighted average borrowing interest rate for the period from September 5, 2003 through December 31, 2003 was 5.25%. Our borrowing availability under the Revolving Loan Agreement is generally limited to up to e ighty-five percent (85%) of the value of Eligible Receivables plus eighty-five percent (85%) of the value of Eligible Divested Company Receivables, but not to exceed $75.0 million. The defined borrowing base as of December 31, 2003 was $47.6 million, net of specified reserves of $15.0 million. The availability of amounts under our Revolving Loan Agreement is also subject to our compliance with certain financial ratios. As of December 31, 2003, we were in compliance with these ratios. As of December 31, 2003, we had borrowed approximately $13.1 million, which included $1.1 million of prepaid finance fees that will be amortized over the next nine months and does not count against availability, and we had issued approximately $21.7 million in letters of credit, leaving approximately $13.9 million available for additional borrowing. We have classified our Revolving Loan Agreement as a long-term liability at December 31, 2003. In connection with entering into the Revolving Loan Agreement, we incurred deferred financing costs of $2.6 million, which are amortized using the effective interest method over the life of the loan agreement.
40
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
On February 20, 2004, we completed a private placement of our common stock and warrants to purchase common stock to investors. We received net proceeds of approximately $52.3 million in the private placement. We sold approximately 4.4 million shares of our common stock, and warrants to purchase approximately 1.8 million shares of our common stock (inclusive of warrants paid to the placement agent). The price paid by investors was $12.70 per unit, except for 155,400 units sold at $12.87 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.4 shares of common stock with a warrant exercise period of five years.
On July 15, 2003, we sold the assets of our pharmaceutical services operations, including substantially all of the assets of SunScript Pharmacy Corporation, to Omnicare, Inc. for $90.0 million, of which $75.0 million was received in cash at closing with up to $15.0 million in additional purchase price, payable to us on or before July 15, 2005 subject to fulfillment of the conditions described below. We simultaneously entered into agreements pursuant to which Omnicare would provide pharmacy services to our inpatient facilities (the "Pharmacy Agreements"). The $15.0 million holdback portion is subject to reduction in the event that prior to payment: (i) we reject or modify one or more Pharmacy Agreements in a bankruptcy proceeding; (ii) the new operator of any of our divested facilities does not assume the same contract with Omnicare; and/or (iii) we breach the Pharmacy Agreements. On July 15, 2003, we used $39.5 million to pay off a prior term loan (including the $3.7 million discounted interest), $33.9 million to partially reduce our borrowing under our prior revolving loan agreement and $1.6 million for professional fees related to the sale.
We have substantially completed our restructuring efforts, including the restructuring of the portfolio of leases under which we operate most of our long-term care facilities. Through December 31, 2003, we had divested 127 facilities and had identified nine facilities that we would seek to transition to new operators. During the year ended December 31, 2003 we withheld approximately $28.0 million in accrued rent payments and $0.7 million of mortgage payments on facilities that we identified for transfer to new operators. Through December 31, 2003, we were released of our obligations to pay approximately $13.5 million of the withheld rent and $20.4 million of future mortgage debt. These amounts were recorded in our net gain on disposal in discontinued operations. The gain was significantly offset by the increase of accounts receivable allowances of $24.6 million recorded in 2003 related to the divestiture of the 127 facilities and amounts recorded to reduce remaining facility assets to net realizable value, netting to a gain of $5.8 million through December 31, 2003. The remaining amounts that we withheld and that were not released are classified as current obligations at December 31, 2003.
We incurred total capital expenditures related primarily to improvements at existing facilities, as reflected in the segment reporting, of $13.6 million, $34.7 million, $4.0 million and $30.3 million for year ended December 31, 2003, the ten months ended December 31, 2002, the two months ended February 28, 2002, and the year ended December 31, 2001, respectively. These capital expenditures include those related to discontinued operations of $3.8 million and $13.8 million, respectively, for the year ended December 31, 2003 and the ten month period ended December 31, 2002. We had construction commitments as of December 31, 2003 under various contracts of approximately $0.8 million related to improvements at facilities.
41
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
On February 28, 2002, we delivered a promissory note to the United States of America as part of our settlement agreement with the federal government and $8.0 million remains outstanding under the note. The outstanding payments coming due under the promissory note are payable as follows: $2.0 million on February 28, 2005; and $3.0 million on each of February 28, 2006 and 2007. Interest under the promissory note is based upon the weekly average one-year constant maturity treasury yield. The effective interest rate as of December 31, 2003 was approximately 2.2%.
We continue to negotiate settlements of bankruptcy claims for periods prior to October 14, 1999 that were filed by various State Medicaid agencies. We expect to pay in excess of approximately $3.6 million to the State Medicaid agencies to resolve these claims. The payments are expected to be made partly in cash, partly with promissory notes and potentially netted against reimbursements payable to us. We currently have $4.0 million reserved against our borrowing base agreement relating to these payments.
Obligations and Commitments
The following table provides information about our contractual obligations and commitments in future years as of December 31, 2003 (in thousands):
Payments Due by Period |
|||||||
|
|
|
|
|
|
After |
|
Contractual Obligations: |
|||||||
Debt (excluding capital |
|
|
|
|
|
|
|
Capital lease obligations |
364 |
364 |
- |
- |
- |
- |
- |
Construction commitments |
782 |
782 |
- |
- |
- |
- |
- |
Purchase obligations |
2,500 |
2,500 |
- |
- |
- |
- |
- |
Operating leases |
341,973 |
52,720 |
50,911 |
51,514 |
39,099 |
34,930 |
112,799 |
Total |
$ 449,592 |
$ 86,055 |
$ 82,323 |
$ 58,855 |
$ 45,127 |
$ 37,887 |
$ 139,345 |
======= |
====== |
====== |
====== |
====== |
====== |
====== |
Amount of Commitment Expiration Per Period |
|||||||
Total |
|
|
|
|
|
|
|
Other Commercial Commitments: |
|||||||
Letters of credit |
$ 21,720 |
$ 21,720 |
$ - |
$ - |
$ - |
$ - |
$ - |
Total |
$ 21,720 |
$ 21,720 |
$ - |
$ - |
$ - |
$ - |
$ - |
======= |
====== |
====== |
====== |
====== |
====== |
====== |
(1) |
Includes total interest on debt of $25.1 million based on contractual rates, of which $3.5 million is attributed to variable interest rates determined using the weighted-average method. |
Actual letters of credit outstanding as of December 31, 2003 were $39.4 million, however approximately $17.7 million were duplicative and required to replace existing letters of credit when our prior loan agreement was refinanced such that our total exposure for letters of credit under our credit facility was $21.7 million.
42
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
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. Our operations could be adversely affected if we experience significant delays in receiving reimbursement rate increases from Medicaid and Medicare sources for our labor and other costs.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk because we hold debt that is sensitive to changes in interest rates. We manage our interest rate risk exposure by maintaining a mix of fixed and variable rates for debt. The following table provides information regarding our market sensitive financial instruments and constitutes a forward-looking statement.
|
Fair Value |
Fair Value |
|||||||
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
2003 |
2002 |
|
(Dollars in thousands) |
|||||||||
Total long-term debt: |
|||||||||
Fixed rate |
$ 3,064 |
$ 7,917 |
$ 5,394 |
$ 4,339 |
$ 1,445 |
$ 15,604 |
$ 37,763 |
$ 33,231 |
$ 137,406 |
Average interest rate |
7.59% | 7.63% | 7.27% | 7.89% |
8.86% |
9.69% | |||
Variable rate |
$ 21,536 | $ 19,579 | $ - | $ - | $ - | $ - | $ 41,115 |
$ 27,867 |
$ 22,987 |
Average interest rate |
5.41% |
6.49% |
0.0% |
0.0% |
0.0% |
0.0% |
|
Item 8. Financial Statements and Supplementary Data
Information with respect to Item 8 is contained in our 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
Not applicable.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, our management, including our Chief Executive Officer (who also serves as Chairman of the Board) and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. No change in our internal control over financial reporting occurred during the last fiscal quarter of 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
43
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PART III
Item 10. Directors and Executive Officers of the Registrant
Our directors and executive officers as of March 1, 2004 were:
Name |
Position with Sun |
Richard K. Matros |
Chairman of the Board and Chief Executive Officer |
Kevin W. Pendergest |
Executive Vice President and Chief Financial Officer |
Steven A. Roseman |
Executive Vice President, General Counsel and Secretary |
Chauncey J. Hunker |
Corporate Compliance Officer |
Heidi J. Fisher |
Senior Vice President of Human Resources |
Jennifer L. Botter |
Senior Vice President and Corporate Controller |
William A. Mathies |
President of SunBridge Healthcare Corporation |
Tracy A. Gregg |
President of SunDance Rehabilitation Corporation |
Kathryn Gay Kelley |
President of CareerStaff Unlimited, Inc. |
Jennifer L. Clarke |
President of SunPlus Home Health Services, Inc. and |
Mary K. Ousley |
Executive Vice President of SunBridge Healthcare Corporation |
Gregory S. Anderson |
Director |
Bruce C. Vladeck |
Director |
Milton J. Walters |
Director |
Richard K. Matros, age 50, has been our Chairman of the Board and Chief Executive Officer since November 2001. Mr. Matros served as Chief Executive Officer and President of Bright Now! Dental from 1998 to 2000. He served Regency Health Services, Inc., a publicly held long-term care operator, as Chief Executive Officer from 1995 to 1997, as President and a director from 1994 to 1997, and as Chief Operating Officer from 1994 to 1995. He served Care Enterprises, Inc. as Chief Executive Officer during 1994, as President, Chief Operating Officer and a director from 1991 to 1994, and as Executive Vice President - Operations from 1988 to 1991. Mr. Matros currently serves on the board of directors of Bright Now! Dental, Geriatrix, Inc. and Meridian Neurocare, LLC.
Kevin W. Pendergest, age 50, has been our Executive Vice President and the Chief Financial Officer since March 2002. Mr. Pendergest was the President and owner of Strategic Alliance Network, a healthcare services advisory firm, from 1995 to February 2002. From 1990 to 1995 he was Executive Vice President and Chief Financial Officer of GranCare, Inc., a publicly held long-term care company. From 1981 to 1989, Mr. Pendergest held various positions with Deloitte Haskins & Sells, the last of which was as Partner in Charge of Healthcare Consulting for the Western Region of the United States.
Steven A. Roseman, age 45, has been our Executive Vice President, General Counsel and Secretary since May 2002. From March 2001 to May 2002, Mr. Roseman was Counsel to the law firm of LeBoeuf Lamb Greene & MacRae, LLP. From 1997 to 2000, he was Senior Vice President, General Counsel and Secretary of American Health Properties, Inc., a NYSE-listed healthcare-oriented real estate investment trust. Previously, Mr. Roseman was Vice President Business Affairs Worldwide Pay Television for Paramount Pictures Corporation and, prior to that, was a partner in Ervin, Cohen & Jessup, a Beverly Hills, California law firm.
44
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Chauncey J. Hunker, Ph.D., age 53, has been our Corporate Compliance Officer since 2000. From 1996 to 2000, Dr. Hunker served as Vice President of Continuous Quality Improvement of SunDance Rehabilitation Corporation, our rehabilitation therapy subsidiary ("SunDance"). From 1995 to 1996, he was a Clinical Director of SunDance, and from 1992 to 1995 he was Regional Vice President of Learning Services - Midwestern Regional Facility in Madison, Wisconsin. Dr. Hunker has also served as Adjunct Assistant Professor, Department of Neurology, at the University of Wisconsin Medical School since 1989.
Heidi J. Fisher, age 47, has been our Senior Vice President of Human Resources since February 2002. From 1998 to 2002, Ms. Fisher was Vice President Human Resources of Bright Now! Dental, a dental practice management company. From 1997 to 1998, she was Corporate Director of Human Resources at Covenant Care, Inc., a long-term care company. From 1994 to 1997, Ms. Fisher was with Regency Health Services, Inc., a long-term care company, most recently with the title Senior Director of Human Resources. From 1987 to 1994, Ms. Fisher was Senior Manager of Human Resources with Volt Delta Resources, Inc.
Jennifer L. Botter, age 41, has been our Senior Vice President since February 2004 and our Corporate Controller since 2000. From 1998 to 1999, Ms. Botter held various positions with us. From 1996 to 1998, she was Director of Finance for Fulcrum Direct, Inc., a manufacturer and cataloguer of children's apparel. From 1984 to 1996 she held financial consulting and accounting positions in the high technology and manufacturing industries.
William A. Mathies, age 44, has been President of SunBridge Healthcare Corporation, our inpatient services subsidiary, since March 2002. From 1995 to March 2002, Mr. Mathies served as Executive Vice President of Beverly Enterprises, Inc., a long-term care company. Most recently, he was the Executive Vice President of Innovation/Services for Beverly. He previously served Beverly as President of Beverly Health and Rehabilitation Services, (the long term care subsidiary of Beverly), from 1995 to 2000, and various other operational positions from 1981 to 1985.
Tracy A. Gregg, age 50, has been the President of SunDance Rehabilitation Corporation, our rehabilitation therapy services subsidiary, since 2000. From 1987 to 1999, Ms. Gregg was employed by NovaCare, Inc in various capacities, most recently as Senior Vice President of Operations of the Long Term Care Division. Ms. Gregg has over 28 years of experience in the long term care industry.
Kathryn Gay Kelley, age 49, has served as President of CareerStaff Unlimited, Inc., our temporary medical staffing subsidiary, since February 2002. From 1993 to 2002, Ms. Kelley was employed by Nursefinders, Inc. in various capacities, including Branch Manager, Area Director and Vice President. From 1990 to 1993, Ms. Kelley was employed with Harris Methodist Health Systems as the Director of Employment and Employee Relations, and prior to that was employed with Alcon Laboratories as a Senior Staff Recruiter. Ms. Kelley, who is also a nurse, has worked in human resources and recruitment for over 20 years and has worked with both domestic and international recruitment.
Jennifer L. Clarke, age 49, has served as President of SunPlus Home Health Services, Inc., our home healthcare services subsidiary, since 1997 and of SunAlliance Healthcare Services, Inc., our mobile radiology and laboratory services subsidiary, since 1999. From 1995 to 1997, Ms. Clarke was Vice-President of the Southern California region home health services for Regency Health Services, Inc. and from 1990 to 1995 she served as Vice-President of Operations for LifeCare Solutions, a multi-site California based home health and home infusion company. From 1983 to 1990, she was the administrator of a hospital-based home health agency, West HealthCare. Ms. Clarke was an executive officer of SunAlliance and SunPlus when they commenced chapter 11 bankruptcy proceedings in October 1999.
45
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Mary K. Ousley, age 58, has served as Executive Vice President of SunBridge Healthcare Corporation since 2001. From 1999 to 2001, Ms. Ousley was Senior Vice President Health Service for Marriott International's Senior Living Division. From 1996 to 1999, Ms. Ousley was employed by Horizon Healthcare Corporation, which was acquired in 1997 by Integrated Health Services, Inc., as Vice President Clinical Services for Horizon and as Senior Vice President Government Affairs for Integrated Health Services. From 1991 to 1996, Ms. Ousley was Corporate Director Professional Services for the Hillhaven Corporation and from 1980 to 1991 she was Executive Administrator for EPI Healthcare Corporation. Ms. Ousley served as President of the American Health Care Association, the largest trade organization representing long-term care from 2001 to 2003. Over the past fifteen years, Ms. Ousley has been appointed to, and ha s made recommendations for, the General Accounting Office (GAO) and the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), and has served in various capacities as an advisor to the Centers for Medicare and Medicaid (CMS). She is currently serving on the CMS and Quality Improvement Organization's technical expert panel on the development and implementation of a quality improvement model for long-term care.
Gregory S. Anderson, age 47, has served as a member of our Board of Directors since November 2001. Mr. Anderson has served as the President and Chief Executive Officer of Quality Care Solutions, Inc., a publicly held provider of software and services for the healthcare industry, from 1998 to 2002. He has also served as President and Chief Executive Officer of Glendora Holdings, LLC, an operator of long-term care facilities and medical imaging centers, since 2002. Prior to 1998 Mr. Anderson was in the venture capital business. From 1993 to 1998 he was President of Anderson & Wells Co., the venture capital manager of Sundance Venture Partners and El Dorado Investment Co. Mr. Anderson currently serves on the board of directors of Hawaiian Airlines, Inc., a publicly held airline (which commenced bankruptcy proceedings in March 2003), Glendora Hospital and Valley Commerce Bank.
Bruce C. Vladeck, Ph.D., age 54, has served as a member of our Board of Directors since November 2001. Dr. Vladeck has served as Professor of Health Policy and Geriatrics at Mount Sinai School of Medicine since 1998 and as an independent consultant since 1997. From 1998 to 2003, he also served as Senior Vice President for Policy for Mount Sinai NYU Health and Director of the Institute for Medicare Practice. From 1993 to 1997, Dr. Vladeck was Administrator of the Health Care Financing Administration (HCFA) of the U.S. Department of Health and Human Services. From 1983 to 1993, Dr. Vladeck served as President of United Hospital Fund of New York. Dr. Vladeck currently serves as a Trustee of Ascension Health, the March of Dimes Birth Defects Foundation and the Medicare Rights Center.
Milton J. Walters, age 61, has served as a member of our Board of Directors since November 2001. Mr. Walters has served with investment banking companies for over 30 years, including: Tri-River Capital since 1999 and from 1988 to 1997, as President; Prudential Securities from 1997 to 1999, most recently as Managing Director; Smith Barney from 1984 to 1988, most recently as Senior Vice President and Managing Director; Warburg Paribas Becker from 1965 to 1984, most recently as Managing Director. He currently serves on the Board of Directors of Decision One Corporation, Fredericks of Hollywood and Quest Products Corporation.
Audit Committee
The Board of Directors of Sun Healthcare Group, Inc. has established an Audit Committee to oversee our accounting and financial reporting processes on behalf of the Board. The Audit Committee currently consists of three members of the Board of Directors, all of whom are "independent" as defined by the Securities and Exchange Commission: Milton J. Walters (chair), Gregory S. Anderson and Bruce C. Vladeck, Ph.D. The board has designated one member of the Audit Committee, Mr. Walters, as a financial expert, as defined by the Securities and Exchange Commission. Mr. Walters' biography is set forth above.
46
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act and the rules promulgated thereunder require our directors and executive officers and persons who own more than ten percent of our common stock to report their ownership and changes in their ownership of common stock to the Securities and Exchange Commission (the "Commission"). Copies of the reports must also be furnished to us. Specific due dates for the reports have been established by the Commission and we are required to report any failure of our directors, executive officers and more than ten percent stockholders to file by these dates.
Based solely on a review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during 2003 all Section 16(a) filing requirements applicable to our directors, executive officers and greater than ten percent beneficial owners were met with the exception of Sanjay Patel and John Nickoll, former directors of the Company, who each filed one late Form 4. Each such Form 4 reported one transaction.
Code of Ethics
We adopted a Code of Ethics that applies to Mr. Matros as our Chief Executive Officer, Mr. Pendergest as our Chief Financial Officer, Ms. Botter as our Corporate Controller, and other financial personnel. The Code of Ethics is designed to deter wrongdoing and to promote, among other things, (i) honest and ethical conduct, (ii) full, fair, accurate, timely and understandable disclosures, and (iii) compliance with applicable governmental laws, rules and regulations. The code of ethics is attached as an exhibit (see Item 15 - Exhibits) and is also available on our website www.sunh.com. If we make any substantive amendments to the Code of Ethics or grant any waiver, including any implicit waiver, from a provision of the code to our Chief Executive Officer, Chief Financial Officer or Corporate Controller, we will disclose the nature of such amendment or waiver on our website.
Item 11. Executive Compensation
Summary Compensation Table
The following table provides information concerning employment compensation for services to us and our subsidiaries for the fiscal years shown for those persons (the "Named Executive Officers") who were, during the year ended December 31, 2003, (i) the individuals who served as chief executive officer, and (ii) the other four most highly compensated executive officers.
47
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Long-Term |
|||||||
Name and Principal Position |
|
Annual Compensation Salary Bonus |
Restricted Stock Awards ($) |
Securities Underlying Options (#) |
|
||
Richard K. Matros (1) |
2003 |
$ 653,695 |
$ 812,500 |
$ -4,050,000(2) |
$ - |
$ - |
|
Kevin W. Pendergest (1) |
2003 |
428,134 |
531,250 |
- |
- |
- |
|
William A. Mathies (1) |
2003 |
403,072 |
500,000 |
- |
- |
- |
|
Tracy A. Gregg |
2003 |
279,193 |
223,018 |
- |
- |
- |
|
Steven A. Roseman(1) |
2003 |
277,606 |
343,750 |
- |
- |
- |
______________________
(1) |
Mr. Matros joined us in November 2001, Mr. Pendergest and Mr. Mathies joined us in February 2002 and Mr. Roseman joined us in May 2002. |
(2) |
We awarded Mr. Matros with a restricted stock grant of 150,000 shares on February 28, 2002 at a then-estimated value of $27 per share. The restricted stock vests as follows: 60,000 shares on February 28, 2003 and 30,000 shares on each of February 28, 2004, 2005 and 2006. At December 31, 2003, the 90,000 unvested restricted shares had an aggregate value of $895,000, based on the last reported sales price of the common stock on the Over-The-Counter Bulletin Board on December 31, 2003. To the extent we declare any dividends on our common stock, Mr. Matros' restricted shares would participate in any such dividends. |
(3) |
We awarded Mr. Pendergest a one-time sign-on bonus when he joined us. |
Option Grants in Last Fiscal Year
The Named Executive Officers were not granted any stock options during the year ended December 31, 2003. On January 22, 2004, we granted an aggregate of 90,000 shares of restricted stock to 16 officers pursuant to our 2002 Management Equity Incentive Plan. The restricted shares vest at the rate of 25% on each of January 22, 2005, 2006, 2007 and 2008.
48
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Fiscal Year-End Option Values
Set forth in the table below is information concerning the value of stock options held as of December 31, 2003 by each of the Named Executive Officers. None of the Named Executive Officers exercised any stock options during the year ended December 31, 2003.
|
Number of Securities |
Value of Unexercised |
||
Name |
Exercisable |
Unexercisable |
Exercisable |
Unexercisable |
Richard K. Matros |
60,000 |
90,000 |
$ - |
$ - |
Kevin W. Pendergest |
80,000 |
120,000 |
- |
- |
William A. Mathies |
40,000 |
60,000 |
- |
- |
Tracy A. Gregg |
5,000 |
15,000 |
- |
- |
Steven A. Roseman |
5,625 |
16,875 |
- |
- |
__________________
(1) The last reported sales price of the common stock of $9.95 per share, as reported on the Over-The-Counter Bulletin Board at December 31, 2003, was less than the exercise price of all stock options.
Compensation of Directors
Our non-employee directors are entitled to receive: (i) an annual fee of $24,000, which is payable in four equal quarterly installments, (ii) $1,750 for each Board of Directors or Committee meeting attended in person, (iii) an additional $500 for each subsequent meeting attended that same day, and (iv) $500 for any meetings attended by telephone. In addition, each Chairperson of a Committee of the Board of Directors is entitled to receive an additional annual fee of $4,000, payable in four equal quarterly installments. Each of the non-employee directors is reimbursed for out-of-pocket expenses for attendance at Board and committee meetings. In addition, each of the non-employee directors has been awarded stock options to purchase 10,000 shares of common stock at an exercise price of $27 per share and 10,000 shares of common stock at an exercise price of $11.25 per share.
Employment and Severance Agreements with Named Executive Officers
We entered into employment agreements with Mr. Matros, Mr. Pendergest, Mr. Mathies and Mr. Roseman in 2002, providing for annual base salaries of $650,000, $425,000, $400,000 and $275,000, respectively. The agreements with Mr. Matros and Mr. Pendergest have terms of four years and are automatically renewed for additional terms of one year unless the employee or Sun notifies the other that the term will not be renewed. The agreements with Mr. Mathies and Mr. Roseman do not have specified terms. In addition to the base salary, Mr. Matros, Mr. Pendergest, Mr. Mathies and Mr. Roseman are entitled to annual bonuses for each fiscal year in which we achieve or exceed the following financial performance targets: (i) if 100% to 119% of target earnings before interest, taxes, depreciation and amortization, then 50% of base salary; (ii) 120% to 139% of target earnings before interest, taxes, depreciation and amortization, then 75% of base salary; and (iii) if greater than 140% of target earnings before interest, taxes, depreciation and amortization, then 100% of base salary. Target earnings are set annually by the Board of Directors. For the year ended December 31, 2003, we achieved greater than 140% of target earnings and we paid the officers incentive bonuses accordingly. Pursuant to the agreements, these officers received options to purchase an aggregate of 472,500 shares of common stock at an exercise price of $27 per share. The options vest over the four-year period ending 2006.
49
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
The employment agreements with Mr. Matros and Mr. Pendergest generally provide that in the event of termination of employment without Good Cause or by the employee for Good Reason (each as defined in the employment agreements), then the employee would be entitled to a lump sum severance amount equal to the greater of (i) the base salary owing for the remaining term of the agreement or (ii) two years of base salary, unless the event occurred within two years of a change of control, in which case they would each be entitled to three years of base salary. The employment agreements with Mr. Mathies and Mr. Roseman generally provide that in the event of termination of employment without Good Cause or by the employee for Good Reason, then the employee would be entitled to a lump sum severance payment equal to two years and one years base salary, respectively, unless the event occurred within two years of a change of control, in which case they would be entitled to t hree years and two years of base salary, respectively. Additionally, each employee would be entitled to any earned but unpaid bonus and certain of the employees would also be entitled to one or two times the amount of the bonus which would have been earned in the year of termination (depending upon the terms of the applicable agreement.)
We have entered into severance agreements with five of our other executive officers pursuant to which they would receive severance payments in the event of their Involuntary Termination of employment (as defined in the agreements). The severance payments would be equal to 12 months of their then-current salary, or an aggregate of approximately $1.2 million. In addition to the severance payments, they would have the right to participate for a defined period of time in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to them immediately prior to termination.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Board of Directors currently consists of Bruce C. Vladeck, Ph.D., Milton J. Walters and Greg S. Anderson. None of these individuals has ever been an officer or employee of ours. None of our current executive officers has ever served as a member of the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders' Matters
The following table and footnotes set forth certain information regarding the beneficial ownership of common stock as of March 1, 2004 by (i) each director, (ii) the Named Executive Officers (as defined above) and (iii) all directors and executive officers of Sun Healthcare Group, Inc. as a group.
50
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
|
Shares |
Percent of |
||
Gregory S. Anderson |
3,250 |
(2) |
* |
|
Tracy A. Gregg |
12,727 |
(3) |
* |
|
William A. Mathies |
76,636 |
(4) |
* |
|
Richard K. Matros |
270,455 |
(5) |
1.8% |
|
Kevin W. Pendergest |
154,773 |
(6) |
1.0% |
|
Steven A. Roseman |
10,692 |
(7) |
* |
|
Bruce C. Vladeck |
3,250 |
(2) |
* |
|
Milton J. Walters |
8,250 |
(8) |
* |
|
All directors and executive officers as a |
600,579 |
(9) |
4.0% |
_____________________
* Less than 1.0%
(1) |
Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Options exercisable within 60 days of March 1, 2004 are deemed to be currently exercisable. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned. |
(2) (3)
(4)
(5)
(6) |
Consists solely of shares that could be purchased pursuant to stock options. Consists of (i) 10,000 shares that could be purchased pursuant to stock options, and (ii) 2,727 restricted shares awarded under our 2002 Management Equity Incentive Plan that remain subject to a risk of forfeiture. Consists of (i) 3,000 shares held by the Mathies Family Trust, (ii) 60,000 shares that could be purchased pursuant to stock options, and (iii) 13,636 restricted shares awarded under our 2002 Management Equity Incentive Plan that remain subject to a risk of forfeiture. Consists of (i) 100,000 shares held by Mr. Matros without restriction, (ii) 90,000 shares that could be purchased pursuant to stock options and (iii) 80,455 restricted shares awarded under our 2002 Management Equity Incentive Plan that remain subject to a risk of forfeiture. Consists of (i) 3,000 shares held by the Pendergest Childrens' Trust of 1991, (ii) 4,500 shares held by Mr. Pendergest without restriction, (iii) 120,000 shares that could be purchased pursuant to stock options, and (iv) 27,273 restricted shares awarded under our 2002 Management Equity Incentive Plan that remain subject to a risk of forfeiture. |
(7) |
Consists of (i) 2,000 shares held by Mr. Roseman without restriction, (iii) 5,625 shares that could be purchased pursuant to stock options, and (iii) 3,067 restricted shares awarded under our 2002 Management Equity Incentive Plan that remain subject to a risk of forfeiture. |
(8) |
Consists of (i) 5,000 shares held by Mr. Walters without restriction, and (ii) 3,250 shares that could be purchased pursuant to stock options. |
50 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
|
|
(9) |
Consists of (i) 7,000 shares held in family trusts or by a spouse, (ii) 111,500 shares held without restriction, (iii) 341,625 shares that could be purchased pursuant to stock options, and (iv) 140,454 restricted shares awarded under our 2002 Management Equity Incentive Plan that remain subject to a risk of forfeiture. |
The following table and footnotes set forth certain information regarding the beneficial ownership of our common stock as of March 1, 2004 by each person believed by us to be the beneficial owner of more than five percent of our common stock.
|
Shares |
|
Greenwich Street Capital Partners II, L.P. |
1,180,778 (2) |
7.9% |
Stephen Feinberg |
1,102,362 (3) |
7.4% |
_________________________
(1) |
Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned. |
(2) |
Based on information included in a Form 4 filed with the Commission on March 14, 2003. Consists of shares beneficially held by Greenwich Street Capital Partners II, L.P., GSCP (NJ), L.P., GSCP (NJ), Inc., Greenwich Street Investments II, L.L.C., GSC Recovery II, L.P., GSC Recovery II GP, L.P., GSC Recovery, Inc., GSC Recovery IIA, L.P. and GSC Recovery IIA GP, L.P. |
(3) |
Based on information included in a schedule 13G filed with the Commission in February 2004 consists of securities held by Cerberus Partners, L.P. of which Mr. Feinberg is the general partner. Includes 314,960 shares that could be purchased pursuant to warrants. |
52
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
The following table presents, as of December 31, 2003, compensation plans (including individual compensation arrangements) under which equity securities of Sun Healthcare Group, Inc. are authorized for issuance.
|
|
|
Number of securities |
||||
Equity compensation plans approved by security holders |
|
|
|
||||
Equity compensation plans not approved by security holders |
|
|
|
||||
Total |
720,000 |
$ 27.00 |
190,000 |
Item 13. Certain Relationships and Related Transactions
Sanjay H. Patel, a former director, was the Co-President of GSC Partners during 2003. Mr. Patel is a managing member, executive officer, limited partner or shareholder of certain entities affiliated with, or related to, other entities which, in the aggregate, beneficially owned more than 10% of our common stock while Mr. Patel was a director during the year ended December 31, 2003, (See "Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholders' Matters") and
held in excess of $10.0 million principal amount of indebtedness under our prior loan agreements during 2003. These loan agreements were subsequently paid in full.John F. Nickoll, a former director, was the President, Chairman and Chief Executive Officer of The Foothill Group, Inc. and the Managing Member of FIT GP, LLC, the General Partner of Foothill Income Trust, L.P. during 2003. Through its affiliates, The Foothill Group, Inc. beneficially held more than 10% of our common stock while Mr. Nickoll was a director during the year ended December 31, 2003. (See "Item 10 - Directors and Executive Officers of the Registrant" and "Item 12 - Security Ownership of Certain Beneficial Owners and Management.") Foothill Income Trust L.P. is a party to our Loan Agreement and, during 2003, we were indebted to Foothill Income Trust L.P. under the loan agreements and for letters of credit in excess of $25.0 million.
During 2003, Highland Capital Management LP ("Highland") beneficially held approximately 9.6% of our common stock. See "Item 12 - Security Ownership of Certain Beneficial Owners and Management." Highland was a party to our Loan Agreements during 2003, and we were indebted to Highland Capital Management for in excess of $30.0 million under those agreements, which loan agreements were subsequently paid in full.
Item 14. #9; Principal Accounting Fees and Services
The table below shows the fees that we paid or accrued for the audit and other services provided by
Ernst & Young LLP ("E&Y") and Arthur Andersen LLP ("AA") for fiscal years 2003 and 2002. E&Y provided services for the year ended December 31, 2003 and the ten month period ended December 31, 2002. AA provided services for the two-month period ended February 28, 2002. During 2002, our Audit Committee determined that the provision by AA and E&Y of non-audit services was compatible with maintaining the audit independence of AA and E&Y. The following table summarizes our principal accounting fees and services incurred for the years ended December 31, (in thousands):53
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Services |
2003 |
2002 |
Audit Fees - E&Y |
$ 1,007 |
$ 1,086 |
Audit Fees - AA |
- |
279 |
Tax Fees - E&Y |
14 |
38 |
Tax Fees - AA |
- |
114 |
All Other Fees - E&Y |
356 |
780 |
All Other Fees - AA |
- |
1,037 |
Total |
$ 1,377 |
$ 3,334 |
========= |
========= |
Audit Fees. This category includes the fees for the examination of Sun's consolidated financial statements and the quarterly reviews of interim financial statements. This category also includes advice on audit and accounting matters that arose during or as a result of the audit or the review of interim financial statements, and the preparation of an annual "management letter" on internal control matters.
Tax Fees. Tax fees include the fees related to the planning and preparation of federal, state and local tax returns, compliance with federal, state and local taxing authorities and regulations, assistance with tax audits and appeals before the IRS and similar local and state agencies and the review of federal, state and local income, franchise and other tax-related matters.
All Other Fees. For E&Y, this category includes fees associated with consulting services provided to Sun for medical risk and quality compliance. For AA, this category includes fees associated with consulting services provided to Sun for restructuring related to emergence from chapter 11 bankruptcy proceedings.
Audit Committee Pre-Approval Policies and Procedures. The Charter for the Audit Committee of our Board of Directors establishes procedures for the Audit Committee to follow to pre-approve auditing services and non-auditing services to be performed by our independent public accountants. Such pre-approval can be given as part of the Committee's approval of the scope of the engagement of the independent public accountants or on an individual basis. The approved non-auditing services must be disclosed in our periodic public reports. The Committee can delegate the pre-approval of non-auditing services to one or more of its members, but the decision must be presented to the full Committee at the next scheduled meeting. The charter prohibits Sun from retaining our independent public accountants to perfor m specified non-audit functions, including (i) bookkeeping, financial information systems design and implementation, (ii) appraisal or valuation services, fairness opinions, or contribution-in-kind reports, (iii) actuarial services; and (iv) internal audit outsourcing services. The Audit Committee pre-approved all of the non-audit services provided by our independent public accountants in 2003.
54
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules
(i) Financial Statements:
Report of Ernst & Young, LLP, Independent Auditors
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the year ended December 31, 2003, ten months
ended December 31, 2002, two months ended February 28, 2002 and year ended
December 31, 2001
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended December 31,
2003, ten months ended December 31, 2002, two months ended February 28, 2002 and
year ended December 31, 2001
Consolidated Statements of Cash Flows for the year ended December 31, 2003, ten months
ended December 31, 2002, two months ended February 28, 2002 and year ended
December 31, 2001
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II Valuation and Qualifying Accounts for the years ended December 31,
2003, 2002 and 2001
(All other financial statement schedules required by Rule 5-04 of Regulation S-X are not applicable
or not required).
(b) Reports on Form 8-K
1. |
Report dated November 19, 2003, and filed on November 24, 2003, to furnish our press release that disclosed our third quarter results. |
2. |
Report dated December 29, 2003, and filed on December 30, 2003, to file our press release announcing that we entered into an agreement to sell our rehabilitation therapy operations conducted by SunDance Rehabilitation Corporation. |
55
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(c) Exhibits
Exhibit |
|
3.1(1) |
Amended and Restated Certificate of Incorporation of Sun Healthcare Group, Inc. |
3.2(1) |
Amended and Restated Bylaws of Sun Healthcare Group, Inc. |
4.1(2) |
Form of Registration Rights Agreement among Sun Healthcare Group, Inc. and the parties named therein dated as of February 28, 2002 |
4.2(1) |
Warrant Agreement dated February 28, 2002 between Sun Healthcare Group, Inc. and American Stock Transfer & Trust Company |
4.3(1) |
Sample Common Stock Certificate of Sun Healthcare Group, Inc. |
4.4(3) |
Form of Warrant issued by Sun Healthcare Group, Inc. to each of the purchasers named on the list of purchasers attached thereto |
4.5(3) |
Form of Registration Rights Agreement between Sun Healthcare Group, Inc. and the purchasers named on the list of purchasers attached thereto |
4.6(3) |
Form of Subscription Agreement between Sun Healthcare Group, Inc. and the purchasers named on the list of purchasers attached thereto |
10.1(4) |
Loan and Security Agreement dated September 5, 2003 among Sun Healthcare Group, Inc. and certain of its subsidiaries as Borrowers, Capital Source Finance, LLC, as Collateral Agent and certain other lending institutions |
10.2(5)+ |
Amended and Restated 2002 Non-Employee Director Equity Incentive Plan of Sun Healthcare Group, Inc. |
10.3(2)+ |
2002 Management Equity Incentive Plan of Sun Healthcare Group, Inc. |
|
|
10.4(2) |
Form of Expense Indemnification Agreement between Sun Healthcare Group, Inc. and certain former and current directors and officers |
10.5(7) |
Joint Plan of Reorganization dated December 18, 2001 |
10.6.1(7) |
Amendments to Joint Plan of Reorganization |
10.7(7) |
Disclosure Statement dated December 18, 2001 |
10.8(2) |
Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Sun Healthcare Group, Inc. dated July 12, 2001 |
|
|
10.9(2)+ |
Employment Agreement with Richard K. Matros dated February 28, 2002 |
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES |
|
10.10(5)+ |
Employment Agreement with Kevin W. Pendergest dated February 28, 2002 |
10.11(5)+ |
Employment Agreement with William A. Mathies dated February 28, 2002 |
10.12(5)+ |
Employment Agreement with Steven A. Roseman dated May 22, 2002 |
10.13(8)+ |
Employment Agreement with Heidi J. Fisher dated February 11, 2002 |
10.14(8)+ |
Severance Agreement with Jennifer Clarke dated January 30, 2003 |
10.15(8)+ |
Severance Agreement with Mary Ousley dated March 29, 2002 |
10.16(9)+ |
Severance Agreement with Gay Kelley dated January 30, 2003 |
10.17(9)+ |
Severance Agreement with Tracy A. Gregg dated April 2, 2003 |
10.18(2)+ |
Form of Severance Agreement with Chauncey J. Hunker |
10.19* |
Amended and Restated Master Lease Agreement among Sun Healthcare Group, Inc. and certain of its subsidiaries (as Lessees) and Omega Healthcare Investors, Inc. and certain of its affiliates (as Lessors) dated March 1, 2004 |
10.20 (6) |
Asset Purchase Agreement by and among Omnicare, Inc. (as buyer) and SunScript Pharmacy Corporation, Advantage Health Services, Inc., HoMed Convalescent, Inc., SunScript
Medical Services, Inc. and First Class Pharmacy, Inc. (as sellers) dated as of
June 15, 2003 |
14.1* |
Code of Ethics for the Registrant's Chief Executive Officer and Chief Financial Officer |
21.1* |
Subsidiaries of Sun Healthcare Group, Inc. |
31.1* |
Section 302 Sarbanes-Oxley Certifications by Chief Executive Officer and Chief Financial Officer |
32.1* |
Section 906 Sarbanes-Oxley Certifications by Chief Executive Officer and Chief Financial Officer |
_______________
* Filed herewith.
+ Designates a management compensation plan, contract or arrangement.
(1) Incorporated by reference from exhibits to our Form 8-A filed on March 6, 2002
(2) Incorporated by reference from exhibits to our Form 10-K filed on March 29, 2002
(3) Incorporated by reference from exhibits to our Form 8-K filed on February 20, 2004
(4) Incorporated by reference from exhibits to our Form 10-Q filed on
November 14, 2003
(5) Incorporated by reference from exhibits to our Form 10-Q filed on August 16,
2002
57
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(6) Incorporated by reference from exhibits to our Form 10-Q filed on August 14, 2003
(7) Incorporated by reference from exhibits to our Form 8-K dated February 28, 2002, as amended on
Form 8-K/A
(8) Incorporated by reference from exhibits to our Form 10-K filed on March 28, 2003
(9) Incorporated by reference from exhibits to our Form 10-Q filed on May 14, 2003
58
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
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/ Richard K. Matros |
|
Richard K. Matros |
|
Chairman of the Board and Chief |
|
Executive Officer |
March 5, 2004
59
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of Richard K. Matros and Steven A. Roseman as his attorney-in-fact, to sign this Report on his or her behalf, individually and in the capacity stated below, and to file all supplements and amendments to this Report and any and all instruments or documents filed as a part of or in connection with this Report or any amendment or supplement thereto, and any such attorney-in-fact may make such changes and additions to this Report as such attorney-in-fact may deem necessary or appropriate.
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 as of March 5, 2004 in the capacities indicated.
Signatures |
Title |
/s/ Richard K. Matros |
Chairman of the Board and Chief Executive Officer |
/s/ Kevin W. Pendergest |
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
/s/ Jennifer L. Botter |
Senior Vice President and Corporate Controller |
/s/ Gregory S. Anderson |
Director |
/s/ Bruce C. Vladeck |
Director |
/s/ Milton J. Walters |
Director |
60
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
December 31, 2003
Page |
|
Report of Ernst & Young, LLP, Independent Auditors |
F-2 |
Report of Independent Public Accountants |
F-3 |
Report of Independent Public Accountants |
F-4 |
Consolidated Balance Sheets |
|
Reorganized Company - as of December 31, 2003 |
F-5 |
Reorganized Company - as of December 31, 2002 |
F-5 |
Consolidated Statements of Operations |
|
Reorganized Company - for the year ended December 31, 2003 |
F-7 |
Reorganized Company - for the ten months ended December 31, 2002 |
F-7 |
Predecessor Company - for the two months ended February 28, 2002 |
F-7 |
Predecessor Company - for the year ended December 31, 2001 |
F-7 |
Consolidated Statements of Stockholders' Equity (Deficit) |
F-8 |
Reorganized Company - for the year ended December 31, 2003 |
F-8 |
Reorganized Company - for the ten months ended December 31, 2002 |
F-8 |
Predecessor Company - for the two months ended February 28, 2002 |
F-8 |
Predecessor Company - for the year ended December 31, 2001 |
F-8 |
Consolidated Statements of Cash Flows |
|
Reorganized Company - for the year ended December 31, 2003 |
F-9 |
Reorganized Company - for the ten months ended December 31, 2002 |
F-9 |
Predecessor Company - for the two months ended February 28, 2002 |
F-9 |
Predecessor Company - for the year ended December 31, 2001 |
F-9 |
Notes to Consolidated Financial Statements |
F-10 to F-56 |
Supplementary Data (Unaudited) - Quarterly Financial Data |
1 |
F-1
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
Sun Healthcare Group, Inc.
We have audited the accompanying consolidated balance sheets of Sun Healthcare Group, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year ended December 31, 2003 and the ten month period ended December 31, 2002. Our audit also included the financial statement schedule listed in the Index at Item 15(a) for the year ended December 31, 2003 and the ten month period ended December 31, 2002. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The consolidated financial statements of the Company (i) as of December 31, 2001 and the year then ended and (ii) for the two month period ended February 28, 2002 were audited by other auditors who have ceased operations and whose reports dated Mar ch 18, 2002 and April 29, 2002, respectively, expressed unqualified opinions on those financial statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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 December 31, 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial condition of Sun Healthcare Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the year ended December 31, 2003 and the ten month period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Dallas, Texas
March 1, 2004
F-2
NOTE: The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.
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. (Debtor-in-Possession) (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of losses, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sun Healthcare Group, Inc. (Debtor-in-Possession) and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Albuquerque, New Mexico
March 18, 2002
F-3
NOTE: The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Sun Healthcare Group, Inc.:
We have audited the accompanying consolidated balance sheet of Sun Healthcare Group, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of March 1, 2002, and the related consolidated statements of income (loss), stockholders' equity and cash flows for the two months ended February 28, 2002 (pre-confirmation). 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 audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective February 28, 2002, the Company was reorganized under a plan confirmed by the United States Bankruptcy Court for the District of Delaware and adopted a new basis of accounting whereby all remaining assets and liabilities were adjusted to their estimated fair values. Accordingly, the consolidated financial statements for periods subsequent to the reorganization are not comparable to the consolidated financial statements presented for prior periods.
In our opinion, the consolidated financial statements referred to above present fairly, in all material aspects, the financial position of Sun Healthcare Group, Inc. and subsidiaries as of March 1, 2002, and the results of their operations and their cash flows for the two months ended February 28, 2002, in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Albuquerque, New Mexico
April 29, 2002
F-4
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
Reorganized Company |
|||
December 31, 2003 |
December 31, 2002 |
||
Current assets: |
|||
Cash and cash equivalents |
$ 25,574 |
$ 21,013 |
|
Accounts receivable, net of allowance for doubtful accounts of |
|
|
|
Inventories, net |
3,695 |
21,846 |
|
Other receivables, net of allowance of $736 and $1,174 at |
|
|
|
Assets held for sale |
3,022 |
6,333 |
|
Restricted cash |
33,699 |
41,102 |
|
Prepaids and other assets |
4,742 |
12,437 |
|
Total current assets |
182,084 |
335,422 |
|
Property and equipment, net |
59,532 |
67,714 |
|
Notes receivable, net of allowance of $6,509 and $5,245 at
|
|
|
|
Goodwill, net |
3,834 |
3,894 |
|
Restricted cash |
33,920 |
39,264 |
|
Other assets, net |
20,588 |
28,035 |
|
Total assets |
$ 300,398 |
$ 475,835 |
|
========= |
========= |
See accompanying notes.
F-5
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
|
||||
December 31, 2003 |
December 31, 2002 |
|||
Current liabilities: |
||||
Current portion of long-term debt |
$ 24,600 |
$ 124,183 |
||
Accounts payable |
46,339 |
63,728 |
||
Accrued compensation and benefits |
41,333 |
66,723 |
||
Accrued self-insurance obligations |
59,029 |
72,541 |
||
Income taxes payable |
14,470 |
12,700 |
||
Other accrued liabilities |
53,690 |
61,959 |
||
Total current liabilities |
239,461 |
401,834 |
||
Accrued self-insurance obligations, net of current portion |
138,072 |
109,345 |
||
Long-term debt, net of current portion |
54,278 |
72,040 |
||
Unfavorable lease obligations |
31,856 |
56,526 |
||
Other long-term liabilities |
3,129 |
23,028 |
||
Total liabilities |
466,796 |
662,773 |
||
Commitments and contingencies |
||||
Minority interest |
- |
280 |
||
Stockholders' equity (deficit): |
||||
Preferred stock of $.01 par value, authorized |
|
|
||
Common stock of $.01 par value, authorized |
|
|
||
Additional paid-in capital |
272,889 |
253,375 |
||
Accumulated deficit |
(437,632 |
) |
(437,986 |
) |
(164,643 |
) |
(184,518 |
) |
|
Less: |
||||
Unearned compensation |
(1,755 |
) |
(2,700 |
) |
Total stockholders' deficit |
(166,398 |
) |
(187,218 |
) |
Total liabilities and stockholders' equity (deficit) |
$ 300,398 |
$ 475,835 |
||
|
============== |
=========== |
See accompanying notes.
F-6
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Reorganized Company |
Predecessor Company |
||||||||
For the Year Ended |
For the Ten Months Ended December 31, 2002 |
For the Two Months Ended February 28, 2002 |
For the Year Ended |
||||||
| |
|||||||||
Total net revenues |
$ 834,043 |
$ 679,044 |
| |
$ 301,846 |
$ 2,075,234 |
||||
Costs and expenses: |
| |
||||||||
Operating salaries and benefits |
528,033 |
443,154 |
| |
176,877 |
1,114,477 |
||||
Self insurance for workers' compensation and general
|
|
|
| |
|
|
||||
Other operating costs |
143,276 |
86,139 |
| |
72,156 |
503,816 |
||||
Rent expense |
49,593 |
42,640 |
| |
25,789 |
171,460 |
||||
Corporate general and administrative expenses |
58,359 |
75,837 |
| |
14,776 |
97,263 |
||||
Depreciation and amortization |
7,527 |
17,409 |
| |
4,465 |
32,785 |
||||
Provision for losses on accounts receivable |
12,799 |
7,292 |
| |
417 |
25,972 |
||||
Interest, net (contractual interest expense of $23,730 |
|
|
| |
|
|
||||
Loss on asset impairment |
2,774 |
279,022 |
| |
- |
18,825 |
||||
Legal and regulatory matters, net |
- |
- |
| |
- |
11,000 |
||||
Restructuring costs, net |
14,676 |
- |
| |
- |
1,064 |
||||
Gain on sale of assets, net |
(3,897 |
) |
(8,714 |
) |
| |
- |
(825 |
) |
|
Gain on extinguishment of debt, net |
- |
- |
| |
(1,498,360 |
) |
- |
|||
Total costs and expenses |
868,401 |
981,900 |
| |
(1,189,828 |
) |
2,101,433 |
|||
(Loss) income before reorganization (gain) costs, net, |
|
|
|
|
| |
|
|
|
|
Reorganization (gain) costs, net |
- |
- |
| |
(1,483 |
) |
42,917 |
|||
(Loss) income before income taxes and discontinued |
(34,358 |
) |
(302,856 |
) |
| |
1,493,157 |
(69,116 |
) |
|
Income tax expense (benefit) |
665 |
(7 |
) |
| |
147 |
321 |
|||
(Loss) income before discontinued operations |
(35,023 |
) |
(302,849 |
) |
| |
1,493,010 |
(69,437 |
) |
|
| |
|||||||||
Discontinued Operations: |
| |
||||||||
Loss from discontinued operations, net of related tax |
|
|
|
|
| |
|
|
|
|
Gain (loss) on disposal of discontinued operations, |
|
|
| |
|
|
|
|||
Income (loss) on discontinued operations |
35,377 |
(135,137 |
) |
| |
(7,639 |
) |
- |
||
| |
|||||||||
Net income (loss) |
$ 354 |
$ (437,986 |
) |
| |
$ 1,485,371 |
$ (69,437 |
) |
||
======= |
======== |
| |
======== |
======= |
|||||
Basic and diluted earnings per common and common equivalent share: |
| |
||||||||
Loss before discontinued operations |
$ (3.48 |
) |
$ (30.29 |
) |
| |
$ 24.44 |
$ (1.14 |
) |
|
Income (loss) from discontinued operations, net of tax |
3.52 |
(13.51 |
) |
| |
(.12 |
) |
- |
||
Net income (loss) |
$ 0.04 |
$ (43.80 |
) |
| |
$ 24.32 |
$ (1.14 |
) |
||
======= |
======= |
| |
======= |
======= |
|||||
| |
|||||||||
Weighted average number of common and common equivalent shares outstanding: |
| |
||||||||
| |
|||||||||
Basic and diluted |
10,050 |
10,000 |
| |
61,080 |
61,096 |
||||
======= |
======= |
| |
======= |
======= |
See accompanying notes.
F-7
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Reorganized Company |
Predecessor Company |
|||||||||||||||
For the Year Ended |
For the Ten Months Ended |
For the Two Months Ended February 28, 2002 |
For the Year Ended |
|||||||||||||
Shares |
Amount |
Shares |
Amount |
| |
Shares |
Amount |
Shares |
Amount |
||||||||
Common Stock |
| |
|||||||||||||||
Issued and outstanding at beginning of period |
9,321 |
$ 93 |
8,800 |
$ 88 |
| |
65,209 |
$ 652 |
65,231 |
$ 652 |
|||||||
Elimination of common stock |
- |
- |
- |
- |
| |
(65,209 |
) |
(652 |
) |
- |
- |
|||||
Cancellation of Restricted Stock Awards |
- |
- |
- |
- |
| |
- |
- |
(22 |
) |
- |
||||||
Issuance of common stock |
723 |
7 |
521 |
5 |
| |
8,800 |
88 |
- |
- |
|||||||
Common Stock Issued and outstanding at end |
|
|
|
|
| |
|
|
|
|
|||||||
====== |
======= |
| |
======= |
====== |
||||||||||||
Additional Paid-in Capital |
| |
|||||||||||||||
Balance at beginning of period |
253,375 |
237,512 |
| |
825,099 |
825,147 |
|||||||||||
Other |
- |
- |
| |
(360 |
) |
- |
||||||||||
Elimination of additional paid-in capital |
- |
- |
| |
(824,739 |
) |
- |
||||||||||
Adjustment to market value of common stock held |
|
|
| |
|
|
|
||||||||||
Issuance of common stock in excess of par value |
19,514 |
15,863 |
| |
237,512 |
- |
|||||||||||
Cancellation of Restricted Stock Awards |
- |
- |
| |
- |
2 |
|||||||||||
Additional paid-in capital at end of period |
272,889 |
253,375 |
| |
237,512 |
825,099 |
|||||||||||
| |
||||||||||||||||
Accumulated Deficit |
| |
|||||||||||||||
Balance at beginning of period |
(437,986 |
) |
- |
| |
(2,400,655 |
) |
(2,331,218 |
) |
||||||||
Net income (loss) |
354 |
(437,986 |
) |
1,485,371 |
(69,437 |
) |
||||||||||
Elimination of accumulated deficit |
- |
- |
| |
915,284 |
- |
|||||||||||
Accumulated deficit at end of period |
(437,632 |
) |
(437,986 |
) |
- |
(2,400,655 |
) |
|||||||||
| |
||||||||||||||||
Accumulated Other Comprehensive Loss |
| |
|||||||||||||||
Balance at beginning of period |
- |
- |
| |
- |
(12,483 |
) |
||||||||||
Foreign currency translation adjustment, net of tax |
- |
- |
| |
- |
12,483 |
|||||||||||
Accumulated other comprehensive loss at end of period |
|
|
| |
|
|
|||||||||||
Total |
(164,643 |
) |
(184,518 |
) |
237,600 |
(1,574,904 |
) |
|||||||||
| |
||||||||||||||||
Unearned Compensation |
| |
|||||||||||||||
Balance at beginning of period |
(2,700 |
) |
- |
| |
- |
- |
||||||||||
Restricted Stock Awards |
- |
(4,050 |
) |
- |
- |
|||||||||||
Restricted stock vested |
945 |
1,350 |
| |
- |
- |
|||||||||||
Unearned compensation at end of period |
(1,755 |
) |
(2,700 |
) |
- |
- |
||||||||||
| |
||||||||||||||||
Common Stock in Treasury |
| |
|||||||||||||||
Balance at beginning of period |
- |
- |
| |
2,213 |
(27,376 |
) |
2,213 |
(27,376 |
) |
|||||||
Elimination of treasury stock |
- |
- |
| |
(2,213 |
) |
27,376 |
- |
- |
||||||||
Common stock in treasury at end of period |
- |
- |
| |
- |
- |
2,213 |
(27,376 |
) |
||||||||
| |
======= |
======== |
||||||||||||||
Grantor Stock Trust |
| |
|||||||||||||||
Balance at beginning of period |
- |
- |
| |
1,916 |
(10 |
) |
1,916 |
(60 |
) |
|||||||
Elimination of grantor stock trust |
- |
- |
| |
(1,916 |
) |
10 |
- |
- |
||||||||
Adjustment to market value of common stock held |
|
|
|
| |
|
|
|
|
||||||||
Grantor stock trust at end of period |
- |
- |
| |
- |
- |
1,916 |
(10 |
) |
||||||||
| |
======= |
====== |
||||||||||||||
Total stockholders' (deficit) equity |
$ (166,398 |
) |
$ (187,218 |
) |
$ 237,600 |
$ (1,602,290 | ) | |||||||||
========= |
========= |
| |
========= |
======== |
See accompanying notes.
F-8
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Reorganized Company |
Predecessor Company |
||||||||
|
For the Ten Months Ended
|
For the Two Months Ended
|
|
||||||
Cash flows from operating activities: |
| |
||||||||
Net income (loss) |
$ 354 |
$ (437,986 |
) |
| |
$ 1,485,371 |
$ (69,437 |
) |
||
Adjustments to reconcile net income (loss) to net cash provided by (used for) |
| |
||||||||
Gain on extinguishment of debt, net |
- |
- |
| |
(1,498,360 |
) |
- |
|||
Reorganization (gain) costs , net |
- |
- |
| |
(1,483 |
) |
42,917 |
|||
Depreciation and amortization |
9,396 |
28,405 |
| |
4,465 |
32,785 |
||||
Amortization of favorable and unfavorable lease intangibles |
(8,740 |
) |
(2,535 |
) |
| |
(101 |
) |
(2,910 |
) |
Provision for losses on accounts receivable |
19,073 |
14,787 |
| |
417 |
25,972 |
||||
Gain on sale of assets, net |
(3,897 |
) |
(8,714 |
) |
| |
- |
(825 |
) |
|
(Gain) loss on disposal of discontinued operations, net |
(55,930 |
) |
- |
| |
- |
- |
|||
Loss on write-down of assets held for sale |
- |
- |
| |
6,070 |
- |
||||
Loss on asset impairment |
2,774 |
407,760 |
| |
- |
18,825 |
||||
Legal and regulatory matters, net |
- |
- |
| |
- |
11,000 |
||||
Restricted stock compensation |
945 |
1,350 |
| |
- |
- |
||||
Other, net |
898 |
1,320 |
| |
716 |
9,596 |
||||
Changes in operating assets and liabilities: |
| |
||||||||
Accounts receivable, net |
74,937 |
(15,797 |
) |
| |
(7,368 |
) |
(36,914 |
) |
|
Inventories, net |
790 |
(1,748 |
) |
| |
(473 |
) |
526 |
||
Other receivables, net |
4,261 |
- |
| |
819 |
5,727 |
||||
Restricted cash |
12,472 |
(1,373 |
) |
| |
(4,430 |
) |
(558 |
) |
|
Prepaids and other assets |
4,573 |
(5,575 |
) |
| |
(2,391 |
) |
(4,750 |
) |
|
Accounts payable |
3,656 |
28,210 |
| |
(8,601 |
) |
21,473 |
|||
Accrued compensation and benefits |
(24,141 |
) |
(6,708 |
) |
| |
(1,792 |
) |
(15,995 |
) |
Accrued self-insurance obligations |
11,985 |
13,094 |
| |
(944 |
) |
50,148 |
|||
Income taxes payable |
1,120 |
(498 |
) |
| |
693 |
1,067 |
|||
Other accrued liabilities |
(18,084 |
) |
(20,114 |
) |
| |
(2,793 |
) |
(45,080 |
) |
Liabilities subject to compromise |
- |
- |
| |
10,865 |
- |
||||
Other long-term liabilities |
467 |
(408 |
) |
| |
(2,004 |
) |
339 |
||
Minority interest |
(120 |
) |
(563 |
) |
| |
362 |
46 |
||
Net cash provided by (used for) operating activities before reorganization |
|
|
|
| |
|
|
|
||
Net cash paid for reorganization costs |
(10,225 |
) |
(10,321 |
) |
| |
(2,781 |
) |
(19,583 |
) |
Net cash provided by (used for) operating activities |
26,564 |
(17,414 |
) |
| |
(23,743 |
) |
24,369 |
||
Cash flows from investing activities: |
| |
||||||||
Capital expenditures, net |
(16,564 |
) |
(34,701 |
) |
| |
(3,971 |
) |
(30,330 |
) |
Proceeds from sale of assets held for sale |
83,616 |
17,885 |
| |
- |
18,164 |
||||
Proceeds from redemption of strategic investment |
- |
- |
| |
- |
10,115 |
||||
Repayment of long-term notes receivable |
839 |
1,067 |
| |
168 |
885 |
||||
Other, net |
- |
798 |
| |
142 |
2,626 |
||||
Net cash provided by (used for) investing activities |
67,891 |
(14,951 |
) |
| |
(3,661 |
) |
1,460 |
||
Cash flows from financing activities: |
| |
||||||||
Net payments under Senior Loan Agreements |
(84,274 |
) |
(10,958 |
) |
| |
- |
- |
||
Net payments under DIP Financing |
- |
- |
| |
(55,382 |
) |
(12,441 |
) |
||
Long-term debt borrowings |
- |
- |
| |
112,988 |
3,842 |
||||
Long-term debt repayments |
(5,620 |
) |
(4,396 |
) |
| |
(13 |
) |
(82 |
) |
Principal payments on prepetition debt authorized by Bankruptcy Court |
- |
- |
| |
(7,966 |
) |
(3,017 |
) |
||
Other, net |
- |
(412 |
) |
| |
(3,728 |
) |
(1 |
) |
|
Net cash (used for) provided by financing activities |
(89,894 |
) |
(15,766 |
) |
| |
45,899 |
(11,699 |
) |
|
Effect of exchange rate on cash and cash equivalents |
- |
- |
| |
- |
(1,070 |
) |
|||
Net increase (decrease) in cash and cash equivalents |
4,561 |
(48,131 |
) |
| |
18,495 |
13,060 |
|||
Cash and cash equivalents at beginning of period |
21,013 |
69,144 |
| |
50,649 |
37,589 |
||||
Cash and cash equivalents at end of period |
$ 25,574 |
$ 21,013 |
| |
$ 69,144 |
$ 50,649 |
||||
============= |
============= |
| |
============ |
============ |
See accompanying notes.
F-9
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(1) Nature of Business
References throughout this document to the Company include Sun Healthcare Group, Inc. and our consolidated subsidiaries. In accordance with the Securities and Exchange Commission's "Plain English" guidelines, this Annual Report on Form 10-K has been written in the first person. In this document, the words "we," "our," "ours" and "us" refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.
Business
We are a provider of long-term, subacute and related specialty healthcare services in the United States. We operate through five principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, (iii) medical staffing services, (iv) home health services and (v) laboratory and radiology services. Inpatient services represent the most significant portion of our business. We operated 108 long-term care facilities in 14 states as of March 1, 2004.
Reorganization
On February 6, 2002, the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") approved our Plan of Reorganization that was filed with the Bankruptcy Court on November 7, 2001. On February 28, 2002, we emerged from proceedings under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") pursuant to the terms of our Plan of Reorganization.
We operated our business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court from October 14, 1999 (the "Filing Date") until February 28, 2002. Accordingly, our consolidated financial statements prior to March 1, 2002 have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7") and generally accepted accounting principles applicable to a going concern, which assume that assets will be realized and liabilities will be discharged in the normal course of business.
In connection with our emergence from bankruptcy, we reflected the terms of the Plan of Reorganization in our consolidated financial statements by adopting the fresh-start accounting provisions of SOP 90-7. Under fresh-start accounting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. For accounting purposes, the fresh-start adjustments have been recorded in the consolidated financial statements as of March 1, 2002. Since fresh-start accounting materially changed the amounts previously recorded in our consolidated financial statements, a black line separates the post-emergence financial data from the pre-emergence data to signify the difference in the basis of preparation of the financial statements for each respective entity. See Notes 18, 19 and 20 for additional information about our emergence from bankruptcy and fresh-start accounting.
As used in this Form 10-K, the term "Predecessor Company" refers to our operations for periods prior to March 1, 2002, while the term "Reorganized Company" is used to describe our operations for periods beginning March 1, 2002 and thereafter.
F-10
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Comparability of Financial Information
The adoption of fresh-start accounting as of March 1, 2002 materially changed the amounts previously recorded in the consolidated financial statements of the Predecessor Company. With respect to reported operating results, we believe that business segment operating income of the Predecessor Company is generally comparable to that of the Reorganized Company. However, capital costs (rent, interest, depreciation and amortization) of the Predecessor Company that were based on pre-petition contractual agreements and historical costs are not comparable to those of the Reorganized Company. In addition, the reported financial position, results of operations and cash flows of the Predecessor Company for periods prior to March 1, 2002 generally are not comparable to those of the Reorganized Company.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial accounting and reporting for the impairment of long-lived assets (other than goodwill and indefinite lived intangibles) and for long-lived assets to be disposed of. SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121") and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("APB No. 30"). We adopted the provisions of SFAS No. 144 as of January 1, 2002.
(2) Basis of Reporting and Current Operating Environment
Our consolidated financial statements as of December 31, 2003, have been prepared under accounting principles generally accepted in the United States. We recorded net income and had positive cash flows from operations before reorganization costs of $0.4 million and $36.8 million, respectively, for the year ended December 31, 2003. We have negative working capital and a stockholders' deficit of $57.4 million and $166.4 million, respectively, at December 31, 2003.
In an effort to improve our financial position and address our liquidity issues, in January 2003, we initiated efforts to restructure the portfolio of leases under which we operate most of our long-term care facilities. During the period January 1, 2003 to March 1, 2004, we divested 129 of our under-performing facilities by transitioning operations of those facilities to new operators. We have reached agreement with substantially all of the landlords of the divested facilities. We cannot predict the extent to which the remaining landlords of the divested and anticipated-to-be-divested facilities with whom we have not yet reached agreement, will seek to assert leasehold or other damages; however, we do not anticipate that the total of any claims that may be asserted by those landlords will have a material adverse impact on our financial position.
In addition to our lease restructuring efforts, we also took the following actions to address our financial situation:
F-11
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(a) |
completed the sales of our pharmaceutical services operations in July 2003 and our software development operations in November 2003; |
(b) |
reduced overhead costs;
|
(c) |
refinanced and reduced our senior debt; and
|
(d) |
completed a private placement of our common stock and warrants to purchase our common stock to accredited and institutional investors for net proceeds of approximately $52.3 million in February 2004. |
We have substantially completed the restructuring we commenced in January 2003. We believe that our existing cash reserves of $40.1 million and the $31.0 million available for borrowing under our loan agreement as of March 1, 2004 will provide sufficient funds for our operations, capital expenditures and regularly scheduled debt service payments through the next twelve months.
(3) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include determination of third-party payor settlements, allowances for doubtful accounts, self-insurance obligations, goodwill and other intangible assets and loss accruals. Actual results could differ from those estimates.
(b) Principles of Consolidation
Our consolidated financial statements include the accounts of our subsidiaries in which we own more than 50% of the voting interest. Investments of companies in which we own between 20 - 50% of the voting interests and joint ventures were accounted for using the equity method, which records as income an ownership percentage of the reported income of the subsidiary, regardless of whether it was or was not received by the parent. Investments in companies in which we own less than 20% of the voting interests are carried at cost. All significant intersegment accounts and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
We consider all highly liquid, unrestricted investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
(d) Net Revenues
Net revenues consist of long-term and subacute care revenues, rehabilitation services revenues, temporary medical staffing services revenues, pharmaceutical services revenues and other ancillary services revenues. Net revenues are recognized as services are provided. 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. The methods of making such estimates are reviewed periodically, and differences between the net amounts accrued and subsequent settlements or estimates of expected settlements are reflected in the current period results of operations.
F-12
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Revenues from Medicaid accounted for approximately 35.9%, 36.1%, 44.9% and 45.3%, of our net patient revenue for the year ended December 31, 2003, ten month period ended December 31, 2002, the two month period ended February 28, 2002 and the year ended December 31, 2001, respectively. Revenues from Medicare comprised approximately 25.6%, 26.0%, 25.4% and 25.8% of our net patient revenue for the year ended December 31, 2003, ten month period ended December 31, 2002, the two month period ended February 28, 2002 and the year ended December 31, 2001, respectively. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that our estimates will change by a material amount in the near term. Changes in these estimates related to third party receivables resulted in an increase in net revenues o f approximately $2.0 million for the year ended December 31, 2003, $1.1 million and $2.0 million, respectively, for the ten month and two month periods ended December 31, 2002 and February 28, 2002, and an increase in net revenues of approximately $50.9 million for the year ended December 31, 2001.
(e) Accounts Receivable
Our accounts receivable relate to services provided by our various operating divisions to a variety of payors and customers. The primary payors for services provided in long-term and subacute care facilities that we operate are the Medicare program and the various state Medicaid programs. The rehabilitation therapy service operations provide services to patients in unaffiliated long-term, rehabilitation and acute care facilities. The billings for those services are submitted to the unaffiliated facilities. Many of the unaffiliated long-term care facilities receive a large majority of their revenues from the Medicare program and the state Medicaid programs.
Estimated provisions for doubtful accounts are recorded each period as an expense to the statement of operations. In evaluating the collectibility of accounts receivable, we consider a number of factors, including the age of the accounts, changes in collection patterns, the financial condition of our customers, the composition of patient accounts by payor type, the status of ongoing disputes with third-party payors and general industry conditions. Any changes in these factors or in the actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of change.
The allowance for uncollectible accounts related to facilities that we have divested was based on a percentage of outstanding accounts receivable at the time of divestiture and is recorded in gain or loss on disposal of discontinued operations, net. As collections are recognized, the allowance will be adjusted as appropriate. This percentage was 40% in 2002 and was adjusted to 30% in the fourth quarter of 2003. The percentages were developed from historical collection trends of our divestitures.
The allowance for uncollectible accounts related to facilities that we currently operate is computed by applying a bad debt percentage to the individual accounts receivable aging categories based on historical collections. An adjustment is then recorded each month in the results of operations to adjust the allowance based on the analysis.
F-13
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(f) Inventories
As of December 31, 2003, our inventories relate to the long-term and subacute care operations. The long-term and subacute care operations inventories are stated at the lower of cost or market.
(g) Property and Equipment
Property and equipment is stated at the lower of carrying value or fair value. Property and equipment held under capital lease is stated at the net present value of future minimum lease payments. Major renewals or improvements are capitalized whereas ordinary maintenance and repairs are expensed as incurred. Depreciation 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; and equipment - 3 to 20 years. We capitalize interest directly related to the development and construction of new facilities as a cost of the related asset.
(h) Reorganization Costs (Gain)
Reorganization costs (gain) under chapter 11 are items of expense or income that were incurred or realized by us because we were in reorganization. These included, but were not limited to, professional fees and similar types of expenditures incurred directly relating to the chapter 11 proceeding, loss accruals or realized gains or losses resulting from activities of the reorganization process and interest earned on cash accumulated by us because we were not paying our prepetition liabilities. (See "Note 18 - Emergence from Chapter 11 Bankruptcy Proceedings.")
(i) Stock-Based Compensation
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure ("SFAS No. 148"). This statement amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). The provisions of this statement were effective for interim and annual financial statements for fiscal years ending after December 15, 2002. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Also, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We continue to apply the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"). (See "Note 13 - Capital Stock.")
(j) Net Income (Loss) Per Share
Basic net income (loss) per share is based upon the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is based upon the weighted average number of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
F-14
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(k) Reclassification
Certain reclassifications have been made to the prior period financial statements to conform to the 2003 financial statement presentation.
(4) Loan Agreements
As of September 5, 2003, we entered into a Loan and Security Agreement with CapitalSource Finance LLC, as collateral agent, and certain other lenders (the "Revolving Loan Agreement"). The Revolving Loan Agreement is a $75.0 million two-year revolving line of credit that is secured by our accounts receivable, inventory, equipment and other assets, and the stock of our subsidiaries. Pursuant to the Revolving Loan Agreement, we are paying interest (i) for Base Rate Loans at the greater of (a) prime plus 1.0% or (b) 5.25%, and (ii) for LIBOR Loans at the greater of (a) the London Interbank Offered Rate plus 3.75% or (b) 5.25%. The weighted average borrowing interest rate for the period from September 5, 2003 through December 31, 2003 was 5.25%. Our borrowing availability under the Revolving Loan Agreement is generally limited to up to eighty-five percent (85%) of the value of Eligible Receivables plus eighty-five percent (85%) of the value of Eligible Divested Company Receivables, but not to exceed $75.0 million. The defined borrowing base as of December 31, 2003 was $47.6 million, net of specified reserves of $15.0 million. The availability of amounts under our Revolving Loan Agreement is also subject to our compliance with certain financial ratios. As of December 31, 2003, we were in compliance with these ratios. As of December 31, 2003, we had borrowed approximately $13.1 million, which includes $1.1 million of prepaid finance fees that will be amortized over the next twelve months and does not count against availability, and we had issued approximately $21.7 million in letters of credit, leaving approximately $13.9 million available to us for additional borrowing. We have classified our Revolving Loan Agreement as a long-term liability at December 31, 2003. In connection with entering into the Revolving Loan Agreement, we incurred deferred financing costs of $2.6 million, which are amortized using the effective interest method over the life of the loan agr eement.
(5) Long-Term Debt
Long-term debt consisted of the following as of the periods indicated (in thousands):
F-15
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Reorganized Company |
||||
December 31, 2003 |
December 31, 2002 |
|||
Senior Credit Facility: | ||||
Revolving Loan Agreement |
$ 13,091 |
$ 62,030 |
||
Term Loan Agreement |
- |
37,480 |
||
Mortgage notes payable due at various dates through 2014, |
|
|
||
Industrial Revenue Bonds |
7,450 |
7,915 |
||
Other long-term debt |
10,060 |
15,900 |
||
Total long-term debt |
78,878 |
196,223 |
||
Less amounts due within one year |
(24,600 |
) |
(124,183 |
) |
Long-term debt, net of current portion |
$ 54,278 |
$ 72,040 |
||
========== |
========== |
Long-term debt at December 31, 2003 and December 31, 2002 includes amounts owed under fully secured mortgage notes payable, Industrial Revenue Bonds and other debt. The scheduled maturities of long-term debt as of December 31, 2003 are as follows (in thousands):
2004 |
$ 24,600 |
2005 |
27,496 |
2006 |
5,394 |
2007 |
4,339 |
2008 |
1,445 |
Thereafter |
15,604 |
$ 78,878 |
|
========== |
(6) Property and Equipment
Property and equipment consisted of the following as of the periods indicated (in thousands):
Reorganized Company |
||||
December 31, 2003 |
December 31, 2002 |
|||
Land |
$ 4,659 |
$ 4,658 |
||
Buildings and improvements |
30,101 |
29,874 |
||
Equipment |
25,297 |
35,906 |
||
Leasehold improvements |
20,925 |
24,968 |
||
Construction in progress |
1,087 |
2,451 |
||
Total |
82,069 |
97,857 |
||
Less accumulated depreciation |
(22,537 |
) |
(30,143 |
) |
Property and equipment, net |
$ 59,532 |
$ 67,714 |
||
=========== |
========= |
F-16
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(7) Impairment of Intangible and Long-Lived Assets
(a) Intangible Assets
Goodwill
The Reorganized Company recorded $214.8 million in goodwill under fresh-start accounting based on an independent valuation of the fair value of our assets and liabilities as of March 1, 2002. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142") established new rules on the accounting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized; however, they are subject to annual impairment tests as prescribed by the statement. Intangible assets with definite lives will continue to be amortized over their estimated useful lives. With respect to our goodwill and intangible assets, SFAS No. 142 was effective for us beginning January 1, 2002. Upon adoption of this statement, amortization of goodwill and indefinite life intangibles ceased.
Pursuant to SFAS No. 142, we performed our annual goodwill impairment analysis during the fourth quarter for each reporting unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management and, with the exception of the long-term care facilities, provides services that are distinct from the other components of the operating segment. We determine impairment by comparing the net assets of each reporting unit to their respective fair values. We determine the estimated fair value of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is measured by the difference between the goodwill carrying value and the implied fair value. Based on the analysis performed, we recorded no goodwill impairment for the year ended December 31, 2003, and a goodwill impairment of $231.1 million for the ten months ended December 31, 2002.
Following is a summary of adjusted operating results reflecting the effects of adopting SFAS No. 142 (in thousands, except per share data):
Reorganized |
Predecessor |
||||||||
|
For The Ten |
For The Two |
|
||||||
Reported income (loss) |
$ 354 |
$ (437,986 |
) |
$ 1,485,371 |
$ (69,437 |
) |
|||
Add back: Goodwill amortization |
- |
- |
- |
7,908 |
|||||
Adjusted income (loss) |
$ 354 |
$ (437,986 |
) |
$ 1,485,371 |
$ (61,529 |
) |
|||
============== |
============== |
============ |
============== |
||||||
Basic and Diluted income (loss) |
|||||||||
Reported income |
$ 0.04 |
$ (43.80 |
) |
$ 24.32 |
$ (1.14 |
) |
|||
Goodwill amortization |
- |
- |
- |
.13 |
|||||
Adjusted income (loss) per share |
$ 0.04 |
$ (43.80 |
) |
$ 24.32 |
$ (1.01 |
) |
|||
=============== |
============== |
============ |
============== |
F-17
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The change in the carrying amount of goodwill for the year ended December 31, 2003 was as follows (in thousands):
|
|
Rehabilitation |
Medical |
|
|
|||||
Balance as of March 1, 2002 |
$ 89,335 |
$ 56,660 |
$ - |
$ 68,822 |
$ 214,817 |
|||||
Adjustments to fresh-start accounting |
18,981 |
335 |
450 |
378 |
20,144 |
|||||
Loss on Impairment |
(104,932 |
) |
(56,995 |
) |
- |
(69,140 |
) |
(231,067 |
) |
|
Balance as of January 1, 2003 |
$ 3,384 |
$ - |
$ 450 |
$ 60 |
$ 3,894 |
|||||
Loss on sale of assets |
- |
- |
- |
(60 |
) |
(60 |
) |
|||
Balance as of December 31, 2003 |
$ 3,384 |
$ - |
$ 450 |
$ - |
$ 3,834 |
|||||
========== |
========= |
========= |
========= |
========= |
Indefinite Life Intangibles
The Reorganized Company recorded $34.6 million in trademarks under fresh-start accounting based on an independent and separate valuation report of the fair value of our intangible assets as of March 1, 2002. Our trends of financial performance subsequent to emergence, the Medicare "Cliff" impact and increases in patient liability claims and retention levels and workers' compensation insurance costs represented indicators of impairment as defined in SFAS No. 144. As a result, we internally prepared an impairment analysis using discounted cash flows in order to estimate the fair value of Indefinite Life Intangibles. The analysis resulted in no impairment charge for the year ended December 31, 2003. We recorded an impairment of $26.0 million for the ten months ended December 31, 2002.
F-18
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The change in the carrying amount of trademarks for the year ended December 31, 2003, is as follows (in thousands):
|
Rehabilitation |
|
|
|||
Balance as of March 1, 2002 |
$ 1,100 |
$ 33,500 |
$ 34,600 |
|||
Loss on impairment |
(668 |
) |
(25,315 |
) |
(25,983 |
) |
Balance as of January 1, 2003 |
$ 432 |
$ 8,185 |
$ 8,617 |
|||
Loss on sale of assets |
- |
(2,663 |
) |
(2,663 |
) |
|
Balance as of December 31, 2003 |
$ 432 |
$ 5,522 |
$ 5,954 |
|||
============ |
============ |
=========== |
Finite Life Intangibles
The Reorganized Company recorded $28.2 million in favorable lease intangibles under fresh-start accounting based on an independent and separate valuation report of the fair value of our assets and liabilities as of March 1, 2002. Our trends of financial performance subsequent to emergence, the Medicare "Cliff" impact and increases in patient liability claims and retention levels and workers' compensation insurance cost represented indicators of impairment as defined in SFAS No. 144. As a result, at December 31, 2003 we internally prepared an impairment analysis using discounted cash flows in order to estimate the fair value of Finite Life Intangibles. The analysis resulted in an impairment of $0.5 million and $24.0 million for the year ended December 31, 2003 and the ten months ended December 31, 2002, respectively.
The following is a summary of our finite lived favorable lease intangible assets, net of accumulated amortization of $2.8 million, at December 31, 2003 (in thousands):
Inpatient |
|
Balance as of March 1, 2002 |
$ 28,191 |
Loss on impairment |
(24,011) |
Balance as of January 1, 2003 |
$ 4,180 |
Amortization expense |
(600) |
Loss on discontinued operations |
(86) |
Loss on impairment |
(470) |
Balance as of December 31, 2003 |
$ 3,024 |
======= |
The weighted-average amortization period for favorable lease intangibles is approximately eight years at December 31, 2003. Amortization expense on the favorable lease intangibles totaled $0.6 million for the year ended December 31, 2003. Our estimated aggregate annual amortization expense for these intangibles for each f the next eight years is approximately $0.4 million.
F-19
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(b) Long-Lived Assets
The FASB issued SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets (other than goodwill and indefinite lived intangibles) and for long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121 and APB No. 30. We adopted the provisions of SFAS No. 144 as of January 1, 2002. Similar to SFAS No. 121, SFAS No. 144 requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets' carrying amounts. In estimating the undiscounted cash flows for our impairment assessment, we primarily used our internally prepared budgets and forecast information including adjustments for the following items: Medicare and Medicaid funding; overhead costs; capital expenditures; and patient care liability costs. In accordance with SFAS No. 144, we assess the need for an impairme nt write-down when such indicators of impairment are present.
2003. During the fourth quarter of 2003, we recorded pretax charges totaling approximately $2.3 million for asset impairments in accordance with SFAS No. 144. The asset impairment charges consist of the following:
- |
$2.3 million write-down of property and equipment in our Inpatient Services segment for certain nursing facilities whose book value exceeded estimated fair value when tested for impairment, $0.2 million of which related to under-performing facilities identified for divestiture, as described below. A substantial change in the estimated future cash flows for any of those facilities that have not yet been transitioned could materially change the estimated fair values of those assets, possibly resulting in an additional impairment. |
2002. During the fourth quarter of 2002, we recorded pretax charges totaling approximately $126.7 million for asset impairments in accordance with SFAS No. 144. The asset impairment charges consisted of the following:
- |
$81.6 million write-down of property and equipment in our Inpatient Services segment for certain nursing facilities whose book value exceeded estimated fair value when tested for impairment, $53.6 million of which related to under-performing facilities identified for divestiture, as described below. |
- |
$42.8 million write-down of property and equipment in our Other Operations segment which consisted of $8.7 million for Shared Healthcare Systems and $34.1 million for our corporate headquarters. |
- |
$2.3 million write-down of property and equipment in our Pharmaceutical and Medical Supply Services segment. |
The October 1, 2002 elimination of certain funding under the Medicare program and the increase in our patient care liability costs affected our 2002 and future cash flows, and therefore, the fair values of each of our asset groups. This event led to an impairment assessment on each of our asset groups, including:
- |
estimating the undiscounted cash flows to be generated by each of the asset groups over the remaining life of the primary asset; and |
F-20 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003 |
|
- |
reducing the carrying value of the asset to estimated fair value when the total estimated undiscounted future cash flows were less than the current book value of the long-lived assets (excluding goodwill and other indefinite lived intangible assets). |
We also considered our plans to transition under-performing long-term care facilities, which accounted for approximately 56% of our facilities, to new operators. In order to estimate the fair values of the entities, we used a discounted cash flow approach. That assessment resulted in an impairment related to the under-performing facilities of approximately $53.6 million.
2001. During the fourth quarter of 2001, we reviewed our projections for the future earnings of our businesses because actual results did not meet initial forecasts. Upon completion of the review, we recorded an impairment charge of approximately $18.8 million to reduce to estimated fair value our investment in goodwill and certain other long-lived assets within the Inpatient Services segment and software development division. The write-down of $14.5 million to the Inpatient Services segment was, primarily as a result of decreased future projections of net operating income (loss) and net cash flows due to lower revenue projections. The remaining $4.3 million write down to the software development division relates to the longer than expected time-to-market of certain of our products, which adversely impacted the division's cash flow projections.
(c) Long Lived Assets to be Disposed Of
SFAS No. 144 requires that long-lived assets to be disposed of be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. Depreciation is discontinued once an asset is classified as held for sale. During the two month period ended February 28, 2002, the Predecessor Company presented the operating results of all facilities identified for sale or disposition in discontinued operations in the consolidated statement of operations. From March 1, 20 02 to December 31, 2002, the Reorganized Company had a limited number of facilities disposed of or transferred to assets held for sale. These facilities' operating results are included in continuing operations and are immaterial to our consolidated financial position and results of operations.
(8) Discontinued Operations and Assets Held for Sale
(a) Gain on Sale of Assets, net
2003. During the year ended December 31, 2003, we recorded a gain on sale of assets of $3.9 million primarily related to the sale of land and buildings previously reported in the other operations segment.
2002. During the year ended December 31, 2002, we divested 10 skilled nursing facilities previously reported in our Inpatient segment. The net revenues and net operating losses for the ten month period ended December 31, 2002 for these 10 facilities were approximately $19.5 million and $3.1 million, respectively. The aggregate net loss on disposal during the ten month period ended December 31, 2002 for these divestitures was approximately $4.1 million recorded in gain on sale of assets, net, in our 2002 consolidated statement of operations. Additionally, during 2002, residual divestiture costs associated with prior year divestitures related to certain skilled nursing facilities were approximately $0.7 million.
F-21
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
During 2002, we also recognized gains for the sale of certain mobile radiology operations, previously reported in our Other operations segment, of $0.5 million and the reversal of a rent reserve taken for a closed corporate office for $0.5 million totaling approximately $1.0 million, recorded in gain on sale of assets, net.
In October 2002, we sold our interest in a joint venture that operated two skilled nursing facilities, previously reported in our Inpatient segment, in the Northeast. We recorded a gain of approximately $1.4 million that is included in gain on sale of assets, net.
In July 2002, we sold our interest in a joint venture that operated two pharmacies in the Midwest, previously reported in our Pharmaceutical segment. We recorded a gain of approximately $1.2 million that is included in gain on sale of assets, net.
In April 2002, we sold two of our headquarters buildings in Albuquerque, New Mexico, previously reported in our Other operations segment, for approximately $15.3 million, which approximated their carrying value. The transaction included the leaseback of one of the buildings and part of an adjacent parking structure for an initial period of ten years, with an option to extend the lease for two five-year periods.
In March 2002, we divested our respiratory therapy supplies and equipment business that was operated by our wholly-owned subsidiary, SunCare Respiratory Services, Inc., previously reported in our Rehabilitation Therapy segment. We received $0.9 million in cash for these assets.
2001. During the year ended December 31, 2001, we divested 43 skilled nursing facilities, previously reported in our Inpatient segment. The net revenues and net operating losses for the year ended December 31, 2001 for these 43 facilities were approximately $85.3 million and $7.5 million, respectively. The aggregate net loss on disposal during the year ended December 31, 2001 for these divestitures was approximately $1.4 million recorded in gain on sale of assets, net, and $23.6 million, which was included in reorganization costs (gain), net, in our 2001 consolidated statement of operations.
We sold our remaining operations in the United Kingdom, previously reported in our International operations segment, consisting of 146 inpatient facilities with 8,326 licensed beds, in February 2001. No material cash consideration was received for these operations, but we were released from approximately $112.9 million of aggregate debt, capital lease obligations, notes payable and other liabilities upon the sale. Our operations in Australia were liquidated in July 2001 and we received liquidation proceeds of approximately $0.9 million. We sold our long-term care and pharmacy operations in Germany in April 2001 and received proceeds of approximately $3.5 million. At December 31, 2001, we had no operations outside of the U.S.
During January 2001, we sold substantially all of the assets of our SunChoice medical supplies operations to Medline Industries, Inc., previously reported in our Pharmaceutical and Medical Supplies segment. We received proceeds of $16.6 million in exchange for the SunChoice assets.
F-22
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(b) Discontinued Operations
In accordance with the provisions of SFAS No. 144, the results of operations of the disposed assets for the year ended December 31, 2003 have been reported as discontinued operations for all periods presented in the accompanying consolidated statements of operations for the Reorganized Company.
Inpatient Services: During the year ended December 31, 2003, we divested 127 skilled nursing facilities in accordance with our restructuring plan.
Pharmaceutical Services: In July 2003, we sold the assets of our pharmaceutical services operations, including the assets of SunScript Pharmacy Corporation, to Omnicare, Inc. We received cash proceeds of $75.0 million and the right to receive up to $15.0 million in additional purchase price holdback, which is to be paid to us on or before July 15, 2005 subject to fulfillment of certain conditions.
Other Operations
: On November 7, 2003, Shared Healthcare Systems, Inc. ("SHS"), a majority owned subsidiary, sold substantially all of its software development assets to Accu-Med Services of Washington LLC, a wholly owned subsidiary of Omnicare, Inc., for approximately $5.0 million in proceeds at closing and up to $0.5 million to be paid in cash in December 2004. In addition, we sold the Washington and Oregon mobile radiology operations for $0.2 million in October 2003.A summary of the discontinued operations for the year ended December 31, 2003 and the ten months ended December 31, 2002 is as follows (in thousands):
For The Year Ended December 31, |
For The Ten Months Ended December 31, |
||||||||||||||||
2003 |
2002 |
||||||||||||||||
Inpatient Services |
Pharmaceutical |
|
|
Inpatient Services |
Pharmaceutical |
|
|
||||||||||
Net operating revenues |
$ 438,941 |
$ 116,541 |
$ 1,426 |
$ 556,908 |
| |
$ 749,705 |
$ 167,502 |
$ 1,942 |
$ 919,149 |
||||||||
====== |
========= |
====== |
========= |
| |
====== |
========= |
====== |
========== |
|||||||||
Loss on impairment |
$ - |
$ - |
$ - |
$ - |
| |
$ ( 41,346 |
) |
$ (73,978 |
) |
$ (13,414 |
) |
$ (128,738 |
) |
||||
====== |
========= |
====== |
========= |
| |
====== |
========= |
====== |
========== |
|||||||||
Operating (loss) income (1) |
$ (24,478 |
) |
$ 5,595 |
$ (1,670 |
) |
$ (20,553 |
) |
| |
$ (58,712 |
) |
$ (63,094) |
$ (13,331 |
) |
$ (135,137 |
) |
||
| |
|||||||||||||||||
Gain on disposal of |
|
|
|
|
| |
|
|
|
- |
||||||||
====== |
========= |
====== |
========= |
| |
====== |
========= |
====== |
========== |
|||||||||
Income (loss) on |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|||
====== |
========= |
====== |
========= |
| |
====== |
========= |
====== |
========== |
(1) |
Operating loss includes $0.4 million in exit costs in Other for the year ended December 31, 2003 and $128.8 million in asset impairment costs, of which $41.4 million is in Inpatient Services, $74.0 million is in Pharmaceutical Services and $13.4 million is in Other for the ten months ended December 31, 2002, respectively. |
(2) |
(Loss) income on discontinued operations is net of related tax expense of $0.7 million in Pharmaceutical Services for the year ended December 31, 2003 and $0.4 million, of which $0.2 million is in Inpatient Services and $0.2 million is in Pharmaceutical Services for the ten months ended December 31, 2002. |
F-23
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(c) Assets Held for Sale
As of December 31, 2003, assets held for sale consisted of three undeveloped parcels of land and a vacant office building valued at $2.3 million and artwork valued at $0.7 million, within our consolidated financial statements in our Corporate segment, which we expect to sell during 2004.
As of December 31, 2002, assets held for sale consisted of five undeveloped parcels of land which were valued at $6.3 million within our consolidated financial statements in our Other Operations segment.
(9) Commitments and Contingencies
(a) Lease Commitments
We lease real estate and equipment under cancelable and noncancelable agreements. Most of our operating leases have original terms from seven to twelve years and contain at least one renewal option, (which could extend the terms of the leases by five to ten years), purchase options, escalation clauses and provisions for payments by us of real estate taxes, insurance and maintenance costs. Future minimum lease payments under real estate leases and equipment leases, are as follows (in thousands):
|
Capital |
Operating |
||
2004 |
$ 395 |
$ 52,720 |
||
2005 |
- |
50,911 |
||
2006 |
- |
51,514 |
||
2007 |
- |
39,099 |
||
2008 |
- |
34,930 |
||
Thereafter |
- |
112,799 |
||
Total minimum lease payments |
395 |
$ 341,973 |
||
Less amount representing interest |
(31 |
) |
============ |
|
Present value of net minimum lease payments under capital leases |
$ 364 |
|||
=========== |
Rent expense under operating leases, excluding expense related to discontinued operations, totaled approximately $46.1 million, $40.4 million, $24.9 million and $166.1 million for the year ended December 31, 2003, the ten month period ended December 31, 2002, the two month period ended February 28, 2002 and the year ended December 31, 2001, respectively. The operating lease expense for continuing operations was included in rent expense in the accompanying consolidated statements of operations. The operating lease expense for discontinued operations for the year ended December 31, 2003 and the ten month period ended December 31, 2002 was $41.7 million and $85.4 million, respectively, and was recorded in loss from discontinued operations in the accompanying consolidated statements of operations. As of March 1, 2004, we have identified seven of our skilled nursing facilities for divestiture, six of which are under operating leases and one un der a mortgage.
F-24
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(b) Purchase Commitments
Our inpatient services segment has a contractual agreement through January 31, 2009 establishing Medline Industries, Inc. ("Medline") as the primary medical supply vendor for all of the long-term care facilities that we operate. The agreement provides that the long-term care division shall purchase at least 90% of its medical supply products from Medline. Additionally, if we choose to terminate the agreement without cause or if Medline chooses to terminate the agreement with cause, we may be required to pay Medline liquidated damages of $2.5 million if the agreement is terminated prior to January 11, 2005.
(c) Employment and Severance Agreements
We entered into employment agreements with Mr. Matros, Mr. Pendergest, Mr. Mathies, Mr. Roseman and Ms. Fisher in 2002, providing for annual base salaries of $650,000, $425,000, $400,000, $275,000 and $225,000, respectively. The agreements with Mr. Matros and Mr. Pendergest have terms of four years and are automatically renewed for additional terms of one year unless the employee or Sun notifies the other that the term will not be renewed. The agreements with Mr. Mathies, Mr. Roseman and Ms. Fisher do not have specified terms. In addition to the base salary, Mr. Matros, Mr. Pendergest, Mr. Mathies and Mr. Roseman are entitled to annual bonuses for each fiscal year in which we achieve or exceed the following financial performance targets: (i) if 100% to 119% of target earnings before interest, taxes, depreciation and amortization, then 50% of base salary; (ii) 120% to 139% of target earnings before interest, taxes, depreciation and amortization, then 75% of base salary; and (iii) if greater than 140% of target earnings before interest, taxes, depreciation and amortization, then 100% of base salary. Target earnings are set annually by the Board of Directors. Ms. Fisher is entitled to an annual bonus of up to one-third of her base salary based on targets established by the company.
The employment agreements with Mr. Matros and Mr. Pendergest generally provide that in the event of termination of employment without Good Cause or by the employee for Good Reason (each as defined in the employment agreements), then the employee would be entitled to a lump sum severance amount equal to the greater of (i) the base salary owing for the remaining term of the agreement or (ii) two years of base salary, unless the event occurred within two years of a change of control, in which case they would each be entitled to three years of base salary. The employment agreements with Mr. Mathies, Mr. Roseman and Ms. Fisher generally provide that in the event of termination of employment without Good Cause or by the employee for Good Reason, then the employee would be entitled to a lump sum severance payment equal to two years, one years and one years base salary, respectively, unless the event occurred within two years of a change of control, in which case they would be entitled to three years, two years and two years of base salary, respectively. Additionally, each employee would be entitled to any earned but unpaid bonus and certain of the employees would also be entitled to one or two times the amount of the bonus which would have been earned in the year of termination (depending upon the terms of the applicable agreement.)
We have entered into severance agreements with five of our other executive officers pursuant to which they would receive severance payments in the event of their Involuntary Termination of employment (as defined in the agreements). The severance payments would be equal to 12 months of their then-current salaries, or an aggregate of approximately $1.2 million for all five employees. In addition to the severance payments, they would have the right to participate for a defined period of time in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to them immediately prior to termination.
F-25
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(d) Insurance
We self-insure for certain insurable risks, including general and professional liability, workers' compensation liability and employee health insurance liability through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary by the states in which we operate. There is also a risk that the amounts funded to our programs of self-insurance may not be sufficient to respond to all claims asserted under those programs. In addition, in certain states in which we operate, state law prohibits insurance coverage for punitive damages arising from general and professional liability litigation, and we could be held liable for punitive damages in those states
. Although we believe the companies we have purchased insurance from are solvent, in light of the dramatic changes occurring in the insurance industry in recent years, we cannot be assure d that they will remain solvent and able to fulfill their obligations. Provisions for estimated reserves, including incurred but not reported losses, are provided in the period of the related coverage. These provisions are based on actuarial analyses, internal evaluations of the merits of individual claims, and industry loss development factors or lag analyses. The methods of making such estimates and establishing the resulting reserves are reviewed periodically, and any adjustments resulting there from are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.Prior to January 1, 2000, the maximum loss exposure with respect to the third-party insurance policies was $100,000 per claim for general and professional liability. Since January 2000, we have relied upon self-funded insurance programs for general and professional liability claims up to a base amount per claim and an aggregate per location, which amounts we are responsible for funding, and we obtained excess insurance policies for claims above those amounts. The programs had the following coverages that we were responsible for self-funding: (i) for events occurring from January 1, 2000 to December 31, 2002, $1.0 million per claim, and $3.0 million aggregate per location, (ii) for claims made in 2003, $10.0 million per claim with excess coverage above the level; and (iii) for claims made in 2004, $5.0 million per claim with excess coverage of $5.0 million above this level. An independent actuarial analysis is prepared twice a year to determine the ex pected losses and reserves for estimated settlements for general and professional liability under the per claim retention level, including incurred but not reported losses. For the years 2001 and 2002, these reserves are provided on an undiscounted basis in the period that the event occurred. For the policy year 2003, reserves are provided on an undiscounted basis in the period the claim was reported. As of December 31, 2003 and 2002, the reserves for such risk were approximately $121.7 million and $108.0 million, respectively. We estimate our range of exposure at December 31, 2003 was $109.5 million to $133.8 million and that the range will decline over time as our lease divestiture program is completed. Provisions for such risks were approximately $34.1 million, $44.1 million, $9.0 million, and $58.1 million for the year ended December 31, 2003, the ten months ended December 31, 2002, the two months ended February 28, 2002 and the year ended December 31, 2001, respectively, of w hich $18.6 million and $33.6 million for the year ended December 31, 2003 and the ten months ended December 31, 2002, respectively, were related to divested skilled nursing facilities and were included in net income from discontinued operations. At December 31, 2002, we had $12.0 million in pre-funded amounts restricted for payment of general and professional liability claims in a revocable trust account. At December 31, 2003, we had $5.0 million in pre-funded amounts, classified in current assets, restricted for payment of general and professional liability claims in a revocable trust account.
F-26
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The majority of our workers' compensation risks are insured through insurance policies with third parties. Our reserves are estimated by independent actuaries beginning with the 2000 policy year and by company analysis using industry development factors for prior years. Effective with the policy period beginning January 1, 2002, we discount our workers' compensation reserves based on a 4% discount rate. At December 31, 2003, the discounting of these policy periods resulted in a reduction to our reserves of $4.8 million. The provision for such risks, which includes accruals for insurance premiums and claims costs, for the year ended December 31, 2003, the ten months ended December 31, 2002, the two months ended February 28, 2002, and the year ended December 31, 2001 was $36.0 million, $26.5 million, $3.4 million and $54.9 million, respectively, of which $12.9 million and $12.8 million for the year ended December 31, 2003 and the ten months ended December 31, 2002, respectively, were related to divested skilled nursing facilities and included in net income from discontinued operations. We have recorded reserves of $69.6 million and $65.3 million, as of December 31, 2003 and 2002, respectively. We estimated our range of exposure at December 31, 2003 was $62.6 million to $76.5 million. At December 31, 2002, we had pre-funded amounts restricted for payment of workers' compensation claims of $57.5 million of which $21.8 million was classified in current assets and $35.7 million was held in non-current assets in a revocable trust account. At December 31, 2003, we had $53.4 million in pre-funded amounts in a revocable trust account restricted for payment of workers' compensation claims, of which $22.4 million was classified in current assets and $31.0 million was held in non-current assets.
(e) Construction Commitments
As of December 31, 2003, we had construction commitments under various contracts of approximately $0.8 million. These items consisted primarily of contractual commitments to improve existing facilities.
(f) Restricted Cash
Restricted cash, included in current assets, as of December 31, 2003 and December 31, 2002, was $33.7 million and $41.1 million, respectively, related to our funding of self insurance obligations and various escrow and bond commitments. Of the $33.7 million restricted as of December 31, 2003, $22.4 million was held for workers' compensation claim payments, $5.0 million was held for the payment of patient care liability claims and settlements and $6.3 million was held for bank collateral, various mortgages and bond payments. Of the $41.1 million restricted as of December 31, 2002, $21.8 million was held for workers' compensation claim payments, $12.0 million was held for payment of patient care liability claims and settlements, $5.2 million was held for U.S. Trustee fees related to our 2002 bankruptcy and $2.2 million was held for various bonds.
Non-current restricted cash as of December 31, 2003 and December 31, 2002, included $33.9 million and $39.3 million, respectively, related primarily to our funding of future workers' compensation self-insurance obligations and $3.6 million maintained to repay a mortgage.
(10) Income Taxes
The provision for income taxes was based upon management's estimate of taxable income or loss for each respective accounting period. We recognized an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences would result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. We also recognized as deferred tax assets the future tax benefits from net operating loss, capital loss, and tax credit carryforwards. A valuation allowance was provided for deferred tax assets as it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
F-27
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Income tax expense (benefit) on (losses) income before discontinued operations consisted of the following (in thousands):
Reorganized Company |
Predecessor Company |
||||||
For The Year |
For The Ten |
For The Two |
For The Year |
||||
Current: |
|||||||
Federal |
$ - |
$ - |
| |
$ - |
$ - |
||
State |
665 |
(7) |
| |
147 |
321 |
||
665 |
(7) |
| |
147 |
321 |
|||
Deferred: |
| |
||||||
Federal |
- |
- |
| |
- |
- |
||
State |
- |
- |
| |
- |
- |
||
- |
- |
| |
- |
- |
|||
Total |
$ 665 |
$ (7) |
| |
$ 147 |
$ 321 |
||
=========== |
============ |
| |
============= |
============= |
Actual tax expense (benefit) differed from the expected tax expense (benefit) on loss before discontinued operations which was computed by applying the U.S. Federal corporate income tax rate of 35% to our loss before income taxes as follows (in thousands):
Reorganized Company |
Predecessor Company |
||||||||
For The Year |
For The Ten |
For The Two |
For The Year |
||||||
Computed expected tax benefit |
$ (12,025 |
) |
$ (106,000 |
) |
| |
$ 522,605 |
$ (24,191 |
) |
|
Adjustments in income taxes resulting from: |
| |
||||||||
Cancellation of indebtedness
|
| |
(451,026 |
) |
||||||
Amortization of goodwill |
| |
3,016 |
|||||||
Impairment loss |
16,473 |
| |
3,785 |
||||||
Change in valuation allowance |
14,283 |
98,945 |
| |
(82,920 |
) |
99,508 |
|||
Legal and regulatory matters |
| |
2,860 |
8,105 |
||||||
(Loss reversal) loss on planned |
| |
|
|
|
|||||
State income tax
(benefit) |
|
|
|
|
| |
|
|
|
|
Other |
(228 |
) |
496 |
| |
300 |
5,174 |
|||
$ 665 |
$ (7 |
) |
| |
$ 147 |
$ 321 |
||||
============ |
========= |
| |
========= |
========= |
F-28
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Deferred tax assets (liabilities) at December 31 consisted of the following (in thousands):
2003 |
2002 |
|||
Deferred tax assets: |
||||
Accounts and notes receivable |
$ 28,713 |
$ 20,479 |
||
Accrued liabilities |
90,463 |
86,670 |
||
Property and equipment |
32,718 |
76,805 |
||
Intangible assets |
34,267 |
89,900 |
||
Carryforward of deductions limited by Internal Revenue Code
|
|
|
||
Write-down of assets held for sale |
9,804 |
2,062 |
||
Partnership investments |
6,613 |
4,577 |
||
Alternative minimum tax credit |
4,347 |
4,265 |
||
Jobs and other credit carryforwards |
7,201 |
6,227 |
||
Capital loss carryforwards |
95,418 |
3,954 |
||
State net operating loss carryforwards |
42,169 |
47,450 |
||
Federal net operating loss carryforwards |
357,101 |
266,441 |
||
Other |
- |
469 |
||
708,814 |
615,549 |
|||
Less valuation allowance: |
||||
Federal |
(589,052) |
(511,687) |
||
State |
(119,762) |
(103,862) |
||
(708,814) |
(615,549) |
|||
Total deferred tax assets |
- |
- |
||
Total deferred tax liabilities |
- |
- |
||
Deferred taxes, net |
$ - |
$ - |
||
======== |
======== |
In connection with the fresh-start accounting adopted in 2002, our assets and liabilities were recorded at their respective fair values. Deferred tax assets and liabilities were then recognized for the tax effects of the differences between fair values and tax bases. In addition, deferred tax assets were recognized for future tax benefits of net operating loss ("NOL"), capital loss and tax credit carryforwards, and a valuation allowance was recorded for the overall net increase in deferred tax assets recognized in connection with fresh-start accounting.
To the extent management believes the pre-emergence net deferred tax assets will more likely than not be realized, a reduction in the valuation allowance established in fresh-start accounting will be recorded. The reduction in this valuation allowance will first reduce reorganization value in excess of amounts allocable to identifiable assets recorded in fresh-start accounting and other intangible assets, with any excess being treated as an increase to capital in excess of par value.
During the year ended December 31, 2003, our net deferred tax assets increased by approximately $93.3 million. We also increased our valuation allowance by approximately $93.3 million because we have no net operating loss carryback potential, and there is insufficient evidence regarding the generation of future taxable income to allow for the recognition of deferred tax assets under FAS 109.
F-29
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
In connection with our emergence from bankruptcy, we realized a gain on the extinguishment of debt of approximately $1.5 billion. This gain was not taxable since the gain resulted from our reorganization under the Bankruptcy Code. However, pursuant to Section 108 of the Internal Revenue Code, we were required as of the beginning of our 2003 taxable year to reduce certain tax attributes, including (a) NOL and capital loss carryforwards, (b) certain tax credits, and (c) tax bases in assets, in an amount equal to such gain on extinguishment. The overall increase in the valuation allowance during 2003 is primarily the result of increases in our deferred tax assets (i.e.,U.S. NOLs and capital loss carryforwards) due to adjustments to this tax attribute reduction calculation as of the beginning of 2003.
After considering the reduction in tax attributes discussed above, we have Federal NOL carryforwards of $1.0 billion with expiration dates from 2004 through 2023. Various subsidiaries have state NOL carryforwards totaling $939.5 million with expiration dates through the year 2023. In addition, we have capital loss carryforwards of $272.6 million, of which $10.1 million, $260.4 million and $2.1 million will expire in 2004, 2006, and 2007, respectively. Our alternative minimum tax credit carryforward of $4.3 million has no expiration date. Our $7.2 million of other tax credit carryforwards will expire in years 2004 through 2022.
Our reorganization on the Effective Date constituted an ownership change under Section 382 of the Internal Revenue Code. Therefore, the use of any of our losses and tax credits generated prior to the Effective Date that remain after attribute reduction are subject to the limitations described in Section 382. Our application of the rules under Section 382 and Section 108 is subject to challenge upon IRS review. A successful challenge could significantly impact our ability to utilize deductions, losses and tax credits generated prior to 2003.
(11) Supplementary Information Relating to Statements of Cash Flows
Supplementary information for the consolidated statements of cash flows is set forth below (in thousands):
Reorganized Company |
Predecessor Company |
||||||||
|
For The Ten |
For The Two |
|
||||||
|
|||||||||
Cash paid during the period for: |
| |
||||||||
Interest, net of $77, $68, $14 and $69 capitalized |
|
|
| |
|
|
||||
Income taxes (refunded) paid |
(455) |
910 |
| |
(548 |
) |
(931 |
) |
We acquired one skilled nursing facility during the year ended December 31, 2003 by entering into a new lease agreement in March 2003. We had no acquisitions during the ten month, two month and twelve month periods ended December 31, 2002, February 28, 2002 and December 31, 2001, respectively. During the ten month period ended December 31, 2002 we acquired nine skilled nursing facilities by issuing $31.5 million of mortgage notes.
F-30
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(12) Fair Value of Financial Instruments
The estimated fair values of our financial instruments as of December 31 are as follows (in thousands):
2003 |
2002 |
|||
Carrying |
|
Carrying |
|
|
Cash and cash equivalents |
$ 25,574 |
$ 25,574 |
$ 21,013 |
$ 21,013 |
Long-term debt including current portion |
78,878 |
61,098 |
196,223 |
160,393 |
The cash and cash equivalents carrying amount approximates fair value because of the short maturity of these instruments.
At December 31, 2003 and December 31, 2002, the fair value of our long-term debt, including current maturities, was based on estimates using present value techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk.
(13) Capital Stock
(a) Common Stock
As of December 31, 2003, the Reorganized Company had issued approximately 9,893,979 shares of its common stock in connection with the extinguishment of the Predecessor Company's liabilities subject to compromise. As of December 31, 2003, we expected to issue up to an additional 106,021 shares of our common stock to general unsecured creditors with claims of more than $50,000 in accordance with the provisions of the Plan of Reorganization. The fair value of the additional common stock expected to be issued is approximately $2.9 million valued at $27 per share by our reorganization plan and was recorded in other long-term liabilities in the December 31, 2003 consolidated balance sheet. Between January 1, 2004 and March 1, 2004, we issued an additional 4,515,839 shares of common stock and the closing price of our common stock on the Over-the-Counter Bulletin Board was $12.25 on March 1, 2004.
As of December 31, 2003, the Reorganized Company had issued 150,000 shares of restricted common stock to its Chairman and Chief Executive Officer at $27 per share. The restricted common stock vests as follows: 40% vested on February 28, 2003, and 20% vests on each of February 28, 2004, 2005 and 2006. Restricted stock awards are outright stock grants. The issuance of restricted stock and other stock awards requires the recognition of compensation expense measured by the fair value of the stock on the date of grant. During the year ended December 31, 2003, we recognized $0.9 million in expense related to the issuance of these stock awards.
(b) Warrants
In April 2002, the Reorganized Company issued warrants to purchase approximately 500,000 shares of its common stock to the holders of the Predecessor Company's senior subordinated notes. The warrants have a strike price of $76 per share and are exercisable over a three-year period. The fair value of the warrants was estimated to be $1.8 million and is recorded in additional paid in capital in the December 31, 2003 consolidated balance sheet.
F-31
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(c) Stock Option Plan
In February 2002, we adopted the 2002 Management Equity Incentive Plan, which allows for the issuance of up to 900,000 shares of our common stock, which includes the 150,000 shares of restricted common stock. As of December 31, 2003, our management held options to purchase 660,000 shares under this plan.
In March 2002, we adopted the 2002 Non-employee Director Equity Incentive Plan, which, as amended in August 2002, allows for the issuance of up to 160,000 options to purchase shares of our common stock. As of December 31, 2003, our directors held options to purchase 60,000 shares under this plan.
As of December 31, 2003, we had outstanding options covering an aggregate of 720,000 shares of our common stock to our officers and directors at an exercise price of $27 per share, which price was equal to or greater than the estimated market value at date of issuance. Of those options, 450,000 vest over a four-year period, with 20% vesting upon issuance and the remaining portion vesting ratably over the first four anniversary dates. The remaining 270,000 options vest 25% per year on the first four anniversary dates. All options expire in 2009.
We account for stock-based compensation using the intrinsic value method prescribed in APB No. 25, and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee must pay to acquire the stock.
The following is a summary of the status of our Stock Option Plans and changes during the periods ended (shares in thousands):
Reorganized Company |
Predecessor Company |
||||||||||||||
For the Year Ended |
For the Ten Months Ended December 31, 2002 |
For the Two Months Ended February 28, 2002 |
For the Year Ended |
||||||||||||
|
Weighted |
|
Weighted |
|
Weighted |
|
Weighted |
||||||||
Outstanding at beginning of period |
800 |
$ 27.00 |
- |
$ - |
| |
451 |
$ 10.22 |
856 |
$ 8.25 |
||||||
Granted: |
| |
||||||||||||||
Price equals fair value |
- |
- |
845 |
27.00 |
| |
- |
- |
- |
- |
||||||
Cancelled |
- |
- |
- |
- |
| |
(219 |
) |
10.22 |
- |
- |
|||||
Forfeited |
(80 |
) |
27.00 |
(45 |
) |
27.00 |
| |
(232 |
) |
10.22 |
(322 |
) |
7.40 |
||
Outstanding at period-end |
720 |
27.00 |
800 |
27.00 |
| |
- |
- |
534 |
8.81 |
||||||
======== |
========= |
| |
======== |
======== |
|||||||||||
Options exercisable at period-end |
248 |
27.00 |
90 |
27.00 |
| |
- |
- |
451 |
10.22 |
||||||
======== |
========= |
| |
======== |
======== |
|||||||||||
Options available for future grant |
190 |
110 |
| |
- |
10,787 |
||||||||||
======== |
========= |
| |
======== |
======== |
|||||||||||
Weighted average fair value of |
|
|
| |
|
|
||||||||||
======== |
======== |
| |
======== |
======== |
F-32
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
SFAS No. 148 provides companies alternative methods to transitioning to SFAS No. 123's fair value method of accounting for stock-based employee compensation, and amends certain disclosure requirements. SFAS No. 148 does not mandate fair value accounting for stock-based employee compensation, but does require all companies to meet the disclosure provisions. We currently do not recognize compensation expense for our stock option grants, which are issued at fair market value on the date of grant, and accounted for under the intrinsic value method, APB No. 25.
The fair value of each option granted in 2002 is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: (a) expected life of four years; (b) expected volatility of 62%; (c) risk-free interest rate of 3%; and (d) no dividend yield. No options were granted during the year ended December 31, 2003, the two month period ended February 28, 2002 and the year ended December 31, 2001.
If we determined compensation cost for our 2003, 2002 and 2001 option grants at a fair value consistent with SFAS No. 123 (see "Note 3 - Summary of Significant Accounting and Financial Reporting Policies", which describes that SFAS 123 establishes fair value as the measurement basis for stock-based awards), our net losses and net losses per share for the years ended December 31 would approximate the pro forma amounts below (in thousands, except per share data):
F-33
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Reorganized Company |
Predecessor Company |
||||||||
For The Year |
For The Ten |
For The Two |
For The Year Ended |
||||||
| |
|||||||||
| |
|||||||||
Net income (loss) as reported |
$ 354 |
$ (437,986 |
) |
| |
$ 1,485,371 |
$ (69,437 |
) |
||
| |
|||||||||
Compensation expense |
(511 |
) |
(415 |
) |
| |
- |
(1,211 |
) |
|
| |
|||||||||
Net (loss) income (pro forma) |
$ (157 |
) |
$ (438,401 |
) |
| |
$ 1,485,371 |
$ (70,648 |
) |
|
============== |
============== |
| |
============= |
============= |
|||||
Net (loss) income per share: |
| |
||||||||
Basic and diluted: |
| |
||||||||
Net income (loss) as reported |
$ 0.04 |
$ (43.80 |
) |
| |
$ 24.32 |
$ (1.14 |
) |
||
Compensation expense |
(0.05 |
) |
(0.04 |
) |
| |
- |
(.02 |
) |
|
Net (loss) income pro forma |
$ (0.01 |
) |
$ (43.84 |
) |
| |
$ 24.32 |
$ (1.16 |
) |
|
============== |
============= |
| |
============= |
============= |
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to options granted prior to 1995, and additional option grants in future years are anticipated. The following table summarizes information about stock options outstanding as of December 31, 2003 (shares in thousands):
Options Outstanding |
Options Exercisable |
||||||||||
|
|
Weighted Average |
Weighted |
|
Weighted |
||||||
$27.00 |
- |
$27.00 |
720 |
5.32 |
$27.00 |
248 |
$27.00 |
(14) Earnings per Share
Basic net income (loss) per share is based upon the weighted average number of common shares outstanding during the period. The weighted average number of common shares in the year ended December 31, 2003 include the common shares issued in connection with the emergence of 9,893,979, the common shares outstanding to be issued once the prepetition claims are finalized of 106,021 and the vested restricted stock discussed in "Note 13 - Capital Stock."
Diluted net earnings (loss) per share is based upon the weighted average number of common shares outstanding during the period plus the number of incremental shares of common stock contingently issuable upon exercise of stock options and if dilutive, include the assumption that our restricted common stock of the Reorganized Company and convertible securities of the Predecessor Company were converted as of the beginning of the period. Net earnings are adjusted for the interest on the convertible securities, net of interest related to additional assumed borrowings to fund the cash consideration on conversion of certain convertible securities and the related income tax benefits. In periods of losses, diluted net losses per share is based upon the weighted average number of common shares outstanding during the period. As we had a net loss for the ten months ended December 31, 2002 and for the year ended December 31, 2001, our stock options and convertible debe ntures were anti-dilutive.
Options to purchase approximately 720,000, 800,000, and 534,000 shares of common stock were outstanding for the year ended December 31, 2003, the ten months ended December 31, 2002, and the year ended December 31, 2001, respectively, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common stock. We had no dilutive instruments outstanding in the two month period ended February 28, 2002.F-34
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(15) Other Events
(a) LitigationIn February 2003, the BMFEA, which is a division of the Office of the Attorney General of the State of California, alleged that we had violated the terms of the PIFJ entered into during October 2001. Pursuant to the PIFJ, we are enjoined from engaging in violations of federal or state statutes or regulations governing the operation of health care facilities in the State of California. Among other things, the BMFEA alleged that our California facilities have had inadequate staffing, training and supervision. To remedy these alleged violations, the BMFEA had requested that we pay their costs of the investigation and to audit our operations in California, and, initially, requested a significant but unspecified cash penalty. The BMFEA investigation included onsite inspections, searches, interviews and examinations of our residents and facility personnel, service of document requests and, in one instance, service of a search warrant seeking documents and further information regarding the operation of certain of our California facilities.
In January 2004, 11 current and one former employee of SunBridge Care and Rehab for Escondido-East were arraigned on charges brought by the California Department of Justice, alleging that the defendants permitted an elderly woman under their care to be placed in a situation in which her health was endangered in circumstances likely to produce great bodily harm or death. Ten of the twelve defendants were also charged with a misdemeanor count of falsifying paperwork with fraudulent intent. SunBridge Care and Rehab for Escondido-East is a skilled nursing facility in Escondido, California that is operated by Care Enterprises West, an indirect subsidiary of Sun Healthcare Group, Inc. Neither Sun Healthcare Group, Inc. nor Care Enterprises West has been charged with any wrongdoing. We have commenced an internal investigation of the California Department of Justice's allegations and continue our ongoin g efforts to work in cooperation with the California Department of Justice during the course of their investigation.
We do not know whether the BMFEA will ultimately assert that the Company is in violation of the PIFJ and, if so, what actions the BMFEA may take. There can be no assurance that there will not be an adverse outcome in this matter, or that additional charges will not be filed against the 12 employees, other employees, Care Enterprises West or any of its affiliates, or any officers and directors. We are unable to estimate any amount that the BMFEA may ultimately seek from us, or the cost to us resulting from an adverse outcome in this matter, although an adverse outcome in this matter could have a material adverse effect on our financial position, results of operations and cash flows.
In March and April 1999, class action lawsuits were filed against us and three individuals, who were at that time our officers, in the United States District Court for the District of New Mexico. These actions have been consolidated as In re Sun Healthcare Group, Inc. Securities and Litigation Master, File No. Civ. 99-269. The lawsuits allege, among other things, that we did not disclose material facts concerning the impact that changes to reimbursement for our skilled nursing facilities under Medicare's prospective payment system would have on our results of operations. The lawsuits seek compensatory damages and other relief for stockholders who purchased our common stock during the class-action period. Pursuant to an agreement among the parties, we were dismissed without prejudice in December 2000. In January 2002, the District Court dismissed the lawsuit with prejudice and entered judgment in favor of the remaining defendants. In February 200 2, the plaintiffs filed a Motion to Amend the Judgment and to File an Amended Complaint. In April 2003, the plaintiffs' Motion was denied by the United States District Court for the District of New Mexico. In May 2003, the plaintiffs filed an appeal with the United States Court of Appeals for the Tenth Circuit. We intend to defend this matter vigorously.
F-35
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
We are a party to various other legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of our business, including claims that our services have resulted in injury or death to the residents of our facilities, claims relating to employment and commercial matters. We have experienced an increasing trend in the number and severity of litigation claims asserted against us. We believe that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years, resulting in an increased aggressiveness, due to the heightened awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which we have had significant operations, including California, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions. There can be no assurance that we will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.
We operate in industries that are extensively regulated. As such, in the ordinary course of business, we 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 are or have been and/or may in the future be non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, these industries are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is ever found by a court of competent jurisdiction to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension or exclusion of the provider or individual from participation in their program. We believe that there has been, and will co ntinue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations and cash flows.
(b) Other Inquiries
From time to time, fiscal intermediaries and Medicaid agencies examine cost reports filed by predecessor operators of our skilled nursing facilities. If, as a result of any such examination, it is concluded that overpayments to a predecessor operator were made, we, as the current operator of such facilities, may be held financially responsible for such overpayments. At this time we are unable to predict the outcome of any existing or future examinations.
F-36
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(c) Legislation, Regulations and Market Conditions
We are subject to extensive federal, state and local government regulation relating to licensure, conduct of operations, ownership of facilities, expansion of facilities and services and reimbursement for services. As such, in the ordinary course of business, our operations are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which may be non-routine. We believe that we are in substantial compliance with the applicable laws and regulations. However, if we are ever found to have engaged in improper practices, we could be subjected to civil, administrative or criminal fines, penalties or restitutionary relief, which may have a material adverse impact on our financial position, results of operations and cash flows.
We entered into a Corporate Integrity Agreement (the "CIA") with the OIG in July 2001 and it became effective on February 28, 2002. We implemented further internal controls with respect to our quality of care standards and Medicare and Medicaid billing, reporting and claims submission processes and engaged an independent third party to act as quality monitor and Independent Review Organization under the CIA. A breach of the CIA could subject us to substantial monetary penalties and exclusion from participation in Medicare and Medicaid programs. We believe that we are in compliance with the terms and provisions of the CIA. Any such sanctions could have a material adverse effect on our financial position, results of operations, and cash flows.
In December 2000, the federal government released the final privacy rules of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The rules provide for, among other things, (i) giving consumers the right and control over the release of their medical information, (ii) the establishment of boundaries for the use of medical information, and (iii) penalties for violation of an individual's privacy rights. HIPAA provides for the imposition of civil or criminal penalties for the violation of these rules. HIPAA's security regulations were finalized in February 2003 and will become effective in April 2005. The security regulations specify administrative procedures, physical safeguards and technical services and mechanisms designed to ensure the privacy of protected health information. In addition, HIPAA regulations were finalized in the fourth quarter of 2000 and became effective in October 2003 to require standard formatting for healthca re providers that submit claims electronically. We estimate that the efforts and resources we will expend to comply with the HIPAA privacy, security and transaction code set regulations will run $1.8 million in total, of which $0.9 million was incurred in the year ended December 31, 2003 and approximately $0.9 million is expected to be incurred for 2004. The majority of the cost is recognized in the corporate segment as general and administrative expense in the consolidated results of operations.
(16) Segment Information
We operate predominantly in the long-term care segment of the healthcare industry. We are a provider of long-term, sub-acute and related ancillary care services to nursing home patients. In addition to services provided in the United States, we previously provided services in the United Kingdom, Spain, Germany and Australia.
We have changed the composition of our segments and therefore restated the previously reported segment information related to the Reorganized Company. The change since the last annual SEC filing includes new segments for Medical Staffing, Home Health, Laboratory and Radiology which previously were categorized in the Other segment and removal of the Pharmaceutical Services, International and Other segments as they have been sold.
F-37
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The following summarizes the services provided by our reportable and other segments:
Inpatient Services: This segment provides, among other services, inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. We provide 24-hour nursing care in these facilities by registered nurses, licensed practical nurses and certified nursing aids. At December 31, 2003, we operated 110 long-term care facilities (consisting of 100 skilled nursing facilities, seven assisted living facilities and three specialty acute care hospitals) with 11,210 licensed beds as compared with 237 facilities with 26,845 licensed beds at December 31, 2002. As part of our restructuring efforts, we may divest 9 of the skilled nursing facilities representing approximately 688 licensed beds.
Rehabilitation and Respiratory Therapy Services: This segment provides, among other services, physical, occupational, speech and respiratory therapy supplies and services to affiliated and nonaffiliated skilled nursing facilities. At December 31, 2003, this segment provided services to 461 facilities, 361 nonaffiliated and 100 affiliated, as compared to 536 facilities at December 31, 2002, of which 320 were nonaffiliated and 216 were affiliated. In March 2002, we sold substantially all of the assets of our respiratory therapy operation. SunDance also operates four outpatient rehabilitation clinics and one certified outpatient rehabilitation clinic (CORF) in Colorado. We also provide rehabilitative and special education services to pediatric clients as well as rehabilitation therapy services for adult home healthcare clients in the greater New York City metropolitan area through HTA of New York, Inc.
Medical Staffing Services: We are a nationwide provider of temporary medical staffing primarily through CareerStaff Unlimited, Inc. ("CareerStaff"). For the year ended December 31, 2003, CareerStaff derived approximately 12% of its revenues from schools and governmental agencies, 40% from hospitals and other providers and 48% from skilled nursing facilities. CareerStaff provides (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians and (iv) related medical personnel. As of December 31, 2003, CareerStaff had 37 division offices, which provided temporary therapy and nursing staffing services in major metropolitan areas and one division office, which specialized in the placement of temporary traveling therapists in smaller cities and rural areas.
Home Health: As of December 31, 2003, this segment provided skilled nursing care, rehabilitation therapy and home infusion services to adult and pediatric patients in California and Ohio through SunPlus Home Health Services, Inc. ("SunPlus"). SunPlus also operates three licensed pharmacies in California.
Laboratory and Radiology: Through SunAlliance Healthcare Services, Inc. ("SunAlliance"), we provide mobile radiology and medical laboratory services in Arizona, California, Colorado and Massachusetts to skilled nursing facilities.
Other Operations: We previously provided pharmaceutical products primarily to nonaffiliated and affiliated long-term and sub-acute care facilities through SunScript Pharmacy Corporation. In July 2003, we sold substantially all of the assets to Omnicare, Inc.
F-38
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
International Operations: We sold our operations in the United Kingdom, Germany and Australia during 2001 in February, April and July, respectively. During 2000, we sold 18 pharmacies in the United Kingdom and our operations in Spain. We did not have any international operations at December 31, 2001 and thereafter.
The accounting policies of the segments are the same as those described in the Note 3 - "Summary of Significant Accounting Policies." We primarily evaluate segment performance based on profit or loss from operations after allocated expenses and before reorganization items, income taxes and extraordinary items . Gains or losses on sales of assets and certain items including impairment of assets recorded in connection with SFAS No. 144 and No. 142, legal and regulatory matters and restructuring costs are not considered in the evaluation of segment performance. Allocated expenses include intersegment charges assessed to segments for management services and asset use based on segment operating results and average asset balances, respectively. We account for intersegment sales and provision of services at estimated market prices.
Corporate assets primarily consist of cash and cash equivalents, receivables from subsidiary segments, notes receivable, property and equipment, unallocated intangible assets and goodwill. Although corporate assets include unallocated intangible assets and goodwill, the amortization of these items, if applicable, is reflected in the results of operations of the associated segment.
Our reportable segments are strategic business units that provide different products and services. They are managed separately because each business has different marketing strategies due to differences in types of customers, different distribution channels and different capital resource needs.
F-39
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The following tables summarize, for the years indicated, operating results and other financial information, by business segment (in thousands):
|
Inpatient |
Rehabilitation Services |
Medical |
Home |
Laboratory |
|
Intersegment |
|
Discontinued |
|||||||||
Reorganized Company |
||||||||||||||||||
Total net revenues |
$ 572,957 |
$ 167,656 |
$ 61,824 |
$ 55,533 |
$ 43,767 |
$ 73 |
$ (67,767 |
) |
$ 834,043 |
$ 556,908 |
||||||||
Operating expenses |
485,988 |
145,351 |
56,665 |
48,098 |
37,935 |
5 |
(67,757 |
) |
706,285 |
520,091 |
||||||||
Corporate general and administrative |
14,103 |
3,457 |
2,172 |
888 |
- |
41,097 |
- |
61,717 |
6,371 |
|||||||||
Rent expense |
41,167 |
1,136 |
1,121 |
2,136 |
1,128 |
2,915 |
(10 |
) |
49,593 |
41,803 |
||||||||
Provision for losses on accounts receivable |
6,653 |
2,036 |
516 |
167 |
3,454 |
(27 |
) |
- |
12,799 |
6,275 |
||||||||
Depreciation and amortization |
5,197 |
1,128 |
65 |
477 |
621 |
39 |
- |
7,527 |
1,869 |
|||||||||
Interest, net |
3,095 |
(27 |
) |
- |
2 |
(4 |
) |
13,861 |
- |
16,927 |
648 |
|||||||
Net segment income (loss) |
$ 16,754 |
$ 14,575 |
$ 1,285 |
$ 3,765 |
$ 633 |
$ (57,817 |
) |
$ - |
$ (20,805 |
) |
$ (20,149 |
) |
||||||
===== |
===== |
===== |
===== |
===== |
===== |
===== |
===== |
===== |
||||||||||
Intersegment revenues |
$ (600 |
) |
$ 59,543 |
$ 7,216 |
$ - |
$ 1,608 |
$ - |
$ (67,767 |
) |
$ - |
$ - |
|||||||
Identifiable segment assets |
$ 134,701 |
$ 27,380 |
$ 10,412 |
$ 11,396 |
$ 14,166 |
$ 458,741 |
$ (360,447 |
) |
$ 296,349 |
$ 4,049 |
||||||||
Segment capital expenditures |
$ 4,294 |
$ 234 |
$ 78 |
$ 327 |
$ 880 |
$ 3,965 |
$ - |
$ 9,778 |
$ 3,800 |
Inpatient |
Rehabilitation |
Medical |
Home |
Laboratory |
|
Intersegment |
|
Discontinued |
|||||||||||
Reorganized Company |
|||||||||||||||||||
Total net revenues |
$ 477,807 |
$ 150,451 |
$ 51,891 |
$ 45,134 |
$ 41,367 |
$ 222 |
$ (87,828 |
) |
$ 679,044 |
$ 919,149 |
|||||||||
Operating expenses |
401,633 |
122,682 |
45,313 |
38,759 |
34,966 |
1 |
(87,754 |
) |
555,600 |
817,747 |
|||||||||
Corporate general and administrative |
24,918 |
6,660 |
1,508 |
689 |
(11 |
) |
42,355 |
- |
76,119 |
2,646 |
|||||||||
Rent expense |
36,965 |
885 |
770 |
1,721 |
1,045 |
1,328 |
(74 |
) |
42,640 |
85,405 |
|||||||||
Provision for losses on accounts receivable |
7,201 |
(2,074 |
) |
(287 |
) |
(65 |
) |
2,683 |
(166 |
) |
- |
7,292 |
7,495 |
||||||
Depreciation and amortization |
6,075 |
1,067 |
(4 |
) |
497 |
524 |
9,250 |
- |
17,409 |
10,996 |
|||||||||
Interest, net |
1,693 |
(10 |
) |
3 |
2 |
- |
10,844 |
- |
12,532 |
842 |
|||||||||
Net segment (loss) income |
$ (678 |
) |
$ 21,241 |
$ 4,588 |
$ 3,531 |
$ 2,160 |
$ (63,390 |
) |
$ - |
$ (32,548 |
) |
$ (5,982 |
) |
||||||
===== |
===== |
===== |
===== |
===== |
===== |
===== |
===== |
===== |
|||||||||||
Intersegment revenues |
$ (459 |
) |
$ 77,813 |
$ 4,078 |
$ - |
$ 6,396 |
$ - |
$ (87,828 |
) |
$ - |
$ - |
||||||||
Identifiable segment assets |
$ 129,320 |
$ 24,452 |
$ 12,274 |
$ 11,937 |
$ 9,391 |
$ 482,930 |
$ (368,100 |
) |
$ 302,204 |
$ 173,631 |
|||||||||
Segment capital expenditures |
$ 8,288 |
$ 55 |
$ 65 |
$ 124 |
$ 376 |
$ 11,984 |
$ - |
$ 20,892 |
$ 13,792 |
F-40
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
||||||||||||||||
|
Rehabilitation |
Pharmaceutical |
|
|
|
|
|
|||||||||
Predecessor Company Ended February 28, 2002 |
||||||||||||||||
Total net revenues |
$ 227,906 |
$ 28,501 |
$ 41,101 |
$ - |
$ 29,815 |
$ - |
$ (25,477 |
) |
$ 301,846 |
|||||||
Operating expenses |
199,534 |
23,521 |
36,080 |
- |
26,555 |
2 |
(25,463 |
) |
260,229 |
|||||||
Corporate general and administrative |
4,670 |
744 |
483 |
- |
661 |
8,402 |
- |
14,960 |
||||||||
Rent expense |
23,018 |
565 |
746 |
- |
829 |
645 |
(14 |
) |
25,789 |
|||||||
Provision for losses on accounts receivable |
(104 |
) |
42 |
509 |
- |
460 |
(490 |
) |
- |
417 |
||||||
Depreciation and amortization |
1,847 |
253 |
566 |
- |
382 |
1,417 |
- |
4,465 |
||||||||
Interest, net |
273 |
1 |
(2 |
) |
- |
120 |
2,280 |
- |
2,672 |
|||||||
Net segment (loss) income |
$ (1,332 |
) |
$ 3,375 |
$ 2,719 |
$ - |
$ 808 |
$ (12,256 |
) |
$ - |
$ (6,686 |
) |
|||||
===== |
======= |
======= |
======= |
===== |
===== |
====== |
======= |
|||||||||
Intersegment revenues |
$ (92 |
) |
$ 15,755 |
$ 8,325 |
$ - |
$ 1,489 |
$ - |
$ (25,477 |
) |
$ - |
||||||
Identifiable segment assets |
$ 430,847 |
$ 80,477 |
$ 115,259 |
$ - |
$ 51,733 |
$ 514,167 |
$ (364,067 |
) |
$ 828,416 |
|||||||
Segment capital expenditures |
$ 1,987 |
$ 38 |
$ 249 |
$ - |
$ 124 |
$ 1,573 |
$ - |
$ 3,971 |
||||||||
|
Rehabilitation |
Pharmaceutical |
|
|
|
|
|
|||||||||
Predecessor Company For the Year Ended December 31, 2001 |
||||||||||||||||
Total net revenues |
$ 1,609,388 |
$ 175,159 |
$ 257,579 |
$ 23,887 |
$ 178,065 |
$ 1,393 |
$ (170,237 |
) |
$ 2,075,234 |
|||||||
Operating expenses |
1,362,539 |
140,970 |
222,119 |
16,639 |
161,120 |
(3,642 |
) |
(170,179 |
) |
1,729,566 |
||||||
Corporate general and administrative |
33,237 |
4,190 |
3,908 |
1,716 |
4,760 |
51,140 |
- |
98,951 |
||||||||
Rent expense |
150,301 |
3,756 |
4,232 |
4,598 |
5,233 |
3,398 |
(58 |
) |
171,460 |
|||||||
Provision for losses on accounts receivable |
15,689 |
1,424 |
3,685 |
- |
5,355 |
(181 |
) |
- |
25,972 |
|||||||
Depreciation and amortization |
12,576 |
1,752 |
4,311 |
- |
3,193 |
10,953 |
- |
32,785 |
||||||||
Interest, net |
2,758 |
32 |
4 |
1,183 |
513 |
8,145 |
- |
12,635 |
||||||||
Income (loss) before corporate allocations |
32,288 |
23,035 |
19,320 |
(249 |
) |
(2,109 |
) |
(68,420 |
) |
- |
3,865 |
|||||
Corporate management fees |
52,294 |
10,344 |
15,085 |
- |
7,360 |
(85,083 |
) |
- |
- |
|||||||
Net segment (loss) income |
$ (20,006 |
) |
$ 12,691 |
$ 4,235 |
$ (249 |
) |
$ (9,469 |
) |
$ 16,663 |
$ - |
$ 3,865 |
|||||
===== |
======= |
======== |
====== |
===== |
====== |
====== |
======= |
|||||||||
Intersegment revenues |
$ (526 |
) |
$ 99,549 |
$ 62,209 |
$ - |
$ 9,005 |
$ - |
$ (170,237 |
) |
$ - |
||||||
Identifiable segment assets |
$ 382,581 |
$ 30,515 |
$ 74,815 |
$ - |
$ 59,796 |
$ 519,711 |
$ (417,614 |
) |
$ 649,804 |
|||||||
Segment capital expenditures |
$ 17,595 |
$ 472 |
$ 937 |
$ 537 |
$ 1,865 |
$ 8,924 |
$ - |
$ 30,330 |
F-41
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Measurement of Segment Income or Loss
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (See "Note 3 - Summary of Significant Accounting Policies"). We evaluate financial performance and allocate resources primarily based on income or loss from operations before income taxes, excluding any usual items.
The following table reconciles net segment (loss) income to consolidated income (loss) before income taxes and discontinued operations:
|
Reorganized and Predecessor Company |
|
|||||
2003 |
2002 |
| |
2001 |
||||
| |
|||||||
Net segment (loss) income |
$ (20,805 |
) |
$ (39,234 |
) |
| |
$ 3,865 |
|
Loss on asset impairment |
(2,774 |
) |
(279,022 |
) |
| |
(18,825 |
) |
Legal and regulatory matters, net |
- |
- |
| |
(11,000 |
) |
||
Restructuring costs, net |
(14,676 |
) |
- |
| |
(1,064 |
) |
|
Gain on sale of assets, net |
3,897 |
8,714 |
| |
825 |
|||
Gain on extinguishment of debt, net |
- |
1,498,360 |
| |
- |
|||
Reorganization gain (costs), net |
- |
1,483 |
| |
(42,917 |
) |
||
(Loss) income before income taxes and discontinued operations |
$ (34,358 |
) |
$ 1,190,301 |
| |
$ (69,116 |
) |
|
======== |
======== |
| |
========= |
(17) Restructuring Costs
We commenced our restructuring in January 2003 and expect to complete our restructuring in the second quarter of 2004. We adopted SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities for all divestiture activities initiated after December 31, 2002. Under SFAS No. 146, there are four major types of costs associated with our restructuring: one-time termination benefits, contract termination, facility consolidation and professional fees. We have recognized these expenses in the income statement line "restructuring costs" as they are incurred. All of the costs are under the Corporate reportable segment. We have no liability account associated with this restructuring activity because all of the related expenses were paid when incurred. The following table sets forth the costs related to the restructuring activity in detail (in millions).
Major Type of RestructuringCost |
Year Ended |
Total |
|
One-Time Termination Benefits |
$ 0.9 |
$ 1.0 |
|
Contract Terminations (3) |
4.9 |
4.9 |
|
Facility Consolidation |
0.1 |
0.2 |
|
Professional Fees |
8.8 |
10.2 |
|
Total |
$ 14.7 |
$ 16.3 |
|
==== |
==== |
||
(1) Cumulative amount incurred to date |
|||
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003
|
|||
(2) Aggregate amount expected to be incurred during entire restructuring. |
|||
(3) Included costs related to the termination of bank loans. |
(18) Emergence from Chapter 11 Bankruptcy Proceedings
(a) Confirmation of Joint Plan of Reorganization
On October 14, 1999, we together with all of our U.S. operating subsidiaries filed voluntary petitions for protection under chapter 11 of the U.S. Bankruptcy Code with the Bankruptcy Court. On February 6, 2002, the Bankruptcy Court approved our Plan of Reorganization and on February 28, 2002 we consummated the Plan of Reorganization. The principal provisions of the Plan of Reorganization are set forth below:
Type of Claim/Security |
Treatment under Plan of Reorganization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Financial Reporting Matters
Under chapter 11, certain claims against us in existence prior to the Filing Date were stayed while we continued operations as a debtor-in-possession. These claims are reflected in the accompanying consolidated balance sheets for 2001 and 2000 as "liabilities subject to compromise." Claims secured by our assets ("secured claims") also were stayed although the holders of such claims had the right to petition the Bankruptcy Court for relief from the automatic stay to permit such creditors to foreclose on the property securing their claim.
F-43
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
We determined that, generally, the fair market value of the collateral was less than the principal amount of our secured prepetition debt obligations; accordingly, we discontinued accruing interest on substantially all of these obligations as of the Filing Date. We received approval from the Bankruptcy Court to pay or otherwise honor certain of our prepetition obligations, including employee wages and benefits.
The principal categories and the balances of chapter 11 claims reclassified in the accompanying consolidated balance sheets as of December 31, 2001 and included in "liabilities subject to compromise" are identified below (in thousands):
Revolving Credit Facility |
$ 437,066 |
Credit Facility Term Loans |
358,981 |
Senior Subordinated Notes due 2007 |
250,000 |
Senior Subordinated Notes due 2008 |
150,000 |
Interest payable |
101,856 |
Prepetition trade and other miscellaneous claims |
88,171 |
Convertible Subordinated Debentures due 2004 |
83,300 |
Mortgage notes payable due at various dates through 2005 |
46,023 |
Other long-term debt |
14,377 |
Industrial Revenue Bonds |
8,365 |
Senior Subordinated Notes due 2002 |
6,161 |
Capital leases |
3,457 |
Convertible Subordinated Debentures due 2003 |
1,382 |
Total liabilities subject to compromise |
$ 1,549,139 |
============ |
(c) Debtor-in-Possession Financing
On October 14, 1999, we entered into a Revolving Credit Agreement with CIT/Business Credit, Inc. and Heller Healthcare Finance, Inc. (the "DIP Financing Agreement"). The DIP Financing Agreement provided for maximum borrowings by us of $200.0 million, subject to certain limitations. We used borrowings from new loan agreements to pay off our borrowings outstanding under the DIP Financing Agreement on February 28, 2002.
(d) Reorganization Costs
Reorganization costs under chapter 11 are items of expense or income that were incurred or realized by us because we were in reorganization. These included, but were not limited to, professional fees and similar types of expenditures incurred directly relating to the chapter 11 proceeding, loss accruals or realized gains or losses resulting from activities of the reorganization process and interest earned on cash accumulated by us because we were not paying prepetition liabilities.
F-44
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The components of reorganization costs (gain), net, were as follows for the periods indicated (in thousands):
Predecessor Company |
||||||
|
|
|
||||
Professional fees |
$ 8,171 |
$ 25,779 |
$ 27,756 |
|||
Restructuring |
3,843 |
- |
- |
|||
Adjust carrying value of assets no longer |
|
|
|
|
||
Adjust carrying value of assets held for sale |
(598 |
) |
- |
- |
||
Loss on sale of assets |
- |
15,267 |
310,060 |
|||
Miscellaneous |
- |
3,795 |
866 |
|||
Less: |
||||||
Interest earned on accumulated cash |
(88 |
) |
(1,924 |
) |
(2,807 |
) |
Total reorganization costs (gain), net |
$ (1,483 |
) |
$ 42,917 |
$ 335,875 |
||
=========== |
=========== |
=========== |
(19) Fresh-Start Accounting
We adopted the provisions of fresh-start accounting as of March 1, 2002. In connection with the preparation of the Predecessor Company's Disclosure Statement, an independent financial advisor determined our reorganization value, or fair value, to be $360.0 million to $460.0 million, with a point estimate value of $410.0 million, before considering certain long-term debt or other obligations assumed in the Plan of Reorganization. Our Disclosure Statement was confirmed by the Bankruptcy Court. This reorganization value was based upon our projected cash flows, selected comparable market multiples of publicly traded companies and other applicable ratios and valuation techniques. The estimated total equity value of the Reorganized Company aggregating $271.8 million was determined after taking into account the values of the obligations assumed in connection with the Plan of Reorganization.
F-45
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
A reconciliation of fresh-start accounting recorded as of February 28, 2002 follows (in thousands):
Predecessor |
| |
|
Reorganized |
||||||||
February 28, |
| |
Debt
|
|
|
March 1, |
||||||
Current assets: |
| |
||||||||||
Cash and cash equivalents |
$ 69,162 |
| |
$ - |
$ (18 |
) (i) |
$ - |
$ 69,144 |
||||
Accounts receivable, net |
211,248 |
| |
- |
(449 |
) (i) |
- |
210,799 |
||||
Inventory, net |
21,367 |
| |
- |
- |
- |
21,367 |
|||||
Other receivables, net |
5,089 |
| |
- |
(182 |
) (i) |
- |
4,907 |
||||
Prepaids and other assets |
12,554 |
| |
- |
(16 |
) (i) |
- |
12,538 |
||||
| |
|||||||||||
Total current assets |
319,420 |
| |
- |
(665 |
) |
- |
318,755 |
||||
| |
|||||||||||
Property and equipment, net |
132,482 |
| |
- |
55,407 |
(g) |
- |
187,889 |
||||
Assets held for sale |
18,288 |
| |
- |
- |
- |
18,288 |
|||||
Goodwill, net |
180,269 |
| |
- |
34,548 |
(g) |
- |
214,817 |
||||
Other assets, net |
30,963 |
| |
- |
57,704 |
(g) |
- |
88,667 |
||||
| |
|||||||||||
Total assets |
$ 681,422 |
| |
$ - |
$ 146,994 |
$ - |
$ 828,416 |
|||||
======== |
| |
======= |
======= |
======= |
======= |
F-46
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
Predecessor |
| |
|
Reorganized |
||||||||
February 28, |
| |
Debt |
|
|
March 1, |
||||||
Current liabilities: |
| |
||||||||||
Current portion of long-term debt |
$ 4,879 |
| |
$ - |
$ - |
$ 2,053 |
(h) |
$ 6,932 |
||||
Current portion of capital leases |
- |
| |
- |
- |
636 |
(h) |
636 |
||||
Accounts payable |
16,142 |
| |
- |
|
1,941 |
(i) |
4,175 |
(h) |
22,258 |
||
Accrued compensation and benefits |
78,301 |
| |
- |
(2,362 |
)(g) |
- |
|
75,939 |
|||
Accrued self-insurance obligations |
42,996 |
| |
- |
- |
2,145 |
(h) |
45,141 |
||||
Income taxes payable |
13,123 |
| |
- |
75 |
(i) |
- |
13,198 |
||||
Other accrued liabilities |
82,219 |
| |
- |
(7,119 |
)(g) |
9,789 |
(h) |
84,889 |
|||
| |
|||||||||||
Total current liabilities |
237,660 |
| |
- |
(7,465 |
) |
18,798 |
248,993 |
||||
| |
|||||||||||
Liabilities subject to compromise |
1,546,292 |
| |
(1,486,111 |
) (a) |
- |
(60,181 |
) (h) |
- |
|||
Accrued self-insurance obligations, |
|
| |
|
|
|
|
|||||
Long-term debt, net of current portion |
134,535 |
| |
- |
6,660 |
(i) |
41,313 |
(h) |
182,508 |
|||
Capital leases, net of current portion |
- |
| |
- |
- |
70 |
(h) |
70 |
||||
Other long-term liabilities |
22,176 |
| |
34,200 |
(f) |
44,400 |
(g) |
- |
100,776 |
|||
| |
|||||||||||
Total liabilities |
1,995,193 |
| |
(1,451,911 |
) |
43,595 |
- |
586,877 |
||||
| |
|||||||||||
Commitments and contingencies |
| |
||||||||||
| |
|||||||||||
Minority interest |
5,767 |
| |
- |
(1,828 |
)(g) |
- |
3,939 |
||||
| |
|||||||||||
Convertible Preferred Stock |
296,101 |
| |
(296,101 |
)(b) |
- |
- |
- |
||||
| |
|||||||||||
Stockholders' equity (deficit): |
| |
||||||||||
Reorganized Company common |
|
| |
|
|
|
|
|
||||
Predecessor Company common stock |
|
| |
|
|
|
|
|
||||
Additional paid-in capital |
824,739 |
| |
(824,739 |
)(c) |
- |
|
- |
237,512 |
|||
| |
237,512 |
(e) |
|||||||||
Retained earnings (accumulated |
|
|
| |
|
|
|
|
|
|
||
| |
915,284 |
(c) |
|||||||||
Less: |
| |
||||||||||
Predecessor Company common |
|
|
| |
|
|
|
|
|
|||
Predecessor Company grantor stock |
(10 |
) |
| |
10 |
(c) |
- |
- |
- |
|||
Total stockholders' equity (deficit) |
(1,615,639 |
) |
| |
1,853,239 |
- |
- |
237,600 |
||||
Total liabilities and stockholders' |
|
| |
|
|
|
|
|
|
|||
======== |
| |
======= |
======= |
====== |
======= |
F-47
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(a) |
To record the discharge of indebtedness in accordance with the Plan of Reorganization (in thousands): |
Revolving Credit Facility |
$ 437,066 |
Credit Facility Term Loans |
358,981 |
Senior Subordinated Notes due 2007 |
250,000 |
Senior Subordinated Notes due 2008 |
150,000 |
Interest payable |
101,855 |
Prepetition trade and other miscellaneous claims |
86,776 |
Convertible Subordinated Debentures due 2004 |
83,300 |
Other long-term debt |
8,087 |
Senior Subordinated Notes due 2003 |
6,161 |
Capital leases |
2,503 |
Convertible Subordinated Debentures due 2003 |
1,382 |
$ 1,486,111 |
|
============ |
(b) |
To record the discharge of the Convertible Preferred Stock of the Predecessor. |
(c) |
To eliminate the Common Stock of the Predecessor. |
(d) |
To record the gain on extinguishment of indebtedness. |
(e) |
To reflect the issuance of the Reorganized Company's common stock. |
(f) |
To reflect the fair value of the Reorganized Company's common stock and warrants that are to be issued to various pre-petition debt holders after emergence. |
(g) |
To adjust the carrying amount of assets and liabilities to fair value. Fair value was determined based upon third-party valuations of our long-lived assets and liabilities. The allocation of goodwill to our reporting units is not yet final, pending further analysis of our plans for certain leased facilities. |
(h) |
To reclassify the pre-petition priority, secured and unsecured claims that were assumed by the Reorganized Company in accordance with the Plan of Reorganization. |
(i) |
To record miscellaneous provisions of the Plan of Reorganization. |
(20) Gain on Extinguishment of Debt
In connection with the restructuring of our debt in accordance with the provisions of the Plan
of Reorganization, we realized a gain of $1.5 billion. This gain has been reflected in the operating
results of the Predecessor Company for the two months ended February 28, 2002 and was originally
classified as an extraordinary gain. Upon adoption of SFAS No. 145, the gain was reclassified to an
appropriate line item on the statement of operations.
F-48
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
A summary of the gain follows (in thousands):
Liabilities extinguished: |
|
Revolving Credit Facility |
$ 437,066 |
Credit Facility Term Loans |
358,981 |
Senior Subordinated Notes due 2007 |
250,000 |
Senior Subordinated Notes due 2008 |
150,000 |
Interest payable |
101,855 |
Prepetition trade and other miscellaneous claims |
86,776 |
Convertible Subordinated Debentures due 2004 |
83,300 |
Other long-term debt |
8,087 |
Senior Subordinated Notes due 2003 |
6,161 |
Capital leases |
2,503 |
Convertible Subordinated Debentures due 2003 |
1,382 |
Company-obligated mandatorily redeemable convertible |
|
1,782,212 |
|
Consideration exchanged: |
|
Common Stock |
270,000 |
Cash payments to senior lenders |
6,652 |
Cash payments to trade creditors - convenience class |
4,400 |
Warrants |
1,800 |
Payment of other executory contracts |
1,000 |
283,852 |
|
$ 1,498,360 |
|
=========== |
F-49
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(21) Filer/Non-Filer Financial Statements
CONSOLIDATING STATEMENT OF OPERATIONS
Predecessor Company
For the Two Months Ended February 28, 2002
(in thousands)
Filers |
Non-filers |
Elimination |
Consolidated |
|||||
Total net revenues |
$ 295,812 |
$ 6,884 |
$ (850 |
) |
$ 301,846 |
|||
Costs and expenses: |
||||||||
Operating costs |
279,869 |
6,097 |
(850 |
) |
285,116 |
|||
Corporate general and administrative |
15,862 |
- |
- |
15,862 |
||||
Depreciation and amortization |
4,285 |
180 |
- |
4,465 |
||||
Provision for losses on accounts receivable |
362 |
55 |
- |
417 |
||||
Interest, net |
2,552 |
120 |
- |
2,672 |
||||
Equity interest in losses of subsidiaries |
(613 |
) |
- |
613 |
- |
|||
Gain on extinguishment of debt |
(1,498,360 |
) |
- |
- |
(1,498,360 |
) |
||
Total costs and expenses |
(1,196,043 |
) |
6,452 |
(237 |
) |
(1,189,828 |
) |
|
Management fee (income) expense |
181 |
(181 |
) |
- |
- |
|||
Income (loss) before reorganization costs (gain), net, income taxes and |
|
|
|
|
|
|||
Reorganization costs (gain), net |
(1,483 |
) |
- |
- |
(1,483 |
) |
||
Income taxes |
147 |
- |
- |
147 |
||||
Loss from discontinued operations |
(1,569 |
) |
- |
- |
(1,569 |
) |
||
Loss on write-down of assets held for sale |
(6,070 |
) |
- |
- |
(6,070 |
) |
||
Net income |
$ 1,485,371 |
$ 613 |
$ (613 |
) |
$ 1,485,371 |
|||
====== |
====== |
====== |
======= |
F-50
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(21) Filer/Non-Filer Financial Statements (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Predecessor Company
For the Two Months Ended February 28, 2002
(in thousands)
Filers |
Non-filers |
Elimination |
Consolidated |
|||||
Cash flows from operating activities: |
||||||||
Net income |
$ 1,485,371 |
$ 613 |
$ (613 |
) |
$ 1,485,371 |
|||
Adjustments to reconcile net income to net cash used for operating activities: |
||||||||
Equity interest in losses of subsidiaries |
(613 |
) |
- |
613 |
- |
|||
Gain on extinguishment of debt |
(1,498,360 |
) |
- |
- |
(1,498,360 |
) |
||
Reorganization costs (gain), net |
(1,483 |
) |
- |
- |
(1,483 |
) |
||
Depreciation and amortization |
4,285 |
180 |
- |
4,465 |
||||
Provision for losses on accounts and other receivables |
362 |
55 |
- |
417 |
||||
Loss on write-down of assets held for sale |
6,070 |
- |
- |
6,070 |
||||
Other, net |
5,588 |
(4,872 |
) |
- |
716 |
|||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(7,875 |
) |
507 |
- |
(7,368 |
) |
||
Other current assets |
(9,196 |
) |
2,721 |
- |
(6,475 |
) |
||
Income taxes payable |
693 |
- |
- |
693 |
||||
Other current liabilities |
(4,263 |
) |
(745 |
) |
- |
(5,008 |
) |
|
Net cash used for operating activities before reorganization costs |
(19,421 |
) |
(1,541 |
) |
- |
(20,962 |
) |
|
Net cash paid for reorganization costs |
(2,781 |
) |
- |
- |
(2,781 |
) |
||
Net cash used for operating activities |
(22,202 |
) |
(1,541 |
) |
- |
(23,743 |
) |
|
|
|
|||||||
Capital expenditures, net |
(3,971 |
) |
- |
- |
(3,971 |
) |
||
Decrease in long-term notes receivable |
168 |
- |
- |
168 |
||||
Other |
(1,884 |
) |
2,026 |
- |
142 |
|||
Net cash (used for) provided by investing activities |
(5,687 |
) |
2,026 |
- |
(3,661 |
) |
||
|
||||||||
Net payments under Revolving Credit Agreement |
(55,382 |
) |
- |
- |
(55,382 |
) |
||
Long-term debt borrowings |
112,988 |
- |
- |
112,988 |
||||
Long-term debt repayments |
- |
(13 |
) |
- |
(13 |
) |
||
Principal payments on prepetition debt authorized by Bankruptcy Court |
(7,966 |
) |
- |
- |
(7,966 |
) |
||
Intercompany advances |
(94 |
) |
94 |
- |
- |
|||
Other |
(3,729 |
) |
1 |
- |
(3,728 |
) |
||
Net cash provided by financing activities |
45,817 |
82 |
- |
45,899 |
||||
Net increase in cash and cash equivalents |
17,928 |
567 |
- |
18,495 |
||||
Cash and cash equivalents at beginning of year |
49,917 |
732 |
- |
50,649 |
||||
Cash and cash equivalents at end of period |
$ 67,845 |
$ 1,299 |
$ - |
$ 69,144 |
||||
======= |
====== |
======= |
======= |
F-51
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(21) Filer/Non-Filer Financial Statements (Continued)
CONSOLIDATING BALANCE SHEET
Predecessor Company
As of December 31, 2001
(in thousands)
ASSETS |
||||||||
Filers |
Non-filers |
Elimination |
Consolidated |
|||||
Current assets: |
||||||||
Cash and cash equivalents |
$ 49,917 |
$ 732 |
$ - |
$ 50,649 |
||||
Accounts receivable, net |
200,445 |
4,515 |
(227 |
) |
204,733 |
|||
Inventory, net |
19,492 |
923 |
- |
20,415 |
||||
Other receivables, net |
9,556 |
- |
- |
9,556 |
||||
Prepaids and other assets |
5,610 |
43 |
- |
5,653 |
||||
Total current assets |
285,020 |
6,213 |
(227 |
) |
291,006 |
|||
Property and equipment, net |
124,832 |
8,384 |
- |
133,216 |
||||
Assets held for sale |
15,803 |
2,355 |
- |
18,158 |
||||
Notes receivable, net |
4,895 |
- |
- |
4,895 |
||||
Goodwill, net |
177,027 |
175 |
- |
177,202 |
||||
Other assets, net |
20,788 |
4,539 |
- |
25,327 |
||||
Investment in subsidiaries |
(280,290 |
) |
- |
280,290 |
- |
|||
Total assets |
$ 348,075 |
$ 21,666 |
$ 280,063 |
$ 649,804 |
||||
======== |
======= |
======== |
========= |
F-52
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(21) Filer/Non-Filer Financial Statements (Continued)
CONSOLIDATING BALANCE SHEET
Predecessor Company
As of December 31, 2001
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
||||||||
Filers |
Non-filers |
Elimination |
Consolidated |
|||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ 54,892 |
$ 83 |
$ - |
$ 54,975 |
||||
Accounts payable |
29,055 |
1,507 |
(227 |
) |
30,335 |
|||
Accrued compensation and benefits |
78,716 |
612 |
- |
79,328 |
||||
Accrued self-insurance obligations |
45,878 |
1,219 |
- |
47,097 |
||||
Income taxes payable |
12,430 |
- |
- |
12,430 |
||||
Other accrued liabilities |
79,708 |
392 |
- |
80,100 |
||||
Total current liabilities |
300,679 |
3,813 |
(227 |
) |
304,265 |
|||
Liabilities subject to compromise (see Note 2) |
1,549,139 |
- |
- |
1,549,139 |
||||
Accrued self-insurance obligations, net of current portion |
51,380 |
- |
- |
51,380 |
||||
Long-term debt, net of current portion |
17,813 |
5,447 |
- |
23,260 |
||||
Other long-term liabilities |
22,136 |
408 |
- |
22,544 |
||||
Total liabilities |
1,941,147 |
9,668 |
(227 |
) |
1,950,588 |
|||
Commitments and contingencies (see Note 9) |
||||||||
Minority interest |
3,177 |
2,228 |
- |
5,405 |
||||
Company-obligated mandatorily redeemable convertible preferred |
|
|
|
|
||||
Intersegment |
(290,060 |
) |
290,060 |
- |
- |
|||
Stockholders' deficit: |
||||||||
Common stock of $.01 par value, authorized 155,000,000 shares, |
|
|
|
|
|
|||
Additional paid-in capital |
825,099 |
49,805 |
(49,805 |
) |
825,099 |
|||
Accumulated deficit |
(2,400,655 |
) |
(330,357 |
) |
330,357 |
(2,400,655 |
) |
|
Less: |
||||||||
Common stock held in treasury, at cost, 2,213,537 shares as of |
|
|
|
|
|
|
||
Grantor stock trust, at market, 1,915,935 shares as of |
|
|
|
|
|
|
||
Total stockholders' deficit |
(1,602,290 |
) |
(280,290 |
) |
280,290 |
(1,602,290 |
) |
|
Total liabilities and stockholders' deficit |
$ 348,075 |
$ 21,666 |
$ 280,063 |
$ 649,804 |
||||
======= |
======== |
======= |
======== |
F-53
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(21) Filer/Non-Filer Financial Statements (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
Predecessor Company
Filers |
Non-filers |
Elimination |
Consolidated |
|||||
Total net revenues |
$ 2,008,534 |
$ 71,668 |
$ (4,968 |
) |
$ 2,075,234 |
|||
Costs and expenses: |
||||||||
Operating costs |
1,832,761 |
67,869 |
(4,968 |
) |
1,895,662 |
|||
Corporate general and administrative |
102,599 |
1,716 |
- |
104,315 |
||||
Depreciation and amortization |
31,371 |
1,414 |
- |
32,785 |
||||
Provision for losses on accounts receivable |
25,162 |
810 |
- |
25,972 |
||||
Loss on impairment |
14,482 |
4,343 |
- |
18,825 |
||||
Interest, net (contractual interest expense $142,800) |
10,960 |
1,675 |
- |
12,635 |
||||
Legal and regulatory matters, net |
11,000 |
- |
- |
11,000 |
||||
Restructuring costs |
- |
1,064 |
- |
1,064 |
||||
Gain on sale of assets, net |
(782 |
) |
(43 |
) |
- |
(825 |
) |
|
Equity interest in losses of subsidiaries |
9,463 |
- |
(9,463 |
) |
- |
|||
Total costs and expenses |
2,037,016 |
78,848 |
(14,431 |
) |
2,101,433 |
|||
Management fee (income) expense before reorganization items |
(2,810 |
) |
2,810 |
- |
- |
|||
Losses before reorganization costs, net, and income taxes |
(25,672 |
) |
(9,990 |
) |
9,463 |
(26,199 |
) |
|
Reorganization costs, net |
43,473 |
(556 |
) |
- |
42,917 |
|||
Income taxes |
291 |
30 |
- |
321 |
||||
Net losses |
$ (69,436 |
) |
$ (9,464 |
) |
$ 9,463 |
$ (69,437 |
) |
|
========== |
========== |
========== |
=========== |
F-54
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(21) Filer/Non-Filer Financial Statements (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
Predecessor Company
For the Year Ended December 31, 2001
(in thousands)
Filers |
Non-filers |
Elimination |
Consolidated |
|||||
Cash flows from operating activities: |
||||||||
Net losses |
$ (69,437 |
) |
$ (9,464 |
) |
$ 9,464 |
$ (69,437 |
) |
|
Adjustments to reconcile net losses to net cash provided by (used for) operating activities: |
||||||||
Equity interest in losses of subsidiaries |
9,464 |
- |
(9,464 |
) |
- |
|||
Loss on impairment |
14,482 |
4,343 |
- |
18,825 |
||||
Depreciation and amortization |
31,371 |
1,414 |
- |
32,785 |
||||
Provision for losses on accounts receivable |
25,162 |
810 |
- |
25,972 |
||||
Legal and regulatory costs |
11,000 |
- |
- |
11,000 |
||||
(Gain) loss on sale of assets, net |
(782 |
) |
(43 |
) |
- |
(825 |
) |
|
Reorganization costs, net |
43,473 |
(556 |
) |
- |
42,917 |
|||
Other, net |
9,844 |
(248 |
) |
- |
9,596 |
|||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(39,226 |
) |
2,312 |
- |
(36,914 |
) |
||
Other current assets |
(2,749 |
) |
3,694 |
- |
945 |
|||
Other current liabilities |
16,072 |
(8,051 |
) |
- |
8,021 |
|||
Income taxes payable |
3,810 |
(2,743 |
) |
- |
1,067 |
|||
Net cash provided by (used for) operating activities before reorganization costs |
52,484 |
(8,532 |
) |
- |
43,952 |
|||
Net cash paid for reorganization costs |
(19,583 |
) |
- |
- |
(19,583 |
) |
||
Net cash (used for) provided by operating activities |
32,901 |
(8,532 |
) |
- |
24,369 |
|||
Cash flows from investing activities: |
||||||||
Capital expenditures, net |
(29,793 |
) |
(537 |
) |
- |
(30,330 |
) |
|
Acquisitions, net of cash acquired |
- |
- |
- |
- |
||||
Proceeds from sale of assets |
14,676 |
3,488 |
- |
18,164 |
||||
Proceeds from redemption of strategic investment |
10,115 |
- |
- |
10,115 |
||||
(Increase) decrease in long-term notes receivable |
885 |
- |
- |
885 |
||||
Decrease in other assets |
6,568 |
(3,942 |
) |
- |
2,626 |
|||
Net cash (used for) provided by investing activities |
2,451 |
(991 |
) |
- |
1,460 |
|||
Cash flows from financing activities: |
||||||||
Net (repayments) borrowings under Revolving Credit Agreement (postpetition) |
(12,441 |
) |
- |
- |
(12,441 |
) |
||
Long-term debt borrowings |
3,748 |
94 |
- |
3,842 |
||||
Long-term debt repayments (prepetition) |
- |
(82 |
) |
- |
(82 |
) |
||
Principal payments on prepetition debt authorized by Bankruptcy Court |
(3,017 |
) |
- |
- |
(3,017 |
) |
||
Other financing activities |
2 |
(3 |
) |
- |
(1 |
) |
||
Intersegment advances |
(5,257 |
) |
5,257 |
- |
- |
|||
Net cash provided by (used for) financing activities |
(16,965 |
) |
5,266 |
- |
(11,699 |
) |
||
Effect of exchange rate on cash and cash equivalents |
(1,070 |
) |
- |
- |
(1,070 |
) |
||
Net increase (decrease) in cash and cash equivalents |
17,317 |
(4,257 |
) |
- |
13,060 |
|||
Cash and cash equivalents at beginning of year |
32,600 |
4,989 |
- |
37,589 |
||||
Cash and cash equivalents at end of year |
$ 49,917 |
$ 732 |
$ - |
$ 50,649 |
||||
======== |
======= |
======= |
======= |
F-55
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(22) Subsequent Events
On February 20, 2004, we completed a private placement of our common stock and warrants to purchase common stock to investors. We received net proceeds of approximately $52.3 million in the private placement. We sold approximately 4.4 million shares of our common stock and warrants to purchase approximately 1.8 million shares of our common stock (inclusive of warrants paid to the placement agent). The price paid by investors was $12.70 per unit, except for 155,400 units sold at $12.87 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.4 shares of common stock with a warrant exercise period of five years.
We have reached agreement with substantially all of our landlords regarding the disposition of past due rent on our divested or to be divested facilities. On March 1, 2004, we entered into an Amended and Restated Master Lease Agreement with Omega Healthcare Investors, Inc. and various of its affiliates ("Omega"). Prior to our portfolio restructuring, we leased 51 facilities from Omega. Pursuant to the new Master Lease, we will continue to operate 30 facilities (including 23 long-term care facilities, two rehabilitation hospitals, and five behavioral facilities). Approximately $7.8 million of accrued past due rent as of March 1, 2004 and future rent obligations that would otherwise have become due under the existing master leases will be combined into "deferred base rent". That deferred base rent will bear interest at a floating rate equal to 375 basis points over the one year LIBOR rate, subject to a f loor of 6% per annum. Interest will not be payable until January 2008, at which time interest thereafter accruing will be payable monthly in arrears. Omega has the right to convert the deferred base rent and accrued interest into 800,000 shares of our common stock, subject to anti-dilution adjustments for sales of shares we make at less than fair market value at the time of sale. We have the right to pay cash in an amount equal to the value of the stock in lieu of issuing the stock to Omega. If the average value of the common stock issuable to Omega under the new Master Lease exceeds 140% of the deferred base rent and interest accrued thereon over a period of 30 business days, we can require Omega to convert the deferred base rent into our common stock.
On January 22, 2004, we granted an aggregate of 90,000 shares of restricted stock to 16 officers pursuant to our 2002 Management Equity Incentive Plan. The restricted shares vest at the rate of 25% on each of January 22, 2005, 2006, 2007 and 2008 and will result in unearned compensation expense of $0.3 million, per year, starting in 2004. We also granted stock options to our non-employee directors to purchase an aggregate of 40,000 shares of our common stock at an exercise price of $11.25 per share under our 2002 Non-Employee Director Equity Incentive Plan. The options vest at the rate of 25% on each of January 22, 2005, 2006, 2007 and 2008.
On January 20, 2004, we submitted an application to list our common stock on the Nasdaq National Market. No assurance can be given that the Sun Healthcare Group, Inc. common stock will become listed on the Nasdaq National Market.
F-56
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA
The following tables reflect unaudited quarterly financial data for fiscal years 2003 and 2002 (in thousands, except per share data):
Reorganized Company |
||||||||||
|
|
|
|
|
||||||
Total net revenues |
$ 212,522 |
$ 213,764 |
$ 207,682 |
$ 200,075 |
$ 834,043 |
|||||
======== |
======== |
======= |
======== |
======== | ||||||
(Loss) income before discontinued |
|
|
|
|
$ (35,023 |
) |
||||
======== |
======== |
======= |
======== |
======= | ||||||
(Loss) gain on discontinued operations |
$ (8,431) |
$ 51,815 |
$ (2,300) |
$ (5,707) |
$ 35,377 | |||||
======== |
======== |
======= |
======== |
======== | ||||||
Net income (loss) |
$ (13,921) |
$ 39,110 |
$ (11,552) |
$ (13,283) |
$ 354 | |||||
======== |
======== |
======= |
======== |
======== | ||||||
|
||||||||||
Basic and diluted |
$ (0.54) |
$ (1.26 |
) |
$ (0.92) |
$ (0.76) |
$ (3.48 |
) |
|||
======== |
======== |
======= |
======== |
======== | ||||||
Net (loss) income per common and common equivalent share: |
||||||||||
Basic and diluted |
$ (1.37) |
$ 3.89 |
$ (1.15) |
$ (1.33) |
$ 0.04 | |||||
======= |
======= |
====== |
======= |
======== |
1
Predecessor |
Reorganized Company |
||||||||||||
Two Months
|
One Month Ended |
|
|
|
|
||||||||
Total net revenues |
$ 301,846 |
| |
$ 70,974 |
$ 208,043 |
$ 202,519 |
$ 197,508 |
$ 679,044 |
||||||
======== |
| |
======== |
======== |
======= |
======= |
======= | |||||||
Income (loss) before
discontinued |
|
| |
|
|
|
|
$ (302,849 |
) |
|||||
======== |
| |
======== |
======== |
======= |
======= |
======= | |||||||
(Loss) gain on discontinued operations |
$ (7,639 |
) |
| |
$ 4,010 |
$ 6,480 |
$ 1,581 |
$ (147,208) |
$ (135,137 | ) | ||||
======== |
| |
======== |
======== |
======= |
======= |
======= | |||||||
| |
|||||||||||||
Net income (loss) |
$ 1,485,371 |
| |
$ 801 |
$ (2,963 |
) |
$ (20,468 |
) |
$ (415,356 |
) |
$ (437,986 | ) | ||
========= |
| |
======== |
======== |
======= |
======= |
======= | |||||||
|
| |
||||||||||||
| |
|||||||||||||
Basic and diluted |
$ 24.44 |
| |
$ (0.31 |
) |
$ (0.92) |
$ (2.17) |
$ (26.89) |
$ (30.29 | ) | ||||
======== |
| |
======== |
======== |
======= |
======= |
======= | |||||||
Net income (loss) income per common |
| |
||||||||||||
| |
|||||||||||||
Basic and diluted |
$ 24.32 |
| |
$ 0.08 |
$ (0.30) |
$ (2.05) |
$ (41.54) |
$ (43.80 | ) | |||||
======== |
| |
======== |
======== |
======= |
======= |
======= |
|
|
(2) |
We recorded a loss on asset impairment of $407.8 million. |
(3) |
We have reclassified certain amounts recorded in the March 31, 2002 10-Q to conform to the presentation for the ten months ended December 31, 2002. |
2
NOTE: The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Sun Healthcare Group, Inc.:
We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Sun Healthcare Group, Inc. (Debtor-in-Possession) and subsidiaries in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule identified as SCHEDULE II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated 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 consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Albuquerque, New Mexico
March 18, 2002
3
SCHEDULE II
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A |
Column B |
Column C |
Column D |
Column E |
||||||||
|
Balance at |
Charged to |
Additions |
|
Balance at |
|||||||
Reorganized Company |
||||||||||||
Year ended December 31, 2003: |
||||||||||||
Allowance for doubtful accounts |
$ 45,905 |
$ 18,114 |
(1) |
$ 23,675 |
(3) |
$ (20,586) |
(4) |
$ 67,108 |
||||
======= |
====== |
======= |
====== |
===== |
||||||||
Notes receivable reserve |
$ 6,419 |
$ 959 |
(1) |
$ - |
$ (133) |
(4) |
$ 7,245 |
(2) |
||||
======= |
====== |
======= |
====== |
===== |
||||||||
Reserve for assets held for sale |
$ - |
$ - |
$ - |
$ - |
$ - |
|||||||
======= |
====== |
======= |
====== |
===== |
||||||||
Corporate restructure reserve |
$ - |
$ - |
$ - |
$ - |
$ - |
|||||||
======= |
====== |
======= |
====== |
===== |
||||||||
Reorganized Company |
||||||||||||
For the Ten Months Ended December 31, 2002: |
||||||||||||
Allowance for doubtful accounts |
$ 68,723 |
$ 13,639 |
(1) |
$ - |
$ (36,457) |
|
$ 45,905 |
|||||
======= |
===== |
======= |
====== |
===== |
||||||||
Notes receivable reserve |
$ 5,321 |
$ 1,148 |
(1) |
$ - |
$ (50) |
|
$ 6,419 |
(2) |
||||
======= |
===== |
======= |
====== |
===== |
||||||||
Reserve for assets held for sale |
$ 4,820 |
$ 1,021 |
$ - |
$ (5,841) |
|
$ - |
||||||
======= |
===== |
======= |
====== |
===== |
||||||||
Corporate restructure reserve |
$ 2,676 |
$ - |
$ - |
$ (2,676) |
|
$ - |
||||||
======= |
===== |
======= |
====== |
===== |
||||||||
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
||||||||||||
Predecessor Company |
||||||||||||
For the Two Months Ended February 28, 2002: |
||||||||||||
Allowance for doubtful accounts |
$ 73,819 |
$ 417 |
(1) |
$ 175 |
(3) |
$ (5,688) |
(4) |
$ 68,723 |
||||
====== |
===== |
======= |
====== |
====== |
||||||||
Notes receivable reserve |
$ 6,216 |
$ - |
$ - |
$ (845) |
(4) |
$ 5,321 |
(2) |
|||||
====== |
===== |
======= |
====== |
====== |
||||||||
Reserve for assets held for sale |
$ 12,904 |
$ (7,339 |
)(5) |
$ - |
$ (745) |
(6) |
$ 4,820 |
|||||
====== |
===== |
======= |
====== |
====== |
||||||||
Corporate restructure reserve |
$ 905 |
$ 3,843 |
(7) |
$ (905) |
(8) |
$ (1,167) |
(9) |
$ 2,676 |
||||
====== |
===== |
======= |
====== |
====== |
||||||||
Predecessor Company |
||||||||||||
Year ended December 31, 2001: |
||||||||||||
Allowance for doubtful accounts |
$ 128,106 |
$ 22,435 |
(1) |
$ - |
$ (76,722) |
|
$ 73,819 |
|||||
====== |
===== |
======= |
====== |
======= |
||||||||
Notes receivable reserve |
$ 1,979 |
$ 3,537 |
(1) |
$ 700 |
$ - |
$ 6,216 |
(2) |
|||||
====== |
===== |
======= |
====== |
======= |
||||||||
Reserve for assets held for sale |
$ 233,746 |
$ 14,442 |
$ - |
$ (235,284) |
|
$ 12,904 |
||||||
====== |
===== |
======= |
====== |
======= |
||||||||
Corporate restructure reserve |
$ 729 |
$ 1,064 |
$ - |
$ (888) |
|
$ 905 |
||||||
======= |
===== |
======= |
====== |
======= |
||||||||
4
|
||||||||||||
(1) |
Charges included in provision for losses on accounts receivable. |
|||||||||||
(2) |
Included in the note receivable reserve are the following: |
|||||||||||
|
|
|||||||||||
|
||||||||||||
|
|
|||||||||||
(4) |
Represents write-offs of applicable receivables. |
|||||||||||
(5) |
Represents reorganization costs (gain), net, and loss on discontinued operations for adjustments to assets held for sale. |
|||||||||||
(6) |
Represents disposition of assets held for sale. |
|||||||||||
(7) |
Recorded as a component of reorganization costs (gain), net. |
|||||||||||
(8) |
Reserves were related to claims subject to compromise and were extinguished in connection with the Company's emergence from bankruptcy. |
|||||||||||
(9) |
Represents amounts paid for severance and other restructuring activities. |
5
EXHIBIT 10.19
EXECUTION COPY
_________________________________________
AMENDED AND RESTATED
MASTER LEASE AGREEMENT
__________________________________________
Among
OMEGA HEALTHCARE INVESTORS, INC.
THE LESSOR ENTITIES IDENTIFIED ON THE SIGNATURE PAGE HEREOF
THE LESSEE ENTITIES IDENTIFIED ON THE SIGNATURE PAGE HEREOF
AND
SUN HEALTHCARE GROUP, INC.
Dated As Of
TABLE OF CONTENTS
ARTICLE I.
1.1 Lease
1.2 Single, Indivisible Lease
1.3 Joint and Several Obligation
1.4 Term
1.5 Option to Renew
3.1 Rent & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9;
3.2 Deferred Base Rent & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9;
3.3 Additional Charges
3.7 Limitation on Counterclaim
3.8 Remaining Divested Properties ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9;
3.9 Transition of Certain Leased Facilities
4.2 Notice of Impositions ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9;
4.3 Adjustment of Impositions
6.1 Ownership of the Leased Properties
6.2 Lessor's Personal Property ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9;
6.3 Lessee's Personal Property
6.4 Grant of Security Interest in Lessee's Personal Property
8.1 Representations and Warranties.
8.2 Representations and Warranties of Lessor
8.3 Compliance with Legal and Insurance Requirements
9.2 Encroachments, Restrictions, etc
i
10.1 Construction of Alterations and Additions to the Leased Properties
13.1 General Insurance Requirements
13.2 Replacement Cost ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9;
13.3 Additional Insurance
14.2 Restoration in the Event of Damage or Destruction Covered by Insurance.
14.3 Restoration in the Event of Damage or Destruction Not Covered by Insurance
15.1 Condemnation Article Definitions.
15.2 Parties' Rights and Obligations
16.1 Events of Default ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9;
16.2 Certain Remedies
ii
22.1 General Prohibition against Assignment
22.2 Corporate or Partnership Transactions
33.2 Compliance With Facility Mortgages
iii
34.1 Lessor's Option to Purchase Lessee's Personal Property
36.1 Conversion of Carry-Over Base Rent.
37.3 Waivers ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9;
37.4 Consents
iv
THIS AMENDED AND RESTATED MASTER LEASE AGREEMENT (this "Master Lease"), is made and entered into on this 1st day of March, 2004 (the "Delivery Date"), to be effective as of December 1, 2003, by and among the lessor entities identified on the signature page hereof (collectively, the "Lessor," and where the context requires, each, a "Lessor"), the lessee entities listed on the signature page hereof (collectively, jointly and severally, the "Lessee," and where the context requires, each, a "Lessee"), Omega Healthcare Investors, Inc., a Maryland corporation ("Omega"), and SUN HEALTHCARE GROUP, INC., a Delaware corporation, the address of which is 101 Sun Avenue, N.E., Albuquerque, New Mexico 87109 ("Sun"), as guarantor (as such, the "Guarantor").
The circumstances underlying the execution of this Master Lease are as follows:
1
The term "Leased Properties" as of the Commencement Date means all of Lessor's right, title and interest in and to the real properties described on Exhibit B to this Master Lease (the "Land") and all of the following:
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In the event that, at anytime during the Term, this Master Lease, by its terms, terminates as to any portion of the Leased Properties, then effective from and after such termination and without the need by any of the parties to execute any amendments to this Master Lease, the "Leased Properties" shall refer to that portion of the Leased Properties which continues to be subject to the terms of this Master Lease. The Leased Properties are leased subject to all covenants, conditions, restrictions, easements and other matters affecting the Leased Properties as of the Commencement Date and such subsequent covenants, conditions, restrictions, easement and other matters as may be agreed to by Lessor or Lessee in accordance with the terms of this Lease, whether or not of record, including the Permitted Encumbrances and other matters which would be disclosed by an inspection or accurate survey of the Leased Properties. L essor represents and warrants to Lessee that as of the Commencement Date it has no actual knowledge of any covenants, conditions, restrictions, easement or other matters affecting the Leased Properties which is not of record.
1.2. 9; & #9; ; 9; & #9; ; Single, Indivisible Lease. This Master Lease constitutes one indivisible lease of the Leased Properties and not separate leases governed by similar terms. The Leased Properties constitute one economic unit, and the Base Rent and all other provisions have been negotiated and agreed to based on a demise of all of the Leased Properties to Lessee as a single, composite, inseparable transaction and would have been substantially different had separate leases or a divisible lease been intended. Except as expressly provided in this Master Lease for specific, isolated purposes (and then only to the extent expressly otherwise stated) and except for the Remaining Transition Facilities which shall continue to be transitioned pursuant to the Transition Agreement and the Future Transition Facilities, which may be transitioned in accordance with the terms of this Master Lease, all provisions o f this Master Lease apply equally and uniformly to all of the Leased Properties as one unit. An Event of Default with respect to any Leased Property is an Event of Default as to all of the Leased Properties. The parties intend that the provisions of this Master Lease shall at all times be construed, interpreted and applied so as to carry out their mutual objective to create an indivisible lease of all of the Leased Properties and, in particular but without limitation, that, for purposes of any assumption, rejection or assignment of this Master Lease under 11 U.S.C. Section 365, this is one indivisible and non-severable lease and executory contract dealing with one legal and economic unit and that this Master Lease must be assumed, rejected or assigned as a whole with respect to all (and only as to all) of the Leased Properties.
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1.3. Joint and Several Obligation. Lessee acknowledges that collectively they are jointly and severally liable for the payment of all sums payable and for the performance of all obligations performable, by one or more of the Lessees. Notwithstanding the foregoing, however, no Lessee shall, by virtue of this Master Lease, have any rights to, or title or interest in, the Leased Property or Properties leased by another Lessee or any obligation to operate the same to the extent it is not licensed to do so under applicable law.
1.4.Term. The initial continued term of this Master Lease ("Initial Continued Term") shall commence on December 1, 2003 and end on December 31, 2013, subject to renewal as set forth in Section 1.5 below.
1.5. Option to Renew. Lessee is hereby granted two (2) successive options to renew this Master Lease for a period of ten (10) Lease Years each. Lessee's options to renew this Master Lease are subject to the following terms and conditions (which conditions may be waived by Lessor in its sole discretion):
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Accounts: All accounts, all rights to payment or reimbursement for goods sold or leased or services rendered (including, without limitation, Medicare, Medicaid and other third party reimbursed receivables) and all accounts receivable, in each case whether or not evidenced by a contract, document, instrument or chattel paper and whether or not earned by performance, including without limitation, the right to payment of management fees and all proceeds of the foregoing.
Action: Any claim, demand, action or proceeding.
Additional Charges: As defined in Article III.
Allocated Current Rent: As defined in Section 3.9.
Article XXXVI Default Notice: As defined in Section 36.8.
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Average Market Price: With respect to any reference date, the average of the Daily Market Prices of the Common Stock for the thirty (30) Business Days ending on and including the Business Day before such reference date.
Award: As defined in Article XV.
(A) During the Initial Continued Term, the Base Rent shall be:
(B) During a Renewal Term, the Base Rent shall be:
(i) For each Lease Year during a Renewal Term, the Base Rent for the previous Lease Year increased by the lesser of (x) 235 basis points over the ten year treasury securities constant maturity rate in effect for the month of December immediately prior to each such increase and (y) two and one-half percent (2.5%).
Board: The Board of Directors of Sun.
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Carry-Over Base Rent: As defined in Section 3.2.
Cash: Cash and cash equivalents and all instruments evidencing the same or any right thereto and all proceeds thereof.
Change In Control: The occurrence of any one or more of the following events:
(1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (a) the then outstanding shares of common stock of Sun (the "Outstanding Sun Common Stock") or (b) the combined voting power of the then outstanding voting securities of Sun entitled to vote generally in the election of directors (the "Outstanding Sun Voting Securities"), provided, however, that none of the following acquisitions shall constitute a Change in Control (unless such acquisition constitutes a Change In Control under paragraph 2 of this definition): (i) any acquisition directly from Sun (including without limitation any acquisition of Sun Common Stock from an underwriter in any one or more underwritten public offerings or from a placement agent in connection wi th a private placement), (ii) any acquisition by Sun, (iii) any acquisition by or for the benefit of any employee benefit plan (or related trust) sponsored or maintained by Sun or any corporation controlled by Sun and (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (a) and (b) of paragraph (3) of this definition; or
(2) Individuals who, as of the Delivery Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided, however, that any individual becoming a director subsequent to the Delivery Date whose election, or nomination for election by Sun's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(3) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of Sun (a "Business Combination"), in each case, unless, following such Business Combination, (a) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Sun Common Stock and Outstanding Sun Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Sun or all or substantially all of Sun's assets either directly or through one or more subsidiaries), and (b) no Person (excludin g any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of Sun or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 33% or more of, the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; provided, however, that in no event shall any acquisition of securities, a change in the composition of the Incumbent Board or a merger or other consolidation pursuant to a plan of reorganization under chapter 11 of the Bankruptcy Code with respect to Sun, constitute a Change in Control; or
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(4) Approval by the shareholders of Sun of a complete liquidation or dissolution of Sun.
Notwithstanding anything above in this definition to the contrary, a Change In Control shall not have occurred in the event of a sale or conveyance in which Sun continues as a holding company of an entity or entities that conduct the business or businesses formerly conducted by Sun, or any transaction undertaken for the purpose of reincorporating Sun under the laws of another jurisdiction, if such transaction does not materially affect the beneficial ownership of Sun's capital stock or as a result of any of the foregoing transactions which is initiated, sponsored or directed, directly or indirectly, by Omega or any of the entities comprising Lessor.
Closing Price: As defined in Section 36.1.6(a).
Code: The Internal Revenue Code of 1986, as amended.
Collateral: As defined in the Amended Security Agreement.
Commencement Date: December 1, 2003.
Condemnation, Condemnor: As defined in Article XV.
Conversion Closing Date: As defined in Section 36.1.4.
Conversion Notice: As defined in Section 36.1.1.
Conversion Price: Initially $9.70125, subject to adjustment as set forth in Section 36.1.6.
Conversion Shares: As defined in Section 36.1.1.
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Date Down Certificates: As defined in Section 36.1.4.
Date of Taking: As defined in Article XV.
Deferred Base Rent: As defined in Section 3.2.
Delivery Date: As defined in the first paragraph of this Lease.
Dilution Event: As defined in Section 36.1.6(a).
Event of Default: As defined in Article XVI.
Excess Shares: As defined in Section 36.2(b).
Excess Shares Payment Restriction: As defined in Section 36.2.2.
Excess Shares Payment Shortfall: As defined in Section 36.2.2.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Excluded Lessee's Personal Property: All vehicles, business office equipment, including computer hardware, software and peripherals, telephone systems and Specialized Medical Equipment owned or leased by Lessee and used in connection with the operation of the Leased Properties.
(A) 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; All shares of Common Stock issued by Sun for cash or other consideration, in an arms length transaction, to a third party at fair value as determined by the Board in good faith,
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(C) All shares of Common Stock issued pursuant to the conversion or exercise of convertible securities or warrants outstanding as of the Delivery Date.
Existing Master Leases: The Master Lease Agreements identified on Schedule I attached hereto.
Expiration Date: December 31, 2013 if no Renewal Option has been exercised, December 31, 2023 if the first Renewal Option has been exercised, or December 31, 2033 if the first and second Renewal Options have been exercised.
Facility Mortgage: As defined in Section 13.1.
Facility Mortgagee: As defined in Section 13.1.
Facility Trade Name: As defined in Section 33.2.
Final Conversion Price: As defined in Section 36.1.1.
Financial Statements: For a fiscal year period, statements of Sun's earnings and retained earnings and of changes in financial position and profit and loss for such period and for the period from the beginning of the respective fiscal year to the end of such period and the related balance sheet as at the end of such period, together with the notes thereto, all in reasonable detail and setting forth in comparative form the corresponding figures for the corresponding period in the preceding fiscal year and prepared in accordance with GAAP and reported on by a "big four" or other nationally recognized accounting firm approved by Lessor, which approval will not be unreasonably withheld or delayed from the beginning of the fiscal year to the end of such period.
Financials: Unaudited statements of a Lessee's or a Facility's financial performance or condition, whether or not fulfilling the requirements for Financial Statements.
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Fiscal Year: The annual period commencing January 1 and terminating December 31 of each year.
Fixtures: As defined in Section 1.1.
Future Operator Lease: As defined in Section 3.9.
Future Operators: As defined in Section 3.9.
Future Transition Facilities: The Facilities listed on attached Schedule III.
Future Transition Facilities Notice: As defined in Section 3.9.
Future Transition Facilities Rent: As defined in Section 3.9.
Future Transition Facilities Rent Shortfall: An amount equal to 75% of the difference between the Allocated Current Rent and the Future Transition Facilities Rent.
Future Transition Facilities Rent Shortfall Statement: As defined in Section 3.9.
GECC: As defined in Section 8.2(f).
GECC Loan Agreement: As defined in Section 8.2(f).
Guaranty: The Amended and Restated Guaranty, dated as of October 7, 1997, executed by Guarantor in favor of Lessor, as the same may be amended or supplemented from time to time.
Hazardous Substances: As defined in Section 7.3.
Impositions: Collectively, all taxes (including, without limitation, all capital stock and franchise taxes of Lessor, all ad valorem, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes), assessments (including Assessments as herein defined), ground rents, water, sewer or other rents and charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Properties or the business conducted thereon by Lessee and/or the Rent (including all interest and penalties thereon due to any failure of payment by Lessee) applicable to periods of time within the Term hereof which at any time during or in respect of the Term hereof may be assessed or imposed on or in respect of or be a lien upon (i) Lessor or Lessor's in terest in the Leased Properties, (ii) the Leased Properties or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (iii) any occupancy, operation, use or possession of, or sales from, or activity conducted on, or in connection with the Leased Properties or the leasing or use of the Leased Properties or any part thereof or (iv) the Rent. The term "Imposition" shall not include: (a) any tax based on gross or net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor generally and not specifically arising in connection with the Leased Properties, but Lessee shall pay any tax hereafter specifically imposed on Rent received by Lessor from Lessee, or (b) any net revenue tax of Lessor or any other person, or (c) any tax imposed with respect to the sale, exchange or other disposition by Lessor of the Leased Properties or the proceeds thereof or (d) any principal or interest on any Assumed Indebtedness on the Leased Properties or any o ther indebtedness of Lessor, except to the extent that any tax, assessment, tax levy or charge, which Lessee is obligated to pay pursuant to the first sentence of this definition and which is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (a) or (b) is levied, assessed or imposed in lieu thereof.
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Initial Continued Term: As defined in Section 1.4.
Interest Period: Each Lease Year during the Term.
Land: As defined in Section 1.1.
Leased Properties: As defined in Section 1.1.
Leasehold Remedies: As defined in Section 36.8.
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Lessee's Leasehold Award: As defined in Section 15.4.
Lessee's Personal Property Award: As defined in Section 15.4.
Lessor Date Down Certificate: As defined in Section 36.1.4.
Lessor Indemnified Party: Lessor and each of Lessor's officers, directors, employees, agents and affiliates and each person that controls (within the meaning of Section 20 of the Exchange Act) any of the foregoing persons.
Lessor's Personal Property: As defined in Section 1.1.
Mandatory Conversion Date: As defined in Section 36.1.3.
Mandatory Conversion Notice: As defined in Section 36.1.3.
Material Capital Improvement: Any repair, replacement, modification or addition to any of the Remaining Transition Facilities, including any of the Personal Property located therein, which has or is reasonably estimated to have a useful life in excess of twenty four (24) months.
Minimum Purchase Price: The Purchase Price for each Leased Property as set forth in Exhibit C hereto.
Monthly Deferred Base Rent Interest: As defined in Section 3.2.1.
NASD: The National Association of Securities Dealers.
Net Proceeds: As defined in Section 14.1.
Notice: A notice given in accordance with Article XXXI.
Officer's Certificate: A certificate of Lessee signed by one or more Executive Officers of Lessee.
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Omega: Omega Healthcare Investors, Inc., a Maryland corporation.
Omega Lenders: As defined in Section 8.2(f).
Original Facilities: As defined in Recital B.
Original Security Agreements: Those certain security agreements between Lessor and any applicable Lessee executed pursuant to any facility lease or Existing Master Lease, as amended, supplemented or otherwise modified from time to time prior to the Commencement Date.
OTA: As defined in Section 3.9.
OTCBB: The OTC Bulletin Board.
Permitted Encumbrances: The Permitted Encumbrances described in Exhibit D hereto.
Permitted Personal Property Leases or Liens: Liens or other exceptions to title granted to, or leases entered into with, a third party in connection with the acquisition of new Personal Property.
Person: An individual or a corporation, partnership, trust, incorporated or unincorporated association, limited liability company, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.
Personal Property: All machinery, equipment, furniture, furnishings, movable walls or partitions, computers (and all associated software and peripheral equipment), trade fixtures and other tangible personal property (but excluding consumable inventory and supplies owned by Lessee, Cash and Accounts), together with all replacements, modifications, alterations and additions thereto, except items, if any, included within the definition of Fixtures or Leased Improvements. The term "Personal Property" shall exclude personal property leased from third parties.
Primary Intended Use: As defined in Section 7.2.2.
Prime Rate: On any date, a rate equal to the annual rate on such date publicly announced by Citibank, N.A. to be its prime rate for 90-day unsecured loans to its corporate borrowers of the highest credit standing, but in no event greater than the maximum rate then permitted under applicable law.
Prospectus and Registration Period: As defined in Section 36.3.3.
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Qualified Buy Back Transaction: Any transaction in which Sun purchases one or more shares of its issued and outstanding Common Stock in conjunction with any issuance of preferred stock or convertible debt or other security, or recapitalization of, or other adjustment to, the capital structure of Sun.
Qualified Lessor: As defined in Section 36.2(a).
REIT: As defined in Section 36.2(a).
REIT Limits: As defined in Section 36.2(b).
Relinquished Lessee's Personal Property: All of the Lessee's Personal Property other than the Excluded Lessee's Personal Property.
Remaining Transition Facilities: As defined in Recital E.
Renewal Term: A period for which the Term is renewed in accordance with Section 1.5.
Rent: Collectively, the Base Rent, the Deferred Base Rent and Additional Charges.
Replacement Property: As defined in Section 9.1.6.
Required Registration Date and Required Registration Statement: As defined in Section 36.3.1.
Rule 144: As defined in Section 36.3.3.
SEC: The United States Securities and Exchange Commission.
SEC Filing: As defined in Section 8.1(i).
Self-Administered Amount: One Hundred and Fifty Thousand ($150,000.00) Dollars.
Shares: As defined in Section 3.2.2.
Specialized Medical Equipment: Any non-affixed equipment (i) which is owned or leased by Lessee, (ii) the cost of which is required to be capitalized in accordance with GAAP and (iii) which is used by Lessee for lifting or transferring, or providing therapeutic interventions or other specialized medical services to, residents/patients.
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State: With respect to each Facility, the state in which such Facility is located
Sun: As defined in the first paragraph of this Master Lease.
Sun Date Down Certificate: As defined in Section 36.1.4.
Taking: As defined in Section 15.1.1.
Term: Collectively, the Initial Continued Term plus the Renewal Term or Renewal Terms, if any.
Transferred Facilities: As defined in Recital E.
Transition Agreement: As defined in Recital D.
Unsuitable for Its Primary Intended Use: A state or condition of any Facility such that by reason of damage or destruction, or a partial taking by Condemnation, such Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, taking into account, among other relevant factors, the number of useable beds, the amount of square footage and the estimated revenue affected by such damage or destruction.
3.2. ; 9; & #9; ; 9; & #9; Deferred Base Rent. In addition to the Base Rent and as consideration for Lessor's agreement to, among other things, (i) reduce the amount of Base Rent due under the Existing Master Leases and (ii) waive the requirement that Lessee replace the Security Deposits as required under the Existing Master Leases, Lessee shall also pay to Lessor as an integral and non-severable part of this Master Lease compromised past due and deferred rent in the amount of $7,761,000 (the "Carry-Over Base Rent") plus accrued and unpaid interest on the outstanding balance thereof, as provided in Section 3.2.1. Any and all references herein to the "Deferred Base Rent" shall mean the Carry-Over Base Rent plus all accrued and unpaid interest thereon as of the applicable reference date as the same may have been reduced upon repayment or conversion thereof, in whole or in pa rt, in accordance with the provisions of this Section 3.2 or Section 36 hereof.
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3.2.1. Interest. The Carry Over Base Rent shall accrue interest at the Applicable Rate during the period from December 1, 2003 through December 31, 2004, at which time the accrued interest thereon shall be added to the Carry Over Base Rent and the aggregate amount shall constitute the Deferred Base Rent as of January 1, 2005. The Deferred Base Rent as of January 1, 2005 and as of each January 1 thereafter shall continue to accrue interest at the Applicable Rate, with the then outstanding balance of the Deferred Base Rent and the interest which has accrued thereon through each December 31 being compounded on each December 31, commencing with December 31, 2004 and ending with December 31, 2007, in order to determine the Deferred Base Rent as of the following January < A NAME="_DV_C505">1, it being understood and agreed that prior to January 1, 2008, interest on the Carry Over Base Rent and the Deferred Base Rent, as applicable, shall accrue but shall not be due or payable. Interest which has accrued from and after January 1, 2008 on outstanding balance of the Deferred Base Rent shall be payable monthly in arrears on the third day of each month, commencing February 3, 2008 (the "Monthly Deferred Base Rent Interest"). Notwithstanding the foregoing, prior to January 1, 2008, Lessee may at its option, at any time pay all or any portion of the accrued and unpaid interest included within the Deferred Base Rent (which shall include any interest thereon which has accrued but not yet been compounded with, and thus added to, the then outstanding balance of the Deferred Base Rent in accordance with the provisions hereof) without any premium or penalty.
3.2.2. No Distributions. Unless, at the date of any payment, purchase, redemption or acquisition referred to in this Section 3.2.2, the accrued and unpaid interest which has then been included in the Deferred Base Rent (which shall include any interest thereon which has accrued but not yet been compounded with, and thus added to, the then outstanding balance of the Deferred Base Rent in accordance with the provisions hereof) has been paid in full, Sun shall not (i) pay any dividends or make any distributions on its Common Stock or (ii) purchase, redeem or otherwise acquire for value any of its Common Stock; provided, however, that Sun may do any of the following: (a) make repurchases of restricted stock from employees of Sun where such shares of restricted stock have not been vested, and (b) consummate a Qualified Buy Back Transaction.
3.2.3 Maturity. The entire unpaid Deferred Base Rent shall be due and payable in full on December 31, 2013 or within ten (10) Business Days after the earlier termination of this Master Lease.3.2.4 Payment Upon a Change in Control. Upon a Change in Control of Sun, the entire unpaid Deferred Base Rent shall be immediately due and payable in full, unless Lessor exercises its conversion rights as set forth in Article XXXVI.
3.2.5 Optional Payment. Subject to Lessor's conversion rights set forth in Article XXXVI, Lessee may at any time upon 30 days advance written notice to Lessor pay all, but not less than all, of the Deferred Base Rent.3.3 Additional Charges. In addition to the Base Rent, the Deferred Base Rent and the Monthly Deferred Base Rent Interest, Lessee will also pay and discharge as and when due and payable all Impositions as provided in Section 4.1, any Future Transition Facilities Rent Shortfall, and all other amounts, liabilities, obligations and Impositions which Lessee assumes or agrees to pay under this Master Lease. In the event of any failure on the part of Lessee to pay any of those items referred to in the previous sentence, Lessee will also promptly pay and discharge every fine, penalty, interest and cost which may be added for non-payment or late payment of such items referred to in this sentence and the previous sentence. Collectively, the items referred to in the first two sentences of this Section 3.3 are referred to as the "Additional Charges" and shall also constitute Rent.
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3.5 Method of Payment of Rent. Except as provided to the contrary in Article XXXVI with respect to the payment of the Deferred Base Rent through the conversion thereof in accordance with the provisions of Article XXXVI, Rent to be paid to Lessor shall be paid by electronic funds transfer debit transactions through wire transfer of immediately available funds and shall be initiated by Lessee for settlement on or before the due date each calendar month; provided, however, if the due date is not a Business Day, then settlement shall be made on the next succeeding day which is a Business Day. Lessor shall provide Lessee with appropriate wire transfer information in a Notice from Lessor to Lessee. Lessee shall inform Lessor of payment by sending a facsimile transmission of Lessee's wire transfer confirmation not later than noon, Eastern Standard or Daylight Savings time on each payment date. If Lessor directs Lessee to pay any Base Rent to any party ot her than Lessor, Lessee shall send to Lessor, simultaneously with such payment, a copy of the transmittal letter or invoice and a check whereby such payment is made or such other evidence of payment as Lessor may reasonably require.
3.6 Net Lease. 3.6.2 Lessor shall not be required to furnish any services whatsoever to the Leased Properties, or make any payment of any kind whatsoever. Lessee hereby assumes the full and sole responsibility for the condition, operation, repair, alteration, improvement, replacement, maintenance and management of the Leased Properties. Lessor shall not be responsible for any loss or damage to any property of Lessee or any sub-tenant, concessionaire, or other user or occupant of any part of the Leased Properties, absent the gross negligence or willful misconduct of Lessor, its employees or agents.18
3.8 Remaining Divested Properties. Lessee shall continue to transition operation of the Remaining Transition Facilities to designees of Omega as soon as practicable in accordance with the Transition Agreement, which shall be and hereby is amended to provide in Section 7(c) of the Transition Agreement as follows: "Either party may terminate this Agreement upon notice to the other party at any time after December 31, 2004." The Base Rent does not include any Base Rent payable on the Remaining Transition Facilities and Lessee shall not pay additional Base Rent in connection with the Remaining Transition Facilities but shall otherwise be responsible for all costs of operation of the Remaining Transition Facilities until each is transitioned in accordance with the Transition Agreement. Lessee shall operate all Remaining Transition Facilities in accordance with the terms of this Master Lease and Section 6 of the Transition Agreement.
3.9 Future Transition of Certain Additional Facilities.3.9.1 If as a consequence of actions taken by the State of California or any instrumentality thereof or of any political subdivision thereof, including without limitation the California Department of Health Services or Department of Justice, any County Department of Mental Health or the California Bureau of Medi-Cal Fraud and Elder Abuse, whether under the Permanent Injunction and Final Judgment filed on October 5, 2001 in the Superior Court of the State of California for the County of San Mateo in People v. Sun Healthcare Group, Inc., et al (San Mateo Superior Court Case No. 418519) (the "PIFJ") or otherwise (i) the cash flow of the Future Transition Facilities taken as a whole (inclusive of all overhead, administrative and other costs allocable to those facilities) is negative and in the reasonable opinion of Sun is likely to remain negative under the then current circumstances for more than two (2) years, or (ii) Sun and Omega otherwis e jointly agree (in the exercise of their respective good faith reasonable business judgment) that it is no longer economically feasible for the applicable Lessee to continue to operate the Future Transition Facilities, Lessee is permitted as to all, but not fewer than all, of the Future Transition Facilities on written notice to Lessor (the "Future Transition Facilities Notice") to (A) transition, in one or more transactions the Future Transition Facilities to one or more new operators acceptable to Omega in its reasonable business discretion (the "Future Operators") and/or (B) with respect to any of the Future Transition Facilities which have not been transitioned to Future Operators within a period of one (1) year after the delivery to Lessor of the Future Facilities Transition Notice, to close any of the Future Transition Facilities in accordance with the laws of the State, it being understood and agreed that in the event Lessee delivers the Future Facilities Transition Notice to Lessor, then Lessee shall be required to use its commercially reasonable efforts for a period of one (1) year thereafter to transition to Future Operators all, but not less than all, of the Future Transition Facilities.
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3.9.2. The affected Lessee shall negotiate an Operations Transfer Agreement ("OTA") in good faith, provided that such OTA shall be substantially in the form of Exhibit E. Omega shall negotiate in good faith the terms of a new Lease with the Future Operators (the "Future Operator Lease") provided that the Future Operator Lease shall be in substantially the same form as Omega's standard form lease for similar size transactions.
3.9.3 Upon completion of the transition of any or all of the Future Transition Facilities, (i) upon the effective date of the applicable Future Operator Lease, this Master Lease shall terminate as to the applicable Future Transition Facility(ies), (ii) upon the effective date of the applicable Future Operator Lease, the Base Rent under this Master Lease shall be reduced by the Allocated Current Rent with respect to the applicable Future Transition Facility(ies) and (iii) from and after the effective date of the applicable Future Operator Lease and throughout the remainder of the Initial Continued Term or the then applicable Renewal Term (if the transition or closure occurs during a Renewal Term), Lessor shall deliver to Lessee on a quarterly basis a statement (the "Future Transition Facilities Rent Shortfall Statement") setting forth in reasonable detail (A) the amount of the Base Rent actually received by Lessor, on an aggregate basis, during the preceding quarter from the Future Operators of th e Future Transition Facilities (the "Future Transition Facilities Rent") and (B) the amount due from Lessee, if any, with respect to the Future Transition Facilities Rent Shortfall, it being understood and agreed that during any quarter when the Future Transition Facilities Rent is equal to or greater than the Allocated Current Rent, Lessee shall have no Future Transition Facilities Rent Shortfall obligation to Lessor. The Future Transition Facilities Rent Shortfall shall be due and payable within ten (10) Business Days after Lessee's receipt from Lessor of the Future Transition Facilities Rent Shortfall Statement. Lessee shall have the right on reasonable notice to Lessor and during normal business hours to review the books and records of Lessor in order to verify the accuracy of the information and calculations contained in the Future Transition Facilities Rent Shortfall Statement and the cost thereof shall be borne by Lessee unless the same discloses that Lessor overbilled Lessee for the Future Transitio n Facilities Rent Shortfall by five percent (5%) or more, in which case the cost of such review shall be borne by Lessor.3.10 Transition Agreement. Except as specifically set forth in this Master Lease to the contrary, the Transition Agreement continues in force and effect as set forth in the Transition Agreement with respect to the Remaining Transition Facilities.
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4.1. Payment of Impositions. Subject to Section 12.1 relating to permitted contests, Lessee will pay, or cause to be paid, all Impositions before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and will promptly, upon request, furnish to Lessor copies of official receipts or other satisfactory proof evidencing such payments. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and in such event, shall pay such installments during the Term hereof (subject to Lessee's right of contest pursuant to the provisions of Section 12.1) as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. If any provision of any Facility Mortgage requires deposits for payment of real estate taxes or other Impositions to be made with such Facility Mortgagee, Lessee shall either pay to Lessor monthly the amounts required and Lessor shall transfer the amounts to such Facility Mortgagee, or, pursuant to written direction by Lessor, Lessee shall make such deposits directly with such Facility Mortgagee. Lessor, at its expense, shall, to the extent required or permitted by applicable law, prepare and file all tax returns and reports as may be required by governmental authorities in respect of Lessor's net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes and taxes on its capital stock, and Lessee, at its expense, shall, to the extent required or permitted by applicable laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by governmental authorities. If any refund is due from any taxing authority in respect of any Imposition paid by Lessee, the same shall be paid over to or retained by Lessee if no Event of Default has occurred hereunder and is continuing. Any such funds retained by Lessor due to an Event of Default shall be applied as provided in Article XVI. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Properties as may be necessary to prepare any required returns and reports. In the event governmental authorities classify any property covered by this Master Lease as personal property, Lessee shall file all required personal property tax returns. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property classified as personal property. Lessee may, upon Notice to and with the consent of Lessor (whic h consent shall not be unreasonably withheld), at Lessee's sole cost and expense, protest, appeal, or institute such other proceedings as Lessee may deem appropriate to effect a reduction of real estate or personal property assessments and Lessor, at Lessee's expense as aforesaid, shall cooperate with Lessee in such protest, appeal, or other action. Lessee shall reimburse Lessor for Lessor's direct costs of cooperating with Lessee for such protest, appeal or other action. Billings for reimbursement by Lessee to Lessor of personal property taxes shall be accompanied by copies of a bill therefor and payments thereof which identify the personal property with respect to which such payments are made. Unless otherwise agreed by Lessor and Lessee, notwithstanding the foregoing, upon the expiration or earlier termination of the Term, all Impositions applicable to the final Lease Year of the Term (if a partial calendar year) shall be prorated between Lessee and Lessor as set fo rth in Section 4.3 hereof.
4.2 Notice of Impositions. Lessor shall give prompt Notice to Lessee of all Impositions payable by Lessee hereunder of which Lessor at any time has knowledge, but Lessor's failure to give any such Notice shall in no way diminish Lessee's obligation hereunder to pay such Impositions, but such failure shall obviate any default hereunder for a reasonable time after Lessee receives Notice of any Imposition which it is obligated to pay.21
4.4 Utility Charges. Lessee will pay or cause to be paid when due all charges for electricity, power, gas, oil, water and other utilities used in the Leased Properties during the Term.
4.5 Insurance Premiums. Lessee will pay or cause to be paid when due all premiums for the insurance coverage required to be maintained pursuant to Article XIII during the Term.ARTICLE IV.
4.1 No Termination, Abatement, etc. Except as otherwise specifically provided in this Master Lease, Lessee shall remain bound by this Master Lease in accordance with its terms and shall not take any action without the consent of Lessor to modify, surrender or terminate the same, and shall not seek or be entitled to any abatement, deduction, deferment or reduction of Rent, or setoff against the Rent. Except as expressly set forth herein, the respective obligations of Lessor and Lessee shall not be affected by reason of (i) any damage to, or destruction of, any of the Leased Properties or any portion of any Leased Property from whatever cause or any Taking of any Leased Property or any portion thereof, (ii) the lawful or unlawful prohibition of, or restriction upon, Lessee's use of any Leased Property, or any portion thereof, or the interference with such use by any person, corporation, partnership or other enti ty, or the eviction of Lessee by paramount title; (iii) any claim which Lessee has or might have against Lessor or by reason of any default or breach of any warranty by Lessor under this Master Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (iv) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, or (v) for any other cause whether similar or dissimilar to any of the foregoing other than a discharge of Lessee from any such obligations as a matter of law. Lessee hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (a) modify, surrender or terminate this Master Lease or quit or surrender the Leased Properties or any portion thereof, or (b) entitle Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums pa yable by Lessee hereunder except as otherwise specifically provided herein. The obligations of Lessor and Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same are terminated pursuant to the express provisions of this Master Lease.
ARTICLE V.
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5.3 Lessee's Personal Property. Lessee shall provide and maintain during the Term such Personal Property, in addition to Lessor's Personal Property, as shall be reasonably necessary and appropriate in order to operate the Facilities for the Primary Intended Use in compliance with all licensure and certification requirements and in compliance with all applicable Legal Requirements and Insurance Requirements. Upon the expiration or earlier termination of this Master Lease as to any or all of the Leased Properties other than as a result of Leseee's purchase of the Leased Properties or any portion thereof in accordance with the terms of this Master Lease (i) Lessee shall have the right, at its sole cost and expense, to remove from the Leased Properties or the Leased Property(ies) as to which this Master Lease has terminated, as applicable, the Excluded Lessee's Personal Property unless there is then outstanding an Event of Default hereunder and Lesso r elects to exercise its rights with respect to the Excluded Lessee's Personal Property in accordance with the terms of the Amended Security Agreement and (ii) the Relinquished Lessee's Property shall be and remain the property of Lessor and Lessee shall, upon request, execute such documents as may be reasonably necessary to convey to Lessor all of Lessee's right, title and interest therein free and clear of all liens, claims, charges and encumbrances. Any of the Excluded Lessee's Personal Property which Lessee fails to remove from the affected Leased Property(ies) within twenty (20) days following the expiration or earlier termination of this Master Lease shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without giving notice thereof to Lessee and without any payment to Lessee or any obligation to account therefore. Lessee shall reimburse Lessor for any and all expenses reasonably incurred by Lessor in disposing of any of the Excluded Lessee 's Personal Property in accordance with the immediately preceding sentence and shall either at its own expense restore the Leased Properties to the condition required by Section 9.1.7, including repair of all damages to the Leased Properties caused by the removal of any of the Excluded Lessee's Personal Property, or reimburse Lessor for any and all expense reasonably incurred by Lessor for such restoration and repair.
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ARTICLE VI.
6.1 Condition of the Leased Properties. Lessee has been and currently is in possession of the Leased Properties and otherwise has knowledge of the condition of the Leased Properties and has found the same to be in good order and repair and satisfactory for its purposes hereunder. Lessee continues to lease the Leased Properties "as is" in their condition at the time this Master Lease is entered into. Lessee waives any claim or action against Lessor in respect of the condition of any Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, TO LESSEE OR TO ANY PARTY WITH WHICH LESSEE ENTERS INTO A MANAGEMENT CONTRACT, IN RESPECT OF ANY LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL S UCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT EACH LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO LESSEE. Lessee further acknowledges that Lessee is solely responsible for the condition of the Leased Properties from and after the Commencement Date. Unless any Leased Property was acquired from Lessee, and to the extent permitted by law, Lessor hereby assigns to Lessee, all of Lessor's rights, if any, to proceed against any predecessor in title for breaches of warranties or representations, or for latent defects in such Leased Property and Lessee agrees to fully prosecute any and all such claims. Lessor shall cooperate with Lessee in the prosecution of any such claims, in Lessor's or Lessee's name, all at Lessee's sole cost and expense.
6.2 Use of Leased Properties.6.2.1 Lessee covenants that it will obtain and maintain all approvals, licenses and permits needed to use and operate the Leased Properties and the Facilities under applicable local, state and federal law, including, but not limited to, licensure as a licensed nursing home or other applicable designation, such as rehabilitation hospital, and Medicare or Medicaid certification, to the extent applicable to the operation of each Facility from time to time.
6.2.2 After the Commencement Date and during the entire Term, Lessee shall use or cause each Leased Property to be used as the applicable Facility thereon is currently licensed, and for such other uses as may be necessary or incidental to such use (the particular such use is herein referred to as the "Primary Intended Use"). Lessee shall not use any Leased Property or any portion thereof for any other use without the prior written consent of Lessor. No use shall be made or permitted to be made by Lessee, its agents and employees of any Leased Properties, and no acts shall be done by Lessee, its agents and employees, which will cause the cancellation of any insurance policy covering any Leased Property or any part thereof, nor shall Lessee sell or otherwise provide to residents or patients therein, or permit to be kept, used or sold in or about any Leased Property any article which may be prohibited by law or by the standard form of fire insurance policies, or any other insuranc e policies required to be carried hereunder, or fire underwriter's regulations.24
6.3 Certain Environmental Matters.
6.3.1 Definitions. The terms defined in this Section have the meanings assigned to them in this Section and include the plural as well as the singular:(a) Clean-Up: The investigation, removal, restoration, remediation and/or elimination of, or other response to, Contamination (as hereinafter defined) to the satisfaction of all governmental agencies having jurisdiction, in compliance with or as may be required by Environmental Laws (as hereinafter defined).
(b) Contamination. The presence, Release or threatened Release of any Hazardous Substance at any Leased Property in violation of any Environmental Law, or in a quantity that would give rise to any affirmative Clean-Up obligation under an Environmental Law, including, but not limited to, the existence of any injury or potential injury to public health, safety, natural resources or the environment associated therewith, or any other environmental condition at, in, about, under or migrating from or to such Leased Property.
(c) Environmental Documents: Each and every (i) document received by Lessee or any Affiliate from, or submitted by Lessee or any Affiliate to, the United States Environmental Protection Agency and/or any other federal, state, county or municipal agency responsible for enforcing or implementing Environmental Laws with respect to the condition of a Leased Property, or Lessee's operations at a Leased Property; and (ii) review, audit, report, or other analysis data pertaining to environmental conditions, including, but not limited to, the presence or absence of Contamination, at, in, or under or with respect to a Leased Property that have been prepared by, for or on behalf of Lessee.
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(d) Environmental Laws: All federal, state and local laws (including, without limitation, common law), statutes, codes, ordinances, regulations, rules, orders, permits or decrees relating to the introduction, emission, discharge or release of Hazardous Substances into the indoor or outdoor environment (including, without limitation, air, surface water, groundwater, land or soil) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, transportation or disposal of Hazardous Substances; or the Cleanup of Contamination, all as are now or may hereinafter be in effect.
(e) Environmental Report: The environmental review, audit and/or report relating to any Leased Property provided to Lessor in connection with Lessor's acquisition of such Leased Property.
(f) Hazardous Substances: Any and all dangerous, toxic or hazardous material, substance, pollutant, contaminant, chemical, waste (including medical waste), or substance including petroleum products, asbestos and PCB's defined, listed or described as such under any Environmental Law.
(g) Regulatory Actions: With respect to any Leased Property, any claim, demand, notice, action or proceeding brought, threatened or initiated by any governmental authority in connection with any Environmental Law, including, without limitation, civil, criminal and/or administrative proceedings, and whether or not seeking costs, damages, equitable remedies, penalties or expenses.
(h) Release: The intentional or unintentional spilling, leaking, dumping, pouring, emptying, seeping, disposing, discharging, emitting, depositing, injecting, leaching, escaping, abandoning, or any other release or threatened release, however defined, of any Hazardous Substance.
6.3.2 Prohibition Against Use of Hazardous Substances. Lessee shall not permit, conduct or allow on any Leased Property, the generation, introduction, presence, maintenance, use, receipt, acceptance, treatment, manufacture, production, installation, management, storage, disposal or release of any Hazardous Substance except for those types and quantities of Hazardous Substances necessary for and ordinarily associated with the conduct of Lessee's business and in full compliance with all Environmental Laws.26
6.3.3 Notice of Environmental Claims, Actions or Contaminations. Lessee will notify Lessor, in writing, promptly upon learning of any existing, pending or threatened: (i) investigation, inquiry, claim or action by any governmental authority with respect to any Leased Property in connection with any Environmental Law, (ii) Third Party Claims, (iii) Regulatory Actions, and/or (d) Contamination of any Leased Property.
6.3.4 Costs of Remedial Actions with Respect to Environmental Matters. If any investigation and/or Clean-Up of any Hazardous Substance or other environmental condition on, under, about or with respect to any Leased Property is required by any Environmental Law, then Lessee shall complete, at its own expense, such investigation and/or Clean-Up or cause each such other person as may be responsible for any of the foregoing to conduct such investigation and/or Clean-Up.6.3.5 Delivery of Environmental Documents. Lessee shall deliver to Lessor complete copies of any and all Environmental Documents that may now be in or at any time hereafter come into the possession of Lessee.
6.3.6 Environmental Audit. At Lessee's expense, Lessee shall from time to time, after Lessor's request therefor, provide to Lessor a written certificate, in form and substance satisfactory to Lessor, from an environmental firm acceptable to Lessor, which states that there is no Contamination on the Leased Property identified by Landlord in such request and that such Leased Property is otherwise in strict compliance with Environmental Laws (the "Environmental Audit"). All tests and samplings shall be conducted using generally accepted and scientifically valid technology and methodologies. Lessee shall give the engineer or environmental consultant reasonable access to such Leased Property and to all records in the possession of Lessee that may indicate the presence (whether current or past) or a Release or threatened Release of any Hazardous Substances on, in, under or about such Leased Property. Lessee shall also provide the engineer or environmental consultant an opportunity to interview such persons employed in connection with such Leased Property as the engineer or consultant deems appropriate. However, Lessor shall not be entitled to request such certificate or certificates from Lessee unless (i) there have been any changes, modifications or additions to any Environmental Laws as applied to or affecting such Leased Property; (ii) a significant change in the condition of any Leased Property has occurred; or (iii) Lessor has another good reason for requesting such certificate or certificates. If the Environmental Audit discloses the presence of Contamination or any noncompliance with Environmental Laws, Lessee shall immediately perform all of Lessee's obligations hereunder with respect to such Hazardous Substances or noncompliance.6.3.7 Entry onto Leased Property for Environmental Matters. If Lessee fails to provide the Environmental Audit contemplated by Section 7.3.6 hereof, Lessee shall permit Lessor from time to time, by its employees, agents, contractors or representatives, to enter upon such Leased Property for the purposes of conducting such soil and chemical tests or any other environmental investigations, examinations, or analyses (hereafter collectively referred to as "Investigation") as Lessor may desire. Lessor, and its employees, agents, contractors, consultants and/or representatives, shall conduct any such investigation in a manner which does not unreasonably interfere with Lessee's use of and operations on any Leased Property (however, reasonable temporary interference with such use and operations is permissible if the investigation cannot otherwise be reasonably and inexpensively conducted). Other than in an emergency, Lessor shall provide Lessee with prior notice before entering any of the Leased Properties to conduct such Investigation, and shall provide copies of any reports or results to Lessee, and Lessee shall cooperate fully in such Investigation.
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6.3.9 Compliance with Environmental Laws. Lessee shall comply with, and cause its agents, servants and employees, to comply with, and shall use reasonable efforts to cause each tenant and other occupant and user of each Leased Property, and the agents, servants and employees of such tenants, occupants and users, to comply with each and every Environmental Law applicable to Lessee and each such tenant, occupant or user with respect to each Leased Property. Specifically, but without limitation:
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ARTICLE VIII.
8.1 Representations and Warranties of Lessee and Sun. Each of Lessee and Sun hereby represents and warrants to Lessor as of the Delivery Date as follows:
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(ii) will be free and clear of any security interests, liens, claims or other encumbrances; and
9;(h) Securities Exemption. The offer and issuance of the Common Stock to Lessor pursuant to this Master Lease will be made in accordance with an exemption from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and pursuant to the exemption available under Subtitle 6 of the Maryland Securities Act, which Lessor represents to be the sole State law applicable to the offer and issuance of the Common Stock.
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(j) Proceedings. There is no pending or, to the best knowledge of Sun or any Lessee, threatened action, suit, proceeding or investigation before any court, governmental agency or body or arbitrator having jurisdiction over Sun, any Lessee or any of their Affiliates that would materially affect the execution by Sun or any Lessee of this Master Lease.
8.2 Representations and Warranties of Lessor. Lessor hereby represents and warrants to Sun as of the Delivery Date as follows:(a) Accredited Investor. Each Lessor is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act of 1933.
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(c) Good Standing; Due Authorization. Omega is duly incorporated and validly existing in good standing under the laws of the State of Maryland. Each of the entities comprising Lessor has been duly formed or organized and is validly existing in good standing under the laws of the state or jurisdiction of its organization or formation. The principal place of business of Omega and each Lessor is in the State of Maryland. The execution, delivery and performance of this Master Lease (including the acquisition of the Conversion Shares in the event of the conversion of the Deferred Base Rent in accordance with the terms hereof) by each Lessor have been duly authorized by all requisite corporate action and no further consent or authorization of any Lessor, Omega, the Board or Omega's shareholders is required.
(d) Enforceability. This Master Lease has been duly executed and delivered by each of Omega and each Lessor and, when this Master Lease is duly authorized, executed and delivered by Lessee, will be a valid and binding agreement enforceable against Omega and each Lessor in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity.
(e) Authority. Each of each Lessor and Omega has full corporate power and authority necessary to (i) own and operate its properties and assets, execute and deliver this Master Lease, (ii) perform its obligations hereunder and (iii) carry on its business as presently conducted and as presently proposed to be conducted.
(f) Consents. No consent, approval, authorization or order of any court, governmental agency or other body is required for execution and delivery by Omega or any Lessor of this Master Lease or the performance by Omega or any Lessor of any of its obligations hereunder other than such as may already have been received. In furtherance and not in limitation of the foregoing, Omega and Lessor (i) represent and warrant that (A) all of the amendments, modifications and waivers to the Existing Master Leases provided for herein, including, but not limited to, the reduction in the Base Rent and the waiver of the requirement for the Security Deposits, are permitted, without the need for Lessee, Sun, Omega or Lessor to secure further consent, under the terms of that Loan Agreement dated as of June 23, 2003 among General Electric Capital Corporation ("GECC") and the other financial institutions who are or thereafter become parties thereto (the "Omega Lenders"), as Lender and Lessor and certain affiliate s of Lessor, as Borrowers (the "GECC Loan Agreement") and (B) in particular that the requirements of Section 6.1.5 of the GECC Loan Agreement will be satisfied after the execution by Omega, Lessor and Lessee of this Master Lease and (ii) acknowledge and agree that Sun and Lessee are relying on the representations set forth in clause (i) hereof in not seeking consent from GECC under the Subordination, Non-Distribution and Attornment Agreement dated as of June 23, 2003 executed by Lessee, Lessor, certain affiliates of Lessor and GECC as agent for the Omega Lenders.
(g) No Conflicts. Neither the execution and delivery by Omega or any Lessor of this Master Lease nor the performance by Omega or any Lessor of any of its obligations hereunder violates, conflicts with, results in a breach of, or constitutes a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) or creates any rights in respect of any person under (A) the certificates of incorporation, by-laws or other organization documents of Omega or any of its subsidiaries, including Lessor, (B) any decree, judgment, order, or determination of any court, governmental agency or body, or arbitrator having jurisdiction over Omega or any Lessor or any of their subsidiaries or any of their respective properties or assets or any material law, treaty, rule or regulation, (C) the terms of any bond, debenture, note, indenture, credit agreement or any other evidence of indebtedness, or any material agreement, stock option or other sim ilar plan, lease, mortgage, deed of trust or other instrument to which Omega, any Lessor or any of their subsidiaries is a party, by which Omega, any Lessor or any of its subsidiaries is bound, or to which any of the properties or assets of Omega, any Lessor or any of its subsidiaries is subject, or (D) any material rule or regulation of the quotation services or any markets where Omega's securities are publicly traded or quoted, applicable either to Omega or the transactions contemplated hereby.
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8.6 Certain Covenants Regarding Management
8.6.1. Limitation of Management Fees. A condition to the effectiveness of the Term with respect to this Master Lease shall be the disclosure to Lessor of the terms of any management agreement between Lessee and any other entity affecting the operational control of any Facility, and Lessor's approval, which shall not be unreasonably withheld, of such terms and of such other entity. Each manager shall subordinate its right to receive any management fee from any Facility to Lessee's obligation to pay Lessor the Base Rent and Additional Charges for such Facility.
8.6.2 ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; Management Agreements. Lessee covenants that during the Term of this Lease it shall neither (i) enter into any management agreement with respect to a Facility without Lessor's approval, which Lessor shall not unreasonably withhold (provided the proposed manager does not fail to meet the criteria set forth in paragraphs 2 and 3 set forth on Exhibit G which would be applicable to it if it were a proposed "Transferee" and it is not proposed that the use of the affected Leased Property change from the Primary Intended Use or violate any other agreement affecting the affected Leased Property), or (ii) amend, modify, renew, replace or otherwise change the terms of any existing management agreement for a Facility without the prior written consent of Lessor, which Lessor may not unreasonably withhold, and, in either case, without a satisfactory subordination by such manager of its right to rec eive its management fee to the obligation of Lessee to pay the Base Rent and Additional Charges to Lessor.
ARTICLE IX.
9.1.1 Lessee, at its expense, will keep the Leased Properties and all fixtures thereon and all landscaping, private roadways, sidewalks and curbs appurtenant thereto and which are under Lessee's control and Lessee's Personal Property in good order and repair (whether or not the need for such repairs occurs as a result of Lessee's use, the elements or the age of the Leased Properties or any portion thereof, or any cause whatever except the failure of Lessor to make any payment or to perform any act expressly required under this Master Lease or any willful misconduct of Lessor), and, except as otherwise provided in Article XIV, with reasonable promptness, make all necessary and appropriate repairs thereto of every kind and nature, whether interior or exterior, structural or non-structural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition whether or not existing prior to the commencement of the Term (concealed or otherwise). Lessee shall not make any changes or alterations to any Leased Property, except as permitted pursuant to Article X .36
9.1.3 It is the intention of these provisions that the level of maintenance of the Leased Properties shall be not less than the standard applied by Lessee in its operation of other similar licensed health care facilities it owns and/or operates. At all times Lessee shall maintain, operate and otherwise manage the Leased Properties on a quality basis and in a manner consistent with the standards of other facilities in the market area for the Leased Properties.
9.1.4 Lessor shall not under any circumstances be required to build or rebuild any improvements on any Leased Property, or to make any repairs, replacements, alterations, restorations or renewals of any nature or description to any Leased Property, whether ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or upon any adjoining property, whether to provide lateral or other support for any Leased Property or abate a nuisance affecting any Leased Property, or otherwise, or to make any expenditure whatsoever with respect thereto, in connection with this Master Lease, or to maintain any Leased Property in any way. Lessee hereby waives, to the extent permitted by law, the right to make repairs at the expense of Lessor pursuant to any law in effect at the time of the execution of this Master Lease or hereafter enacted.37
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ARTICLE X.
10.1 Construction of Alterations and Additions to the Leased Properties. Lessee shall not make or permit to be made any alterations, improvements or additions of or to any Leased Property or any part thereof, unless and until Lessee has obtained Lessor's written approval thereof if and as required pursuant to the terms of this Article X, which approval shall not be unreasonably withheld, and, if and as required by the terms of a Facility Mortgage, the approval of the Facility Mortgagee. Routine landscaping, painting, floor and wallcovering replacements shall not be deemed to be alterations within the meaning of this Article X.
10.1.1 Without the prior written consent of Lessor, Lessee shall not make any structural alterations to any Leased Property (other than replacement with the same materials in the same configuration) the cost of which in any period of twelve (12) consecutive months exceeds Fifty Thousand Dollars ($50,000), including, without limitation, any alterations to the roof, exterior and other load-bearing walls, windows and foundation of such Leased Property.10.1.2 Without the prior written consent of Lessor, Lessee shall not make any non-structural alterations to any Leased Property (other than replacement with the same materials in the same configuration) the cost of which in any period of twelve (12) consecutive months exceeds the Self Administered Amount.
10.1.3 As to any proposed alterations that do not require the approval of Lessor, before commencing the proposed alterations Lessee shall give Lessor at least fifteen (15) Business Days' Notice, and, in the case of structural alterations not requiring the approval of Lessor, Lessee shall deliver a copy of the plans and specifications therefor to Lessor within thirty (30) days after the commencement of such alterations. 10.1.5 If a required approval is granted, Lessee shall cause the work described in the approved plans and specifications to be performed at its expense, promptly and in a first class workmanlike manner, by a licensed general contractor and in compliance with all applicable Insurance Requirements and Legal Requirements and the standards herein. Each alteration, alone or in conjunction with each affected portion of any Leased Property, shall constitute a complete architectural unit in keeping with the character of such Leased Property and the area in which such Leased Property is located, and shall not diminish the value of such Leased Property or change the Primary Intended Use of such Leased Property. Each and every such alteration shall immediately become a part of any Leased Property and shall belong to Lessor subject to the terms and conditions of this Master Lease. Lessee shall have no claim against Lessor at any time in respect of the cost or value of any such alteration. All materials which are scrapped or removed in connection with the making of such alteration shall be the property of Lessee. There shall be no adjustment in the Base Rent by reason of any such alteration.39
ARTICLE XI.
11.1 Liens. Subject to the provisions of Section 12.1 relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon any Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including, however, (i) this Master Lease, (ii) the Permitted Encumbrances, (iii) restrictions, liens and other encumbrances which are consented to in writing by Lessor (Lessor's consent to such liens not to be unreasonably withheld or delayed) and any Facility Mortgagee or any easements granted by or consented to in writing by Lessor, (iv) liens for those taxes of Lessor which Lessee is not required to pay hereunder, (v) subleases permitted by Article XXIII, (vi) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (a) the same are not yet payable, or (b) such liens are in the process of being contested as permitted by Section 12.1, (vii) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due, provided that (a) the payment of such sums shall not be postponed for more than sixty (60) days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or GAAP shall have been made therefor and (b) any such liens are in the process of being contested as permitted by Section 12.1, (viii) any liens which are the responsibility of Lessor hereunder, and (ix) any other liens expressly permitted by the terms hereof).
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12.1 Permitted Contests. Lessee, on its own or on Lessor's behalf (or in Lessor's) name, but at Lessee's sole cost and expense, may contest the amount or validity of any Imposition or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim, or any encroachment or restriction burdening any Leased Property as provided in Section 9.2 ("Claims"), not otherwise permitted by Article XI, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way as relieving, modifying or extending Lessee's covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale of any Leased Property, or any part thereof, to satisfy the same or cause Lessor or Lessee to be in default under any Encumbrance or in violation of any Legal Requirements or Insurance Requirements upon any Leased Property or any interest therein. Upon request of Lessor, Lessee shall either (i) provide a bond, letter of credit or other assurance reasonably satisfactory to Lessor and any court having jurisdiction thereof that all Claims which may be assessed against any Leased Property together with interest and penalties, if any, thereon will be paid, or (ii) deposit within the time otherwise required for payment with a bank or trust company selected by Lessor as trustee, as security for the payment of such Claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith and all Claims which may be assessed against or become a Claim on any Leased Property, or any part thereof, in said legal proceedings, or (iii) deposit in the court having jurisdiction thereof an amount required by the laws of the State in which a Facil ity is located, to release any lien from any Leased Property. Lessee shall furnish Lessor and any lender of Lessor and any other party entitled to assert or enforce any Legal Requirements or Insurance Requirements with evidence of such deposit within five (5) days of the same. Lessor agrees to join in any such proceedings if required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any such proceedings; and Lessee covenants to indemnify and save harmless Lessor from any such costs or expenses, including but not limited to reasonable attorneys' fees incurred in any arbitration proceeding, trial, appeal and post-judgment enforcement proceedings. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. If Lessee fails to pay or satisfy the requirements or conditions of any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon thirty (30) days' advance written Notice to Lessee, pay such charges or satisfy such claims together with any interest and penalties and the same (or the cost thereof) shall be repayable by Lessee to Lessor as Additional Charges upon presentation of a written statement setting forth the amounts so claimed. If Lessor reasonably determines that the giving of such Notice would risk loss to any Leased Property or cause damage to Lessor, then Lessor shall give such written Notice as is practical under the circumstances.
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ARTICLE XIII.
13.1 General Insurance Requirements. During the Term, Lessee shall at all times keep the Leased Properties, and all property located in or on Leased Property, including Lessor's Personal Property and Lessee's Personal Property, insured with the kinds and amounts of insurance described below. Except as otherwise provided in this Article XIII, (a) this insurance shall be written by companies authorized to do insurance business in the State and , (b) all such policies provided and maintained during the Term shall be written by companies having a rating classification of not less than "A-" and a financial size category of "Class X," according to the then most recent issue of Best's Key Rating Guide. The policies (other than Workers' Compensation policies) must name Lessor as an additional insured. Losses shall be payable to Lessor or Lessee as provided in Article XIV. In addition, the policies shall name as an additional insured, the holder o f any mortgage deed of trust or other security agreement on the Leased Properties ("Facility Mortgagee") securing any Assumed Indebtedness and any other Encumbrance placed on the Leased Properties in accordance with the provisions of Article XXXIV ("Facility Mortgage"), as its interest may appear, by way of a standard form of mortgagee's loss payable endorsement in use in the State and in accordance with any such other requirements as may be established by the Facility Mortgagee. Any loss adjustment in the excess of the Self-Administered Amount shall require the written consent of Lessor, Lessee, and the Facility Mortgagee, which consent shall not be unreasonably withheld by either Lessor or Lessee. Evidence of insurance shall be deposited with Lessor and, if requested, with the Facility Mortgagee(s). If any provision of a Facility Mortgage requires deposits of premiums for insurance to be made with the Facility Mortgagee, Lessee shall either pay to Lessor monthly the amounts so required and Lessor shall transfer such amounts to the Facility Mortgagee, or, pursuant to written direction by Lessor, Lessee shall make such deposits directly with such Facility Mortgagee. Upon Lessee's request, Lessor shall provide Lessee with evidence of its transfer of such amounts. The policies on the Leased Properties, including the Leased Improvements, Fixtures and Lessor's Personal Property, and on Lessee's Personal Property, shall insure against the following risks:
13.1.1 Loss or damage by fire, vandalism and malicious mischief, earthquake (if available at commercially reasonable rates) and extended coverage perils commonly known as "Special Risk," and all physical loss perils normally included in such Special Risk insurance, including but not limited to sprinkler leakage, in an amount not less than one hundred percent (100%) of the then full replacement cost thereof (as defined below in Section 13.2); 13.1.3 Loss of rental included in a business income or rental value insurance policy covering risk of loss during reconstruction necessitated by the occurrence of any of the hazards described in Sections 13.1.1 or 13.1.2 (but in no event for a period of less than twelve (12) months) in an amount sufficient to prevent either Lessor or Lessee from becoming a co-insurer;42
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13.4 Waiver of Subrogation. All insurance policies carried by either party covering the Leased Properties, the Fixtures, the Facilities, Lessor's Personal Property or Lessee's Personal Property, including without limitation, contents, fire and casualty insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. Lessee shall pay any additional costs or charges for obtaining such waiver.
13.5 Form Satisfactory, etc.(a) All of the policies of insurance referred to in this Article XIII shall be written in a form reasonably satisfactory to Lessor and any Facility Mortgagee. The property loss insurance policy shall contain a Replacement Cost Endorsement. If Lessee obtains and maintains the professional malpractice insurance described in Section 13.1.5 above on a "claims-made" basis, Lessee shall provide continuous liability coverage for claims arising during the Term either by obtaining an endorsement providing for an extended reporting period reasonably acceptable to Lessor in the event such policy is canceled or not renewed for any reason whatsoever, or by obtaining "tail" insurance coverage converting the policies to "occurrence" basis policies providing coverage for a period of at least three (3) years beyond the expiration of the Term. Lessee shall (i) pay when due all of the premiums therefor, and deliver such policies or certificates thereof to Lessor prior to their effective date, (ii) with respect t o any renewal policy, prior to the expiration of the existing policy, Lessee shall furnish a new policy or binder to Lessor) and (iii) promptly thereafter, deliver the certificate or the new policy and in the event of the failure of Lessee either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof to Lessor at the times required, Lessor shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor when due, which premiums shall be repayable to Lessor upon written demand therefor as Rent, and failure to repay the same shall constitute an Event of Default within the meaning of Section 16.1.
(c) Notwithstanding any provision of this Article XIII to the contrary, each Lessor acknowledges and agrees that the coverage required to be maintained by Lessee, including but not limited to the coverages required under Sections 13.1.4, 13.1.5, 13.1.8 and any workers' compensation insurance, may be provided under one or more policies of self-insurance maintained by Sun and/or one or more of the Lessees or their respective Affiliates.
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13.7 Blanket Policy. Notwithstanding anything to the contrary contained in this Article XIII, Lessee's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee; provided, however, that the coverage afforded Lessor will not be reduced or diminished or otherwise be materially different from that which would exist under a separate policy meeting all other requirements hereof by reason of the use of the blanket policy, and provided further that the requirements of this Article XIII (including satisfaction of the Facility Mortgagee's requirements and the approval of the Facility Mortgagee) are otherwise satisfied, and provided further that Lessee maintains specific allocations acceptable to Lessor.
13.8 No Separate Insurance. 13.8.2 Nothing herein shall prohibit Lessee from insuring against risks not required to be insured hereby, and as to such insurance, Lessor and any Facility Mortgagee need not be included therein as additional insureds, nor must the loss thereunder be payable in the same manner as losses are payable hereunder except to the extent required to avoid a default under the Facility Mortgage or any other Permitted Encumbrance.ARTICLE XIV.
14.1 Insurance Proceeds. All proceeds, net of any costs incurred by Lessor in obtaining such proceeds, payable by reason of any loss or damage to any Leased Property, or any portion thereof, insured under (i) any policy of insurance required by Article XIII or (ii) under any other policies of insurance owned or maintained by Lessee with respect to any Leased Property shall be paid to Lessor and held by Lessor as provided herein. If such proceeds, net of collection costs, but inclusive of the proceeds with respect to the Personal Property which Lessee elects to restore or replace pursuant to Section 14.2 (the "Net Proceeds") are less than the Self-Administered Amount, and, if no Event of Default has occurred and is continuing, Lessor shall pay the Net Proceeds to Lessee promptly upon the completion of any restoration or repair, as the case may be, of any damage to or destruction of any Leased Property, or any portion the reof. If the Net Proceeds equal or exceed the Self-Administered Amount, and if no Event of Default has occurred and is continuing, the Net Proceeds shall be made available for restoration or repair, as the case may be, of any damage to or destruction of any Leased Property, or any portion thereof, as provided in Section 14.9; provided, however, that within fifteen (15) days of the receipt of the Net Proceeds, Lessor and Lessee shall agree as to the portion, if any, thereof attributable to Lessee's Personal Property (and failing such shall submit the matter to arbitration pursuant to the provisions hereof) and those Net Proceeds which the parties agree are payable by reason of any loss or damage to any of Lessee's Personal Property shall be disbursed in the manner specified in Section 14.4.45
14.3 Restoration in the Event of Damage or Destruction Not Covered by Insurance. Except as provided in Section 14.7 below, if during the Term, a Leased Property is totally or partially destroyed from a risk not covered by the insurance described in Article XIII, Lessee shall give Lessor Notice of such damage or destruction within five (5) Business Days of the occurrence thereof. Whether or not such damage or destruction renders such Leased Property Unsuitable for Its Primary Intended Use, Lessee at its option shall either restore such Leased Property to substantially the same condition it was in immediately before such damage or destruction, and such damage or destruction shall not terminate this Master Lease as to such affected Leased Property, or purchase such Leased Property for the Minimum Purchase Price. If Lessee fails to make the election within sixty (60) days of the occurrence or if Lessee elects not to restore, or if Lessee fails to commence or complete the restoration within the Reconstruction Period, then Lessee shall be deemed to have elected to purchase such affected Leased Property and upon the closing of such purchase, this Master Lease shall terminate as to the affected Leased Property. Lessee shall complete the purchase within the Reconstruction Period.
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14.5 Restoration of Lessee's Property. If Lessee is required or elects to restore a Leased Property as provided in Section 14.2 or 14.3, Lessee shall also restore all alterations and improvements made by Lessee and all of Lessee's Personal Property, to the extent required to maintain the then current license of such Leased Property.
14.6 Damage Near End of Term. Notwithstanding any provisions of Section 14.2 or 14.3 appearing to the contrary, if damage to or destruction of a Leased Property occurs during the last twelve (12) months of the Continuing Initial Term or any Renewal Term, and if such damage or destruction cannot be fully repaired and restored within six (6) months immediately following the date of loss as reasonably estimated by Lessor, then Lessee shall have the option, in lieu of restoring such Leased Property to substantially the same (or better) condition as existed immediately before the damage or destruction, to purchase such Leased Property from Lessor for a price equal to the Minimum Purchase Price at the time of the damage or destruction occurred. If Lessee fails to exercise such option by written Notice to Lessor within thirty (30) days following the occurre nce, or if Lessee elects not to restore, or if Lessee elects to restore but fails to commence or complete the restoration within the time limits specified in this Article XIV, then Lessee shall be deemed to have elected to purchase such Leased Property for the price set forth above. Lessee shall complete the purchase within (i) one hundred eighty (180) days of the occurrence if Lessee elects not to restore or (ii) sixty (60) days after the end of the Reconstruction Period in the event Lessee elects, but fails, to restore the affected Leased Property. In any such purchase, Lessee shall receive a credit for any Net Proceeds received and retained by Lessor, less such amounts as may be necessary to cure any default by Lessee.14.7 Waiver. Except as provided elsewhere herein, Lessee hereby waives any statutory or common law rights of termination which may arise by reason of any damage to or destruction of all or any portion of the Leased Properties.
14.8 Procedure for Disbursement of Insurance Proceeds Equal to or Greater Than The Self-Administered Amount. In the event Lessee restores or repairs a Leased Property pursuant to any Subsection of this Article XIV and if the Net Proceeds equal or exceed the Self-Administered Amount, the restoration or repair shall be performed in accordance with the following procedures:47
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14.10. Termination of Master Lease; Abatement of Rent. In the event Lessee purchases the affected Leased Property pursuant to this Article XIV as a result of damage or to destruction of all or any portion of the Leased Property, then (i) this Master Lease shall terminate as to such Leased Property upon payment of the purchase price set forth herein, (ii) the Base Rent due hereunder from and after the effective date of such termination shall be reduced by an amount determined by multiplying a fraction, the numerator of which shall be the Minimum Purchase Price for the affected Leased Property and the denominator of which shall be the Minimum Purchase Price for all of the Leased Properties then subject to the terms of this Master Lease by the Base Rent payable under this Master Lease immediately prior to the effective date of the termination of this Master Lease as to the affected Leased Property, (iii) provided that Lessee is not then in default under this Master Lease and then only to the extent not previously applied by Lessor, Lessor shall remit to Lessee all Net Proceeds pertaining to such Leased Property being held by Lessor and (iv) Lessor shall retain any claim which Lessor may have against Lessee for failure to insure such Leased Property as required by Article XIII. Unless this Master Lease shall terminate pursuant to this Article XIV as to the affected Leased Property, this Master Lease shall remain in full force and effect and Lessee's obligation to make rental payments and to pay all other charges required thereunder shall remain unabated during any period required for repair and restoration.
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ARTICLE XV.
15.1 Condemnation Article Definitions. 15.1.2 "Date of Taking" means the date the Condemnor has the right to possession of a Leased Property being condemned. 15.1.4 "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of condemnation.15.2 Parties' Rights and Obligations. If during the Term there is any Taking of all or any part of a Leased Property or any interest in this Master Lease by Condemnation, the rights and obligations of the parties to this Master Lease shall be determined by this Article XV.
15.3 Total Taking. If title to the fee of the whole of a Leased Property shall be taken or condemned by any Condemnor, this Master Lease shall cease and terminate as to such Leased Property as of the Date of Taking by said Condemnor. If title to the fee of less than the whole of such Leased Property shall be so taken or condemned, which nevertheless renders such Leased Property Unsuitable for Its Primary Intended Use, Lessee and Lessor shall each have the option by written Notice to the other, at any time prior to the taking of possession by, or the date of vesting of title in, such Condemnor, whichever first occurs, to terminate this Master Lease as to such Leased Property as of the date so determined. Upon such date so determined, if such Notice has been given, this Master Lease shall thereupon cease and terminate as to such Leased Property. In either of such events, all Base Rent and Additional Charges paid or payable by Lessee hereunder shall be apportioned as to the affected Leased Property as of the date this Master Lease shall have been so terminated as aforesaid. In the event of any such termination, the provisions of Section 15.4 shall apply.
15.4 Allocation of Portion of Award. The Condemnation Award made with respect to all or any portion of a Leased Property or for loss of rent shall be the property of and payable to Lessor to the extent of the Minimum Purchase Price. To the extent that the laws of the State permit Lessee to make a claim which does not have the effect, directly or indirectly, of reducing Lessor's claim, for Lessee's leasehold interest, moving expenses, or for loss of goodwill or Lessee's business, Lessee shall have the right to pursue such claim in the Condemnation proceeding and shall be entitled to the Award therefor ("Lessee's Leasehold Award"). Lessee hereby assigns to Lessor its interest in Lessee's Leasehold Award to the extent of the difference between the total Condemnation Award and the Minimum Purchase Price. Any Award made for the taking of Lessee's Personal Property, or for removal and relocation expenses of Less
ee in any such proceedings shall be the sole property of and payable to Lessee ("Lessee's Personal Property Award"). In any Condemnation proceedings, Lessor and Lessee shall each seek its own Award in conformity herewith, at its own expense. To assure that Lessor is made whole first from the Condemnation Award, the total of the Condemnation Award payable to Lessor and Lessee's Leasehold Award shall be allocated in the following order of priority:
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The provisions of this Section 15.4 shall not apply in the event Lessee purchases the Leased Property pursuant to this Article XV but, in such event, the provisions of Section 15.8 shall control with respect to the disposition of the Condemnation Award.
15.5 Partial Taking. If title to the fee of less than the whole of a Leased Property shall be so taken or condemned, Lessee shall give Lessor Notice of such partial taking or condemnation within five (5) Business Days of the occurrence thereof. If such Leased Property is still suitable for its Primary Intended Use, or if Lessee or Lessor shall be so entitled, but shall not elect to terminate this Master Lease with respect to such Leased Property as provided in Section 15.3 hereof, Lessee shall with all reasonable dispatch restore the untaken portion of the Leased Improvements on such Leased Property so that such Leased Improvements shall constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to such Condemnation or Taking. Lessee shall commence the restoration of the Facility on such Leas ed Property within sixty (60) days of the Partial Taking, and shall complete the restoration within the Reconstruction Period following such Partial Taking. Lessor shall contribute to the cost of restoration such portion of the Condemnation Award payable to Lessor, if any, together with severance and other damages awarded for taken Leased Improvements, provided, however, the amount of such contribution shall not exceed the cost of restoration. As long as no Event of Default has occurred hereunder, if the Award is in an amount less than the Self-Administered Amount, Lessor shall pay the same to Lessee. As long as no Event of Default has occurred hereunder, if the Award is in an amount more than the Self-Administered Amount, Lessor shall make the portion of the Award to which it is entitled available to Lessee in the same manner as is provided in Section 14.9 for insurance proceeds in excess of the Self-Administered Amount. The Base Rent shall be reduced by reason of such Partial Taking to an amount agreed upon by Lessor and Lessee. If Lessor and Lessee cannot agree upon a new Base Rent, then the Base Rent for such Facility shall be proportionately reduced in accordance with the number of licensed beds no longer operable at such Facility solely by reason of the Partial taking. If Lessee fails to make the election or if it elects not to restore, or if it fails to commence or complete the restoration within the time limits specified in this Section 15.5, then Lessee shall be deemed to have elected to purchase such affected Leased Property for a purchase price equal to the Minimum Purchase Price. If Lessee fails to make the election to terminate this Lease as to the affected Leased Property or if it is required to restore the affected Leased Property but thereafter fails to commence or complete the restoration within the time periods specified in this Section 15.5, then Lessee shall be deemed to have elected to purchase such affected Leased Property for a purchase price equal to the Minimum Purchase Price. Les see shall complete the purchase within (i) one hundred eighty (180) days of the Partial Taking if Lessee elects not to restore or (ii) sixty (60) days after the end of the Reconstruction Period in the event Lessee elects, but fails, to restore the affected Leased Property. In any such purchase, Lessee shall receive a credit for the portion of any Award retained by Lessor.51
15.7 Condemnation Awards Paid to Facility Mortgagee. Notwithstanding anything herein to the contrary, in the event that any Facility Mortgagee is entitled to any Condemnation Award, or any portion thereof, under the terms of any Facility Mortgage, such award shall be applied, held and/or disbursed in accordance with the terms of the Facility Mortgage. In the event that the Facility Mortgagee elects to apply the Condemnation Award to the indebtedness secured by the Facility Mortgage in the case of a Taking as to which the restoration provisions of Section 15.5 apply, this Master Lease shall terminate as of the date of the Taking as to the affected Leased Property, unless within fifteen (15) days of the notice from the Facility Mortgagee Lessor agrees to make available to Lessee for restoration of such Leased Property funds equal to the amount applied by the Fac ility Mortgagee. Unless the Taking is such as to entitle Lessor or Lessee to terminate this Master Lease as to the affected Leased Property and Lessor or Lessee, as the case may be, shall elect to terminate this Master Lease as to the affected Leased Property in the time and in the manner provided, Lessor shall disburse such funds to Lessee as provided in Section 14.9 and Lessee shall restore such Leased Property (as nearly as possible under the circumstances) to a complete architectural unit of the same general character and condition as such Leased Property existing immediately prior to such Taking.
15.8. Termination of Master Lease; Abatement of Rent. In the event Lessee purchases the affected Leased Property pursuant to this Article XV as a result of the Taking of all or any portion of the Leased Property, then (i) this Master Lease shall terminate as to such Leased Property upon payment of the purchase price set forth herein, (ii) the Base Rent due hereunder from and after the effective date of such termination shall be reduced by an amount determined by multiplying a fraction, the numerator of which shall be the Minimum Purchase Price for the affected Leased Property and the denominator of which shall be the Minimum Purchase Price for all of the Leased Properties then subject to the terms of this Master Lease by the Base Rent payable under this Master Lease immediately prior to the effective date of the termination of this Master Lease as to the affected Leased Property and (iii) provided that Lessee is not then in default under this Master Lease and then only to the extent not previous ly applied by Lessor, Lessor shall remit to Lessee the entire Award pertaining to such Leased Property being held by Lessor. Unless this Master Lease shall terminate pursuant to this Article XV as to the affected Leased Property, this Master Lease shall remain in full force and effect and Lessee's obligation to make rental payments and to pay all other charges required thereunder shall remain unabated during any period required for repair and restoration required as a result of such Taking.
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ARTICLE XVI.
16.1 Events of Default. If any one or more of the following events (individually, an "Event of Default") occurs, then Lessee will be in default under this Master Lease and Lessor shall have the rights and remedies hereinafter provided:
16.1.1 If any Lessee fails to make payment of Rent under this Master Lease when the same becomes due and payable and such failure is not cured within a period of two (2) Business Days after Notice thereof from Lessor, provided that Lessee shall be entitled to such Notice and may avail itself of such cure period no more than two (2) times in any Lease Year; or16.1.2 If any Lessee or Guarantor:
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16.1.10 If any Lessee transfers, by means not expressly provided for in this Master Lease, the operational control or management of the Facility leased by such Lessee without the prior written consent of Lessor; or
16.1.11 If any obligation of any Lessee to repay borrowed money in excess of One Million Dollars ($1,000,000) is accelerated by the creditor thereof after default or any other remedy available to such creditor or obligee is exercised because of such default; or54
If any Event of Default occurs, Lessor may terminate this Master Lease by giving Lessee not less than ten (10) days' Notice, whereupon as provided herein, the Term of this Master Lease shall terminate and all rights of Lessee hereunder shall cease. The Notice provided for herein shall be in lieu of and not in addition to any notice required by the laws of the State as a condition to bringing an action for possession of the Facilities or to recover damages under this Master Lease. In addition thereto, Lessor shall have all rights at law and in equity available as a result of Lessee's breach. 16.2 Certain Remedies. If an Event of Default has occurred, and whether or not this Master Lease has been terminated pursuant to Section 16.1, Lessee shall, to the extent permitted by law, if required by Lessor so to do, immediately surrender to Lessor all of the Leased Properties pursuant to the provisions of Section 9.1.7 and quit the same, and Lessor may enter upon and repossess all of the Leased Properties by reasonable force, summary proceedings, ejectment or otherwise, and may remove Lessee and all other persons and any and all Personal Property from the Leased Properties subject to rights of any residents or patients and to any requirement of law. Lessor shall not have the right to exercise its remedies as to less than all of the Leased Properties since such Leased Properties constitute a single integrated economic unit as stated in Section 1.2.
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(d) the Deferred Base Rent which is due and owing at the time of the award, and
(e) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under the terminated Lease or which in the ordinary course of things would be likely to result therefrom.
In making the above determinations, the "worth at the time of award" shall be determined using the lowest rate of capitalization (highest present worth) applicable at the time of the determination and allowed by applicable laws of the State. If the laws of the State do not provide for a rate of capitalization, then the worth at the time of award shall be computed by discounting such amount at the Federal Reserve Discount rate for the State, applicable at the time of the award, plus one percent (1%). Lessor's net income from its operation of the Leased Property, if any, shall be included in the determination of amounts of rental loss that Lessee proves could reasonably be or were avoided.
OR
(2) 9; & #9; ; 9; & #9; ; 9; & #9; ; 9; & #9; ; without termination of Lessee's right to possession of the Leased Property, each installment of the Rent and other sums payable by Lessee to Lessor as the same becomes due and payable, which Rent and other sums shall bear interest at the maximum annual rate permitted by the law of the State from the date when due until paid, and Lessor may enforce, by action or otherwise, any other term or covenant of this Master Lease.
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16.5 Application of Funds. Any payments received by Lessor during the existence or continuance of any Event of Default (and any payment made to Lessor rather than Lessee due to the existence of an Event of Default, shall be applied to Lessee's obligations in the order which Lessor may determine or as may be prescribed by the laws of the State.
16.6 Availability of Remedies. Lessor may exercise its remedies hereunder to the maximum extent permitted by the laws of the State. It shall not be a defense in any proceeding brought in connection with this Master Lease that with respect to other leases or contracts to which Lessor (or Lessor's Affiliates) and Lessee (or Lessee's Affiliates) are parties, Lessor or its Affiliates have sought different remedies in different states or in the State.ARTICLE XVII.
17.1 Rights to Cure Default.17.1.1 Lessor's Rights. If Lessee fails to make any payment or to perform any act required to be made or performed under this Master Lease, and fails to cure the same within the relevant time periods provided in Section 16.1, without further Notice to or demand upon Lessee, and without waiving or releasing any obligation of Lessee or waiving or releasing any default, Lessor may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon all or any part of any Leased Property for such purpose and take all such action thereon as, in Lessor's reasonable opinion, may be necessary or appropriate therefor, provided, however, that if Notice is required under Section 16 but Lessor reasonably determines that the giving of the required Notice before making such payment or taking such action would risk material loss to the Facilit ies, then Lessor will give such Notice as is practical under the circumstances. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on written demand. The obligations of Lessee and rights of Lessor contained in this Article shall survive the expiration or earlier termination of the Lease.
17.1.2 Lessee's Rights If Lessor fails to make any payment or to perform any act expressly required under this Master Lease, and fails to cure the same within the relevant time periods provided in Section 33.1 upon Notice to Lessor but without waiving or releasing any obligation of Lessor, Lessee may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessor, and may, take all such action thereon as may be reasonably necessary or appropriate therefor. All sums so paid by Lessee and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) so incurred, shall be paid by Lessor to Lessee following written demand. The obligations of Lessor and the rights of Lessee contained in this Article shall survive the expiration or earlier termination of this Master Lease.57
ARTICLE XVIII.
18.1 Holding Over. Except as provided in Sections 18.2 and 18.3, if Lessee shall for any reason remain in possession of any Leased Property after the expiration or earlier expiration of the Term, such possession shall be as a month-to-month tenant during which time Lessee shall pay as rental each month, two (2) times the aggregate of (i) one-twelfth (1/12th) of the aggregate Base Rent payable with respect to the affected portion of the Leased Property during the last Lease Year of the preceding Term, (ii) all Additional Charges related to the affected portion of the Leased Property accruing during the month, and (iii) all other sums, if any, payable by Lessee pursuant to the provisions of this Master Lease with respect to the affected portion of the Leased Property. During such period of month-to-month tenancy, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of th is Master Lease, but shall have no rights thereunder other than the right, to the extent given by law to month-to-month tenancies, to continue its occupancy and use of such Leased Property until the month-to-month tenancy is terminated. Except as provided in Section 18.2, nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Master Lease. For purposes hereof, the Base Rent to be allocated to the affected Leased Property(ies) shall be determined by multiplying a fraction, the numerator of which shall be the Minimum Purchase Price of the affected Leased Property(ies) and the denominator of which shall be the Minimum Purchase Price of all of the Leased Properties subject to the terms of this Master Lease on the last day of the Term, by the Base Rent payable hereunder on the last day of the Term.Continuing Clean-Up. If on the last day of the Term of this Master Lease Lessee is obligated to complete a Clean-Up of any Leased Property which Clean-Up was commenced prior to the last day of the Term of this Master Lease, then at the option of Lessor either (i) Lessee shall remain in possession of such Leased Property subject to the terms of this Master Lease, for such period as may reasonably be required for Lessee to diligently complete the Clean-Up, which period , unless otherwise agreed by Lessor and Lessee, shall not exceed three hundred sixty-five (365) consecutive days, or (ii) Lessee shall vacate the Leased Premises on the last day of the Term of this Master Lease as elsewhere required herein and at such time pay to Lessor the amount reasonably required to complete the Clean-Up after the expiration of the Term, together with the reasonably estimated Fair Market Rental Value of such Leased Property to be lost by Lessor during the remaining period of Clean-Up assuming a diligent effort to complete such Clean-Up. If Lessor elects alternative "(i)" in the preceding senten ce, the Base Rent for such Leased Property shall be one hundred five percent (105%) of the Base Rent allocated to the affected portion of the Leased Property for the Lease Year during which the last day of the Term of such occurred, and Lessee shall not be deemed to be holding over pursuant to Section 18.1 hereof. For purposes hereof, the Base Rent to be allocated to the affected Leased Property(ies) shall be determined by multiplying a fraction, the numerator of which shall be the Minimum Purchase Price of the affected Leased Property(ies) and the denominator of which shall be the Minimum Purchase Price of all of the Leased Properties subject to the terms of this Master Lease on the last day of the Term, by the Base Rent payable hereunder on the last day of the Term.
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ARTICLE XIX.
19.1 Subordination. Upon written request of Lessor, any Facility Mortgagee, or the beneficiary of any deed of trust of Lessor, Lessee will subordinate its rights in writing (i) to the lien of any mortgage, deed of trust or the interest of any lease in which Lessor is the lessee and to all modifications, extensions, substitutions thereof (or, at Lessor's option, cause the lien of said mortgage, deed of trust or the interest of any lease in which Lessor is the lessee to be subordinated to the Lease), and (ii) to all advances made or hereafter to be made thereunder. In connection with any such request, Lessor shall provide Lessee with a Non-Disturbance Agreement reasonably acceptable to such mortgagee, beneficiary or lessor providing that if such mortgagee, beneficiary or lessor acquires such Leased Property by way of foreclosure or deed in lieu of foreclosure (or termination of any lease in which Lessor is the Lessee), that such mortgagee, benefic iary or lessor will not disturb Lessee's possession under its Lease and will recognize Lessee's rights thereunder provided that no Event of Default has occurred thereunder. Lessee agrees to consent to amend this Master Lease as reasonably required by a Facility Mortgagee; Lessee shall be deemed to have unreasonably withheld or delayed its consent to changes or amendments to this Master Lease requested by the holder of a mortgage or deed of trust or such similar financing instrument encumbering Lessor's fee interest in such Leased Property if such changes do not materially (i) alter the economic terms of this Master Lease, (ii) diminish the rights of Lessee, or (iii) increase the obligations of Lessee, provided that Lessee shall also have received the Non-Disturbance Agreement provided for in this Section.59
19.3 Estoppel Certificate. Lessee and Lessor each agree, upon not less than ten (10) days prior Notice from the other ("Requesting Party"), to execute, acknowledge and deliver to the other, a statement in writing in substantially the same form as Exhibit H attached hereto (with such changes thereto as may reasonably be requested by the person relying on such certificate) ("Estoppel Certificate"). It is intended that any Estoppel Certificate delivered pursuant hereto may be relied upon by the Requesting Party, any prospective tenant or purchaser of any Leased Property, any mortgagee or prospective mortgagee, or by any other party who may reasonably rely on such statement. Lessee's failure to deliver the Estoppel Certificate within such time shall constitute an Event of Default, and Lessor's failure to deliver the Estoppel Certificate within such time shall be subject to the provisions of Section 33.1, below. If the Estoppel Certificate is not delivered within the ten (10) day perio d, then, in addition, the Requesting Party is authorized to execute and deliver a certificate to the effect that (i) this Master Lease is in full force and effect without modification, and (ii) the other party is not in breach or default of any of its obligations under this Master Lease.
ARTICLE XX.
20.1 Risk of Loss. Except as otherwise specifically provided for herein, during the Term of this Master Lease, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Properties in consequence of the damage thereto or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, attachments, levies or executions (other than those caused by Lessor and those claiming from, through or under Lessor) is assumed by Lessee, and, in the absence of gross negligence, willful misconduct or material breach of this Master Lease by Lessor pursuant to Section 33.1, Lessor shall in no event be answerable or accountable therefor nor shall any of the events mentioned in this Section entitle Lessee to (i) terminate this Master Lease or (ii) to any abatement of Rent except as specifically provided in this Master Lease.
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ARTICLE XXI.
21.1 Lessee Indemnification. Notwithstanding the existence of any insurance or self-insurance provided for in Article XIII, and without regard to the policy limits of any such insurance or self-insurance, Lessee will protect, indemnify, save harmless and defend Lessor, its principals, officers, directors and agents and employees from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Lessor by reason of: (i) any accident, injury to or death of persons or loss of or damage to property occurring on or after the Commencement Date on or about any Leased Property or adjoining sidewalks which are under Lessee's control, including without limitation any claims of malpractice, (ii) any use, misuse, non-use, condition, maintenance or repair by Lessee of any Leased Property, (iii) the failure to pay any Impositions which are the obligations of Lessee to pay pursuant to the applicable provisions of this Master Lease, (iv) any failure on the part of Lessee to perform or comply with any of the terms of this Master Lease and (v) the nonperformance of any contractual obligation, express or implied, assumed or undertaken by Lessee or any party in privity with Lessee with respect to any Leased Property or any business or other activity carried on with respect to any Leased Property during the Term or thereafter during any time in which Lessee or any such other party is in possession of any Leased Property or thereafter to the extent that any conduct by Lessee or any such person (or failure of such conduct thereby if the same should have been undertaken during such time of possession and leads to such damage or loss) causes such loss or claim. Any amounts which become payable by Lessee under this Section shall be paid within ten (10) days after liability therefo r on the part of Lessee is determined by litigation or otherwise, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. Nothing herein shall be construed as indemnifying Lessor against its own grossly negligent acts or omissions or willful misconduct.21.2 Lessor Indemnification. Lessor will indemnify Lessee, its principals, officers, directors and agents and employees from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Lessee by reason of (i) a breach of Lessor's representations or warranties set forth in Section 8.2 or (ii) Lessor's gross negligence or willful misconduct.
21.3 Survival. The liability of each indemnifying party under the provisions of this Article for a claim arising out of events occurring during the Term shall survive any termination of the Lease.ARTICLE XXII.
22.1 General Prohibition against Assignment. Lessee shall not voluntarily, involuntarily or by operation of law, assign, mortgage or otherwise encumber all or any part of Lessee's interest in this Master Lease or in any Leased Property or sublet the whole or any part of any Leased Property or enter any other arrangement (other than a management agreement which shall be governed by Section 8.6 above) under which any Facility is operated by or licensed to be operated by an entity other than Lessee (any and all of which are herein referred to as a "Transfer"), except as specifically permitted hereunder or consented to in advance by Lessor in writing, which consent shall not be unreasonably withheld or delayed (provided that the proposed transferee does not fall within the prohibited conditions set forth in Exhibit G). Consent to any subletting or assignment sha ll not be deemed to be consent to any further subletting or assignment. In the event of any such Transfer, Lessor may collect rent and other charges from the assignee, subtenant or other occupant (any and all of which are herein referred to as a "Transferee") and apply the amounts collected to the rent and other charges herein reserved, but no Transfer or collection of rent and other charges shall be deemed to be a waiver of Lessor's rights to enforce Lessee's covenants under this Master Lease or the acceptance of the Transferee as lessee, or a release of Lessee from the performance of any covenants on the part of Lessee to be performed. Notwithstanding any Transfer, Lessee and any Guarantor shall remain fully liable for the performance of all terms, covenants and provisions of this Master Lease. Any violation of this Master Lease by any Transferee shall be deemed to be a violation of this Master Lease by Lessee. Lesse e's incidental space sharing arrangements (by lease agreement or otherwise) with third parties for beauty shop and similar services shall not be deemed to constitute a Transfer. Notwithstanding any provision of this Master Lease to the contrary, each Lessee shall have the right, upon notice to Lessor, to transfer its interest under this Master Lease (whether by assignment, merger or otherwise) to any entity that is an Affiliate of Sun so long as (i) such Affiliate is duly licensed under applicable State law to operate the affected portion of the Leased Properties and, if applicable, certified to participate in Medicare or Medicaid in connection with its operations thereat and (ii) such Affiliate agrees in writing to be bound by the terms of this Master Lease and Sun acknowledges in writing that such transfer shall not impair or in any way exonerate Sun's obligations as Guarantor pursuant to the terms of the Guaranty.61
22.3 Subordination and Attornment. Lessee shall insert in any sublease permitted by Lessor provisions to the effect that (i) such sublease is subject and subordinate to all of the terms and provisions of this Master Lease and to the rights of Lessor thereunder, (ii) if this Master Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor's option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder, as a result of the termination of this Master Lease, and (iii) if the sublessee receives a written Notice from Lessor or Lessor's assignee, if any, stating that an Event of Default has occurred under this Master Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee b y Lessor or Lessor's assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Master Lease.
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ARTICLE XXIII.
(b) Within fifty (50) days after the end of each of Lessee's Fiscal Year quarters or concurrently with the filing by Sun of its quarterly report on Form 10Q with the SEC, whichever is later (i) a copy of any and all Financial for such Fiscal Year quarter for itself and for the Leased Property as it may have provided to a Guarantor (and, if any such Financials are thereafter provided to a Guarantor for such fiscal quarter, a copy thereof within fifteen (15) days after the same are so provided, together with an Officer's Certificate of each Lessee, stating that (i) Lessee is not in default of any covenant set forth in Article VIII of this Master Lease, or if Lessee is in default, specifying all such defaults, the nature thereof and the steps being taken to remedy the same.
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(d) Within thirty (30) days after the end of each month, a financial report for each of the Facilities for such month, including detailed statements of income and expense and detailed operational statistics regarding occupancy rates, patient mix and patient rates by type for each Facility;
(e) Within thirty (30) days of receipt thereof, copies of surveys performed by the appropriate governmental agencies for licensing or certification purposes, and any plan of correction as approved by the State;
(f) Prompt Notice to Lessor of any action, proposal or investigation by any agency or entity, or complaint to such agency or entity, (any of which is called a "Proceeding"), known to Lessee, the result of which Proceeding would reasonably be expected to be to (i) revoke or suspend or terminate or modify in a way adverse to Lessee, or fail to renew or fully continue in effect, any license or certificate or operating authority pursuant to which Lessee carries on any part of the Primary Intended Use of all or any portion of the Leased Properties, or (ii) suspend, terminate, adversely modify, or fail to renew or fully continue in effect any cost reimbursement or cost sharing program by any state or federal governmental agency, including but not limited to Medicaid or Medicare or any successor or substitute therefor, if the effect thereof is or reasonably could be anticipated to be materially adverse to Lessee or the Leased Properties, or (iii) seek return of or reimbursement for any funds previously advanc ed or paid pursuant to any such program, if the effect thereof is or reasonably could be anticipated to be materially adverse to Lessee or the Leased Properties, or (iv) impose any bed hold, limitation on patient admission or similar restriction on the Leased Properties, or (iv) prosecute any party with respect to the operation of any activity on the Leased Properties or enjoin any party or seek any civil penalty in excess of Twenty Thousand Dollars ($20,000.00) in respect thereof;
(g) As soon as it is prepared in a Lease Year, a capital and operating budget for each Facility for that and the following Lease Year; and
(h) Within fifteen (15) days of Lessee's receipt thereof, copies of Medicaid rate letters.64
23.2. Public Offering Information. Lessee specifically agrees that Lessor may include financial information and such information concerning the operation of the Facilities which does not violate the confidentiality of the facility-patient relationship and the physician-patient privilege under applicable laws, in offering memoranda or prospectuses, or similar publications in connection with syndications, private placements or public offerings of Lessor's securities or interests, and any other reporting requirements under applicable Federal and State Laws, including those of any successor to Lessor. Unless otherwise agreed by Lessee or Guarantor, Lessor shall not revise or change the wording of information previously publicly disclosed by Lessee or Guarantor and furnished to Lessor pursuant to Section 23.1 or this Section 23.2. Lessee agrees to provide such other reasonable information necessary with respect to Lessee and its Leased Property to facilitate a public offering or to satisfy SEC or regulatory disclosure requirements. Lessor shall provide to Lessee a copy of any information prepared by Lessor to be published, and Lessee shall have a reasonable period of time (not to exceed three (3) days) after receipt of such information to notify Lessor of any corrections.
23.3 Lessor's Obligations. Lessor acknowledges and agrees that certain of the information contained in the Financial Statements and/or in the Financials may be non-public financial or operational information with respect to the Sun, the Lessees and/or the Leased Properties. Lessor further agrees (i) to maintain the confidentiality of such non-public information; provided, however, Lessor shall have the right to share such information with its accountants, attorneys and other consultants provided such disclosure is not prohibited by applicable state or federal securities laws and (ii) that it shall not engage in any transactions with respect to the stock or other equity or debt securities of Sun based on any such non-public information.
24.1 Lessor's Right to Inspect. Upon reasonable advance notice to Lessee, Lessee shall permit Lessor and its authorized representatives to inspect its Leased Property during usual business hours. Lessor shall take care to minimize any disturbance of or inconvenience to any residents of any Leased Property, except in the case of emergency, and to conduct such inspections in compliance with applicable laws governing the confidentiality of patient information, including the Health Insurance Portability and Accountability Act.
ARTICLE XXV.
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30.1
Quiet Enjoyment. So long as Lessee pays all Rent as it becomes due and complies with all of the terms of this Master Lease and performs its obligations thereunder, Lessee shall peaceably and quietly have, hold and enjoy the Leased Properties hereby leased for the Term, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances of record as of the Commencement Date or thereafter provided for in this Master Lease or consented to by Lessee. Except as otherwise provided in this Master Lease, no failure by Lessor to comply with the foregoing covenant shall give Lessee any right to cancel or terminate this Master Lease or abate, reduce or make a deduction from or offset against the Rent or any other sum payable under such Lease, or to fail to perform any other obligation of Lessee. Lessee shall , however, have the right, by separate and independent action, to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Article.
To Lessee: c/o Sun Healthcare Group, Inc.
101 Sun Avenue, NE
Albuquerque, NM 87109
Attention: Vice President of Real Estate
Fax Number: 505-468-4998
Attention: General Counsel
Fax Number: 505-468-4747
With a copy to: SunBridge Healthcare Corporation
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And with a copy to: The Nathanson Group PLLC
(that shall not 1520 Fourth Avenue
constitute notice) Sixth Floor
Seattle, WA 98101
Attn: Randi S. Nathanson
Fax Number: 206-623-1738
To Lessor: c/o Omega Healthcare Investors, Inc.
9690 Deereco Road, Suite 100\
Timonium, MD 21093
Attn.: Daniel J. Booth
Telephone No.: (410) 427-1700
Facsimile No.: (410) 427-8800
And with copy to Dykema Gossett, PLLC
(which shall not 39577 Woodward Ave., Suite 300
constitute notice): Bloomfield Hills, Michigan 48304
Attn: Kyle R. Hauberg
Telephone No.: (248) 203-0871
Facsimile No.: (248) 203-0763
32.1 Right of First Opportunity. Except as otherwise specifically provided herein, in the event Lessor determines that it wants to sell the Leased Properties at any time during the Initial Continuing Term or any Renewal Term, Lessor shall first in writing offer to enter into negotiations for such sale with the applicable Lessee or any Affiliate of such Lessee (a "Seller's Notice"). If the applicable Lessee or an Affiliate thereof ("Buyer") shall within ten (10) days from receipt of Seller's Notice give Seller Notice ( a Buyer's Notice") that it wishes to enter into good faith negotiations for the purchase of the Leased Properties (a "Notice of Interest") within the above-described ten (10) day period, Seller and Buyer shall enter into good faith negotiations for a period of thirty (30) days from Seller's receipt of the Notice of Interest (the Negotiation Period") for the sale and purchase of the Leased Properties. If during the Negotiation Period a written agreement with respect to the purchase and sale of the Leased Properties (a "Purchase Agreement") is executed by Seller and Buyer, Seller shall sell and Buyer shall purchase the Leased Properties on the terms and conditions set forth in the Purchase Agreement. If (i) a Notice of Interest is not given as set forth above, then, for a period of one (1) year after the expiration of the time within which a Notice of Interest was required to be given, or (ii) a Notice of Interest is given but Seller and Buyer do not execute a Purchase Agreement during the Negotiation Period, for a period of one (1) year from the expiration of the Negotiation Period, if Seller in its sole discretion continues to desire to sell all, but not less than all, of the Leased Properties, Seller shall be free to sell all but not less than all of the Leased Properties to any third party for a Cash Price that is not less than ninety eight percent (98%) of a Cash Price offered by written notice to Seller by Buyer during the Negotiation Period, free from any claim of any right to purchase the Leased Properties by Buyer, Sun or any Affiliate of Buyer or Sun but subject in each instance to the rights of the Lessee under this Master Lease, including under this Section 32 with respect to future sales of the Leased Properties. For purposes of the preceding sentence, a "Cash Price" shall be the amount to be received by Seller in cash or equivalent upon the closing of the sale net of prorations and expenses to be borne by Seller. If the Leased Properties are not sold within such one (1) year period, before entering into negotiations with any third party for the sale of the Leased Properties Seller shall first offer to enter into negotiations for the sale thereof to Buyer pursuant to the process described above. The foregoing right of first offer (i) is not assignable by Lessee except to an Affiliate of Lessee, (ii) shall simultaneously and automatically terminate upon termination of this Master Lease, (iii) shall not under any circumstances be extended, modified or in any way altered except by a writing executed by Lessor and Lessee and (iv) shall not apply in the event of either (A) a sale by Omega of all or substantially all of the assets of it and its subsidiaries or (B) a sale/leaseback transaction by Omega with respect to the Leased Properties for financing purposes.
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32.2 Appraisers. If it becomes necessary to determine the Fair Market Rental of the Leased Property for any purpose of this Lease, Lessor and Lessee shall first attempt to agree on such Fair Market Rental. If Lessor and Lessee are not able to so agree within a reasonable period of time not to exceed forty-five (45) days, then Lessor and Lessee shall attempt to agree upon a single appraiser to make such determination. If Lessor and Lessee are unable to agree upon a single arbitrator within thirty (30) days thereafter, then the party required or permitted to give Notice of such required determination shall include in the Notice the name of a person selected to act as appraiser on its behalf. Within ten (10) days after such Notice, Lessor (or Lessee, as the case may be) shall by Notice to Lessee (or Lessor, as the case may be) appoint a second person as appraiser on its behalf. The appraisers thus appointed, each of whom must be a member of the American Institute of Real Estate Appraisers (o r any successor organization thereto) and experienced in appraising nursing home properties, shall, within forty-five (45) days after the date of the Notice appointing the first appraiser, proceed to appraise the Leased Property to determine the Fair Market Rental thereof as of the relevant date (giving effect to the impact, if any, of inflation from the date of their decision to the relevant date); provided, however, that if only one appraiser has been so appointed, or if two appraisers have been so appointed but only one such appraiser has made such determination within fifty (50) days after the making of Lessee's or Lessor's request, then the determination of such appraiser shall be final and binding upon the parties. If two appraisers have been appointed and have made their determinations within the respective requisite periods set forth above and if the difference between the amounts so determined does not exceed ten percent (10%) of the lesser of such amounts, then the Fair Market Rental shall be an a mount equal to fifty percent (50%) of the sum of the amounts so determined. If the difference between the amounts so determined exceeds ten percent (10%) of the lesser of such amounts, then such two appraisers shall have twenty (20) days to appoint a third appraiser. If no such appraiser has been appointed within such twenty (20) days or within ninety (90) days of the original request for a determination of Fair Market Rental, whichever is earlier, either Lessor or Lessee may apply to any court having jurisdiction to have such appointment made by such court. Any appraiser appointed by the original appraisers or by such court shall be instructed to determine the Fair Market Rental within forty-five (45) days after appointment of such appraiser. The determination of the appraiser which differs most in terms of dollar amount from the determinations of the other two appraisers shall be excluded, and the average of the sum of the remaining two determinations shall be final and binding upon Lessor and Lessee a s the Fair Market Rental of the Leased Property, as the case may be.
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This provision for determining by appraisal shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Lessor and Lessee shall each pay the fees and expenses of the appraiser appointed by it and each shall pay one-half (2 ) of the fees and expenses of the third appraiser and one-half (2 ) of all other costs and expenses incurred in connection with each appraisal.
34.1 ; 9; & #9; ; 9; & #9; Facility Trade Names. If this Master Lease is terminated by reason of an Event of Default or Lessor exercises its option to purchase Lessee's Personal Property pursuant to Section 35.1, Lessor shall be permitted to use the name(s) under which any Facility has done business during the Term (the "Facility Trade Names"); provided, however, that nothing herein shall be construed as granting Lessor any right to use the name "SunBridge" or "Sun" or "Mediplex"or any variation thereof. Lessee shall not, after any termination of this Master Lease, use any Facility Trade Name in the same market in which any of the Facilities is located in connection with any business that competes with any Facility.
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34.2 Transfer of Operational Control of the Facilities. Upon the expiration or earlier termination of the Term other than as a result of the purchased of the Leased Properties by Lessee pursuant to Section 32,
(a) Lessee shall enter into one or more OTAs in the form of Exhibit E hereto with respect to the Leased Properties and shall transfer operational control of the Facilities to Lessor or Lessor's nominee pursuant to the terms of such OTAs,
(b) To the extent permitted by law, Lessee shall provide all necessary information requested by Lessor or its nominee for the preparation and filing of any and all necessary applications or notifications of any federal or state governmental authority having jurisdiction over a change in the operational control of the Leased Properties, and Lessee shall use its commercially reasonable efforts to cause the operating healthcare licenses held by Lessee to be transferred to Lessor or to Lessor's nominee or shall cooperate in the efforts of Lessor or Lessor's nominee to secure operating healthcare licenses with respect to the Leased Properties in its own name,(c) Lessee shall engage only in transactions or other activities with respect to the Leased Properties which are in the ordinary course of business and shall perform all maintenance and repairs reasonably necessary to keep the Leased Properties in satisfactory operating condition and repair, and shall maintain the supplies and foodstuffs at levels which are consistent and in compliance with all health care regulations, and shall not sell or remove any Personal Property except in the ordinary course of business; provided, however, that (i) Lessee shall have no obligation to make any Material Capital Improvements to any of the Leased Properties unless Lessor agrees to pay for the cost thereof and (ii) Lessee shall have no liability for any damage which may be suffered by it or Lessor as a result of the failure of Lessee to make any such Material Capital Improvements; provided, further, that nothing herein shall affect any claims which Lessor may have against Lessee in the event this Master Lease was t erminated as a result of an Event of Default,
(d) To more fully preserve and protect Lessor's rights under this Section 34.2, Lessee does hereby make, constitute and appoint Lessor its true and lawful attorney-in-fact, for it and in its name, place and stead to execute and deliver all such instruments and documents, and to do all such other acts and things, as Lessor may deem to be necessary or desirable to protect and preserve the rights granted under this Section 34.2, including, without limitation, the preparation, execution and filing with the Board of Health of the State or other appropriate agency of the State or department any and all required "Letters of Responsibility" or similar documents. Lessee further hereby grants to Lessor the full power and authority to appoint one or more substitutes to perform any of the acts that Lessor is authorized to perform under this Section 34.2, with a right to revoke such appointment of substitution at pleasure. The power of attorney granted pursuant to this Section is coupled with an interest and ther efore is irrevocable. Any person dealing with Lessor may rely upon the representation of Lessor relating to any authority granted by this power of attorney, including the intended scope of the authority, and may accept the written certificate of Lessor that this power of attorney is in full force and effect. Photographic or other facsimile reproductions of this Master Lease may be made and delivered by Lessor, and may be relied upon by any person to the same extent as though the copy were an original. Anyone who acts in reliance upon any representation or certificate of Lessor, or upon a reproduction of the Lease, shall not be liable for permitting Lessor to perform any act pursuant to this power of attorney. Notwithstanding the foregoing, Lessor shall not exercise this power of attorney until, and only during the continuance of, an uncured Event of Default under this Master Lease. Lessor shall provide to Lessee copies of any writing as to which Lessor has exercised the power of attorney.71
34.3 Intangibles and Personal Property. Notwithstanding any other provision hereof but subject to Section 6.4 relating to the security interest in favor of Lessor, Lessor's Personal Property shall not include goodwill nor shall it include any other intangible personal property that is severable from Lessor's "interests in real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto. All of Lessor's Personal Property is leased to Lessee pursuant to the terms hereof.
35.1 ; 9; & #9; ; 9; & #9; Arbitration. Except with respect to (i) the payment of Rent, and (ii) any proceedings for possession of any Leased Property, or (iii) valuation questions that are to be resolved by appraisal as set forth in Section 33, hereof, in case any controversy arises between the parties hereto as to any of the requirements of this Master Lease or the performance thereof, and the parties are unable to settle the controversy by agreement or as otherwise provided herein, the controversy shall be resolved by arbitration. The arbitration shall be conducted by three arbitrators selected in accordance with the procedures of the American Arbitration Association and in accordance with its rules and procedures. The decision of the arbitrators shall be final, binding and enforceable and judgment may be entered thereon in any court of competent jurisdiction. The decision shall set forth in writing the basis for the decision. In rendering the decision and award, the arbitrator s shall not add to, subtract from, or otherwise modify the provisions of this Master Lease. The expense of the arbitration shall be divided between Lessor and Lessee unless otherwise specified in the award. Each party in interest shall pay the fees and expenses of its own counsel. Lessor and Lessee shall attempt to agree on a location for the arbitration, and if they are unable to agree within a reasonable period of time, then the arbitration shall be conducted in Baltimore, Maryland. In any arbitration, the parties shall be entitled to conduct discovery in the same manner as permitted under Federal Rules of Civil Procedure 26 through 37. No provision in this Article shall limit the right of any party to this Master Lease to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration, and the exercise of any such remedy does not waive the right of either party to arbitration.
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36.1 ; 9; & #9; ; 9; & #9; Conversion of Deferred Base Rent.
36.1.1 Right to Convert. Subject to Sections 36.1.2 and 36.2, Lessor shall have the right at any time during which the Deferred Base Rent remains owing on written notice to Sun (the "Conversion Notice") to convert, without the payment of any additional consideration by Lessor, all, but not less than all (subject to Section 36.2.2), of the outstanding Deferred Base Rent into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Carry-Over Base Rent by the Conversion Price, determined as provided in this Section 36.1, in effect on the date of the Conversion Notice (the "Final Conversion Price"), provided, however, that in no event shall the number of shares of Common Stock issuable upon conversion of the Deferred Base Rent exceed 19.99% of the shares of Common Stock outstanding on the Delivery Date. Assuming no change in the Conversion Price in effect on the Delivery Date, Lessor would be entitled to 800,000 shares of fully paid and non-assessable shares of Common Stock. The shares of Common Stock issued to Lessor upon the conversion of the Deferred Base Rent will hereinafter be referred to as the "Conversion Shares." Upon receipt of the Conversion Shares, the full amount of the Deferred Base Rent and any and all accrued but unpaid interest thereon converted or for which an Excess Shares Payment has been made (in accordance with Section 36.2.2) shall have been satisfied and discharged in full and neither Sun nor any Lessee shall have any further obligation with respect to the payment thereof. Lessor shall continue to have the right to deliver a Conversion Notice and exercise its rights under this Article XXXVI after Sun has provided a 30-day notice of its intent to pay the Deferred Base Rent in full pursuant to Section 3.2.5 until the third Business Day before the expiration of such 30-day period.
36.1.2 Cash Election. Upon receipt of a Conversion Notice, Sun may at its option, upon written notice provided to Lessor within five Business Days after receipt of the Conversion Notice (a "Sun Election Notice"), in lieu of issuing shares of Common Stock to Lessor, elect to pay Lessor, in immediately available funds, an amount equal to the product of the Average Market Price as of the last Business Day prior to the date of Lessor's receipt of the Sun Election Notice multiplied by the sum of the number of Conversion Shares less the Excess Shares (as hereinafter defined), it being understood and agreed that the amount due to Lessor with respect to the Excess Shares shall be determined in accordance with Section 36.2.2. Payment to Lessor in lieu of the delivery of the Conversion Shares and the Excess Shares pursuant to this Section 36.1.2 shall be made within 30 days of the receipt by Sun of the Conversion Notice.
36.1.3 Mandatory Conversion. Notwithstanding Section 36.1.1 above, at the option of Sun, if at any date after the Delivery Date, the Average Market Price, when multiplied by the number of shares Lessor would be entitled to receive at the then-current Conversion Price upon conversion of the Deferred Base Rent would equal or exceed 140% of the Deferred Base Rent, Sun may at any time upon ten (10) Business Days notice (the "Mandatory Conversion Notice") elect to convert the Deferred Base Rent into shares of Common Stock. If Sun delivers a Mandatory Conversion Notice to Lessor, upon the date that is ten (10) Business Days after the delivery of the Mandatory Conversion Notice (the "Mandatory Conversion Date"), the Deferred Base Rent shall be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Carry-Over Base Rent by the Conversion Price as of the Mandatory Conversion Date.
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36.1.4 Procedure for Conversion
(a) Omega, as the sole duly authorized representative of Lessor with respect to the exercise of the right to convert provided for in this Section 36, shall advise Sun as to the name in which the certificate or certificates for shares of Common Stock are to be issued, provided, that (I) the proposed certificate holder shall be required to confirm to Sun in writing that (i) such person or entity is at such time an accredited investor within the meaning of Regulation D promulgated under the Securities Act and (ii) such person or entity is acquiring the Common Stock for its own account for investment only and not with a view to, or for resale in connection with, the public sale or distribution thereof in the United States, except pursuant to sales registered under the Securities Act or an exemption therefrom (the "Lessor Date Down Certificate") and (II) Lessor's obligation to convert after delivery of the Conversion Notice shall be subject to the delivery by Sun to Lessor of a certificate dated as of the Conversion Closing Date and confirming as of the Conversion Closing Date the truth of the representations and warranties set forth in Section 8.1(a), (d), (e), (f), and (h), and that Sun shall have complied fully with its covenants and agreements contained in Sections 36.1.6, 36.1.8, 36.1.10, 36.2.2, 36.2.3, 36.3, and 36.4, to the extent that performance is then due thereunder (the "Sun Date Down Certificate" and together with the Lessor Date Down Certificate, the "Date Down Certificates"). Subject to the delivery of the Date Down Certificates, the closing of the conversion of the Deferred Base Rent into the Conversion Shares shall take place on the tenth (10th) Business Day following the date the Conversion Notice or the Mandatory Conversion Notice is delivered pursuant to Sections 36.1.1 or 36.1.3, as applicable (the "Conversion Closing Date").If the Sun Date Down Certificate is not provided by Sun, or waived by Lessor, on or prior to the Conversion Closing Date, then Lessor may at its sole option and at any time on or prior to the Conversion Closing Date, withdraw the Conversion Notice or terminate the Mandatory Conversion Notice by written notice to Sun. After such withdrawal, Lessor shall have no further obligations with respect to such Conversion Notice or such Mandatory Conversion Notice and either party may submit a subsequent Conversion Notice or Mandatory Conversion Notice at any time, in accordance with the terms of this Master Lease.
(b) Such conversion shall be deemed to have been made on the date the Conversion Notice is delivered or the date the Mandatory Conversion Notice is delivered pursuant to this Section 36.1, as applicable, and Lessor shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such time. The foregoing notwithstanding, such conversion shall not be deemed effective if and as of the date Lessor delivers written notice of withdrawal to Sun as set forth in Section 36.1.4(a) above.74
36.1.5 Fractional Shares. In lieu of any fractional shares to which Lessor would otherwise be entitled, Sun shall pay to Lessor cash in an amount equal to the product of such fraction multiplied by the Final Conversion Price.
36.1.6 Conversion Price Adjustments. The Conversion Price for the conversion of the Deferred Base Rent under Section 36.1 shall be subject to adjustment from time to time as follows:
(a) If Sun issues any shares of Common Stock other than Excluded Shares (excluding dividends, subdivisions, split ups, combinations and the like) for a consideration per share less than the lesser of the closing bid price on the date Sun enters into a binding obligation to issue such Common Stock or the average of the closing bid price for the five (5) Business Days prior to the date Sun enters into such binding obligation (such lower price being referred to herein as the "Closing Price" and the occurrence of any such issuance being referred to herein as a "Dilution Event"), the Conversion Price shall (except as provided in this Section 36.1.6) be adjusted to a price determined by multiplying the then current Conversion Price by a fraction (A) the numerator of which shall be (x) the number of shares of Common Stock outstanding immediately prior to such issuance (including all shares of Common Stock issuable upon the exercise or conversion of any then o utstanding securities of Sun, including convertible securities, warrants, options and this Master Lease, whether or not then convertible or exercisable), plus (y) the number of shares of Common Stock that the aggregate consideration received by Sun for the total number of additional shares of Common Stock so issued would purchase at the applicable Closing Price for the shares of Common Stock that are issued, and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including all shares of Common Stock issuable upon the exercise or conversion of any then outstanding securities of Sun, including convertible securities, warrants, options and this Master Lease, whether or not then convertible or exercisable) plus the number of such additional shares of Common Stock so issued.
(b) For the purposes of any adjustment of the Conversion Price pursuant to clause (a) immediately above, the following provisions shall apply:
(1) In the case of the issuance of shares of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid for such shares without deducting any reasonable and customary discounts or commissions paid or incurred by Sun in connection with the issuance and sale of such shares.
(2) In the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value of such consideration as determined by the Board in good faith, irrespective of any accounting treatment; provided, however, that if, at the time of such determination, any of Sun's Common Stock is traded in the over-the-counter market or on a national or regional securities exchange, the fair market value as determined by the Board shall not exceed the Closing Price of the Common Stock being issued.
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(3) In the case of the issuance of (i) options to purchase or rights to subscribe for shares of Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock, or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities:
(A) the aggregate maximum number of shares of Common Stock deliverable upon exercise of the options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time the options or rights are issued and for a consideration equal to the consideration (determined in the manner provided in clauses (b)(1) and (b)(2) above), if any, received by Sun upon the issuance of the options or rights plus the minimum purchase price provided in the options or rights for the Common Stock covered thereby;
(B) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any convertible or exchangeable securities, or upon the exercise of options to purchase or rights to subscribe for convertible or exchangeable securities and subsequent conversion or exchange thereof, shall be deemed to have been issued at the time the securities were issued or the options or rights were issued and for a consideration equal to the consideration received by Sun for any securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by Sun upon the conversion or exchange of securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in clauses (b)(1) and (b)(2) above);
(C) on any change in the number of shares of Common Stock deliverable upon exercise of any options or rights or conversion of or exchange for convertible or exchangeable securities, or on any change in the minimum purchase price of the options, rights or securities, other than a change resulting from the anti-dilution provisions of the options, rights or securities, the Conversion Price shall be readjusted to the Conversion Price that would have resulted if the adjustment made upon (x) the issuance of options, rights or securities not exercised, converted or exchanged prior to the change, as the case may be, had been made upon the basis of that change, (y) the issuance of options or rights related to the securities not converted or exchanged prior to such change, as the case may be, had been made upon the basis of that change, or (z) the issuance of the options, rights or securities whose minimum purchase price has changed had been made upon the basis of the changed minimum purchase price.
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(D) on the expiration of any options, warrants or rights, the termination of any rights to convert or exchange or the expiration of any options or rights related to convertible or exchangeable securities, the Conversion Price shall be readjusted to the Conversion Price that would have resulted if the adjustment made upon the issuance of the options, rights, convertible or exchangeable securities or options or rights related to such convertible or exchangeable securities, as the case may be, had been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of the options or rights, upon the conversion or exchange of convertible or exchangeable securities or upon the exercise of the options or rights related to the convertible or exchangeable securities, as the case may be.
(4) Nothing contained in Section 36.1.6(b)(3)(C) and (D) shall have the effect of increasing or decreasing the number of shares of Common Stock issued upon any conversion of the Deferred Base Rent prior to the effective date of any event described therein.
(5) Notwithstanding any provision herein to the contrary, except with respect to an adjustment made pursuant to Section 36.1.6(b)(3)(C) and (D), no adjustment to the Conversion Price pursuant to Section 36.1.6 above shall have the effect of increasing the then current Conversion Price.
(c) If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date the dividend is distributed or the change in the number of outstanding shares of Common Stock is effective, the Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of the Deferred Base Rent shall be increased in proportion to the increase of outstanding shares.
(d) If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of outstanding shares of Common Stock, then, on the effective date of that combination, the Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of the Deferred Base Rent shall be decreased in proportion to the decrease in outstanding shares.
(e) If at any time after the date hereof, there is any capital reorganization, any reclassification of Sun (other than a change in par value or as a result of a dividend or subdivision, split-up or combination of shares), any consolidation or merger of Sun with or into another person (other than any transaction in which Sun is the continuing entity and which does not result in any change in the Common Stock), any sale or other disposition of all or substantially all of the properties and assets of Sun to another person, or any similar transaction which is effected in such a way that holders of Common Stock are entitled to receive Capital Stock or other property with respect to or in exchange for Common Stock, the Deferred Base Rent shall, after the reorganization, reclassification, consolidation, merger, sale, other disposition, or such similar transaction, be convertible into the kind and number of shares of Capital Stock or property of Sun, or of the entity resulting from such consolidation or surviv ing such merger or to which such properties and assets shall have been sold or otherwise transferred, to which Lessor would have been entitled if immediately prior to the reorganization, reclassification, merger, sale or other disposition or such similar transaction, it had converted the Deferred Base Rent into Common Stock. The provisions of this clause (e) shall similarly apply to successive reorganizations, reclassifications, mergers, sales or other dispositions or such similar transactions.
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(f) All calculations under this Section 36.1 shall be made to the nearest cent or to the nearest one hundredth (1/100) of a share, as the case may be.
36.1.7 Minimal Adjustments. No adjustment in the Conversion Price need be made if that adjustment would result in a change in the Conversion Price of less than $0.01. Any adjustment of less than $0.01 that is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Conversion Price.
36.1.8 No Impairment. Sun will not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by Sun through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, but will at all times in good faith assist in carrying out all the provisions of this Article XXXVI and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of Lessor. Sun will not close its books against the transfer of Common Stock issued or issuable upon conversion of the Deferred Base Rent in any manner that interferes with the timely cconversion of the Deferred Base Rent.
36.1.9 Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 36.1, Sun at its expense shall promptly compute the adjustment or readjustment in accordance with the terms of this Section 36.1.9 and prepare and furnish to Lessor a certificate setting forth the adjustment or readjustment and showing in detail the facts upon which the adjustment or readjustment is based. Sun shall, upon written request at any time, furnish or cause to be furnished to Lessor a like certificate setting forth (i) the adjustments and readjustments, (ii) the Conversion Price in effect at the time, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Deferred Base Rent.
36.1.10 Reservation of Common Stock Issuable Upon Conversion; Listing. Sun shall at all times reserve and keep available out of its authorized but unissued Common Stock solely for the purpose of effecting the conversion of the Deferred Base Rent that number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of the Deferred Base Rent; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the Deferred Base Rent, Sun will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to that number of shares as shall be sufficient for that purpose. All shares issued upon conversion of the Deferred Base Rent shall be duly listed and admitted for trading on the applicable national securities exchange or quotation service on which the shares of Common Stock are then traded or quoted.
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36.1.11 Issue Taxes. Sun shall pay any and all United States federal and state issue taxes, other than income or capital gain taxes, payable in respect of any issue or delivery of shares of Common Stock on conversion of the Deferred Base Rent pursuant hereto.
36.2 Maximum Number of Shares.
36.2.1 REIT Status. Each Lessor is either qualified as a real estate investment trust (a "REIT") within the meaning of subchapter M of Subtitle A, Chapter 1 of the Internal Revenue Code of 1986, as amended (the "Code"), or an entity directly or indirectly wholly owned by a REIT and disregarded for federal income tax purposes, or a Qualified REIT Subsidiary within the meaning of Section 856(i)(2) of the Code (collectively, a "Qualified Lessor").
36.2.2 Maximum Conversion.
(a) If the number of shares of Common Stock which Lessor is entitled to receive pursuant to the provisions of this Article XXXVI, for purposes of Section 856(c)(4)(B)(iii)(II) or (III) or Section 856(d)(2)(B) of the Code, or any comparable sections of the Code which then may be in effect, exceeds 9.95% (subject to adjustment as set forth below) of the total voting power of all classes of securities of Sun entitled to vote or of the total value of the outstanding securities of Sun (the "REIT Limits") (such excess shares of Common Stock are herein referred to as "Excess Shares"), then such Excess Shares will in no event be issuable and Sun will (subject to Section 36.2.2(b)) in lieu of issuing the Excess Shares pay immediately available funds to Lessor on the Conversion Closing Date in an amount equal to the product of (i) the number of Excess Shares and (ii) the Average Market Price on the last Business Day prior to the date of receipt of the Conversion Notice or the Mandato ry Conversion Notice, as applicable (the "Excess Shares Payment").
(b) If at the time the Excess Shares Payment is to be made pursuant to this Section 36.2.2, Sun is legally prohibited from making the entire Excess Shares Payment or such payment would result in a default under the terms of any of Sun's then existing credit facilities or agreements (an "Excess Shares Payment Restriction"), Sun shall make the Excess Shares Payment with respect to the maximum permitted number of Excess Shares and the amount of the Excess Shares Payment not paid (the "Excess Shares Payment Shortfall") shall be used to calculate the amount of the new Carry-Over Base Rent and the new Deferred Base Rent that shall survive, with all of the obligations and rights provided for in this Master Lease (including the right to convert at a subsequent date). The amount of the new Carry-Over Base Rent in the event of an Excess Shares Payment Restriction shall equal the Carry-Over Base Rent at the time of the Excess Shares Payment Restriction multiplied by a fraction (A) the numerator of which shall be the amount of the Excess Shares Payment Shortfall and (B) the denominator of which shall be (x) the total number of Conversion Shares plus the total number of Excess Shares, measured at the time of such Excess Shares Payment Restriction, multiplied by (y) the Average Market Price on the last Business Day prior to the date of the related Conversion Notice or Mandatory Conversion Notice, as applicable. The amount of the new Deferred Base Rent in the event of an Excess Shares Payment Restriction shall equal the Deferred Base Rent at the time of the Excess Shares Payment Restriction multiplied by a fraction (A) the numerator of which shall be the amount of the Excess Shares Payment Shortfall and (B) the denominator of which shall be (x) the total number of Conversion Shares plus the total number of Excess Shares, measured at the time of such Excess Shares Payment Restriction, multiplied by (y) the Average Market Price on the last Business Day prior to the date of the related Conversion Notice or Mandatory Conversion Notice, as applicable.
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(c) Sun agrees to use commercially reasonable efforts to obtain any consent from its lenders that may be required to permit the payment of the Excess Shares Payment.
(d) Promptly upon receipt of the Conversion Notice or as part of the Mandatory Conversion Notice, Sun agrees to advise Lessor whether the number of shares of Common Stock to be issued to Lessor pursuant to this Article XXXVI exceeds either of the REIT Limits.
36.2.3 REIT Limit Adjustment. The 9.95% REIT Limits set forth in Section 36.2.2 above shall be adjusted, upward or downward, as appropriate to reflect changes in provisions of the Code limiting the total voting power or total stock of any one issuer that a REIT may own, it being the intent of the parties that ownership by Lessor of the Common Stock (without taking into account any other securities of Sun that Lessor may own from time to time) shall not cause any Lessor to be disqualified as a REIT or cause the Base Rent under this Master Lease not to qualify as "rents from real property" under the Code.
36.2.4 Repurchase Obligation. For the period between the Conversion Closing Date and twenty (20) days after the effective date of the registration of the Common Stock pursuant to Section 36.3 (unless such effective date occurs prior to the Conversion Closing Date, in which case such period shall be the twenty (20) days after the Conversion Closing Date), Sun agrees that:
(a) if each Lessor is then a Qualified Lessor, and
(b) if as a consequence of any repurchase of Common Stock by Sun or any other repurchase by Sun of other outstanding Sun securities, that is to be effected during the period described above, the Common Stock owned by Lessor, would (by itself and without considering any other Sun securities which may be owned by Lessor) exceed either of the REIT Limits,
then Sun will, simultaneously with the repurchase, purchase for a purchase price equal to the Daily Market Price on the Business Day immediately preceding such purchase a sufficient number of shares of Common Stock owned by Lessor so that the Common Stock owned by Lessor does not exceed the REIT Limits.
36.3. Registration Provisions.
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36.3.1 Registration. Sun shall at its own expense and as soon as practicable, file a registration statement on any appropriate form for such purpose (the "Required Registration Statement") under the Securities Act covering the resale of the Conversion Shares no later than the earliest to occur of the following events: (A) 45 days after the first Conversion Closing Date, (B) if Sun is then eligible to register the Conversion Shares for resale on Form S-3, 45 days after the date the initial shelf registration statement filed pursuant to that certain Registration Rights Agreement dated February 13, 2004, among Sun and the Purchasers named in the signature pages thereof, is declared effective by the SEC (the "Prior Registration Effective Date"), (C) if Sun is not eligible to register the Conversion Shares for resale on Form S-3 as of the 45th day following the Prior Registration Effective Date, no later than 45 days after the date on which Sun first becomes eligible t o register the Conversion Shares for resale on Form S-3, and (D) six months following the Prior Registration Effective Date, regardless of which registration form is available to Sun. Sun shall use commercially reasonable efforts to cause such Required Registration Statement to be declared effective as soon as practicable and in all events no later than 120 calendar days after the Conversion Closing Date (the "Required Registration Date"). Sun shall register pursuant to such Required Registration Statement all of the shares of Common Stock issued on the Conversion Closing Date, plus, as applicable, any Excess Shares. Lessor acknowledges and agrees that, notwithstanding anything to the contrary herein, Sun shall not be required pursuant to this Section 36.3 to (i) effect more than one registration, other than if required to register any additional shares issuable as a result of adjustments made in accordance with Section 36.1.6, or (ii) effect the registration of any shares other than the shares to be issued pursuant to this Article XXXVI.
36.3.2 Notice. Sun shall provide prompt written notice to Lessor when any Required Registration Statement has been declared effective by the SEC.
36.3.3 Additional Requirements. Sun will use commercially reasonable efforts to: (A) keep the Required Registration Statement effective until the earlier of (x) the later of (i) the second anniversary of the Conversion Closing Date, or (ii) such time as all of the Common Stock issued or issuable to Lessor can be sold by Lessor or any of its affiliates within a three (3)-month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 under the Securities Act ("Rule 144") or (y) the date all of the Common Stock issued or issuable shall have been sold by Lessor (such later period, the "Registration Period"); (B) prepare and file with the SEC such amendments and supplements to the Required Registration Statement and the prospectus used in connection with the Required Registration Statement (as so amended and supplemented from time to time, the "Prospectus") as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Common Stock by Lessor or any of its affiliates; (C) furnish such number of Prospectuses and other documents incident thereto, including any amendment of or supplement to such Prospectus, as Lessor from time to time may reasonably request; (D) cause all Common Stock to be listed on each securities exchange and quoted on each quotation service on which similar securities issued by Sun are then listed or quoted; (E) provide a transfer agent and registrar for all Common Stock and a CUSIP number for all Common Stock; (F) otherwise comply with all applicable rules and regulations of the SEC and any exchange or quotation service on which the Common Stock are obligated to be listed or quoted under this Master Lease; and (G) file the documents required of Sun and (unless the Common Stock is listed on the Nasdaq National Market or other national securities exchange) otherwise obtain and maintain any requisite blue sky clearance in each jurisdiction where Lessor's principal place of business is located. Lessor shall have the right to approve the description of the selling shareholder, plan of distribution and all other references to Lessor contained in the Required Registration Statement and Prospectus, which approval shall not be unreasonably withheld. It shall be a condition precedent to the obligations of Sun to take any action pursuant to this Section 36.3.3 with respect to the Conversion Shares that Lessor shall furnish to Sun such information regarding itself, the Conversion Shares held by it, and the intended method of disposition of such securities as Sun may reasonably request in writing and as shall be required to effect the registration of the Conversion Shares.
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36.3.4 Prospectus. Sun shall furnish to Lessor upon request a reasonable number of copies of a supplement to or an amendment of the Prospectus as may be necessary in order to facilitate the public sale or other disposition of all or any of the Common Stock by Lessor or any of its affiliates pursuant to the Required Registration Statement.
36.3.5 Reporting. With a view to making available to Lessor and its affiliates the benefits of Rule 144 and Form S-3 under the Securities Act, Sun covenants and agrees to: (A) make and keep available adequate current public information (within the meaning of Rule 144(c)) concerning Sun, until the earlier of (x) the second anniversary of the Conversion Closing Date or (y) such date as all of the Common Stock shall have been resold by Lessor or any of its affiliates; and (B) furnish to Lessor upon request, as long as Lessor owns any Common Stock, (x) a written statement by Sun that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (y) a copy of the most recent annual or quarterly report of Sun, and (z) such other information as may be reasonably requested in order to avail Lessor and its affiliates of Rule 144 or Form S-3 with respect to such Common Stock.
36.3.6 Blackout Period. Notwithstanding anything else in this Section 36.3, if, at any time during which a Prospectus is required to be delivered in connection with the sale of any Conversion Shares, Sun determines in good faith that a development has occurred or a condition exists as a result of which the Required Registration Statement or Prospectus contains a material misstatement or omission, or that a material transaction in which Sun is engaged or proposes to engage would require an amendment to the Required Registration Statement, a supplement to such Prospectus, or a filing under the Exchange Act or other public disclosure of material information and the disclosure of such transaction would be materially detrimental to the consummation of the transaction, or if the Required Registration Statement is filed on a Form S-1 Registration Statement and a post-effective amendment thereto becomes necessary, Sun will immediately notify Lessor thereof by telephone and in writing. Upon rec eipt of such notification, Lessor and its affiliates will immediately suspend all offers and sales of any Conversion Shares pursuant to such Required Registration Statement. In such event, Sun will amend or supplement such Required Registration Statement and Prospectus or make such filings or public disclosures as promptly as practicable and will use commercially reasonable efforts to take such other steps as may be required to permit sales of all Conversion Shares thereunder by Lessor in accordance with applicable federal and state securities laws. Sun will promptly notify Lessor after it has determined in good faith that such sales have become permissible in such manner and will promptly deliver copies of the Required Registration Statement and Prospectus (as so amended or supplemented, if applicable) to Lessor in accordance with this Section 36.3. Notwithstanding the foregoing, (A) under no circumstances shall Sun be entitled to exercise its right to suspend sales of any Conversion Shares as provided i n this Section 36.3.6, pursuant to the Required Registration Statement, for more than a total of sixty days in any twelve (12)-month period, (B) the period during which such sales may be suspended (each a "Blackout Period") at any time shall not exceed thirty (30) days (which need not be consecutive and provided that if the Required Registration Statement is filed on a Form S-1 Registration Statement, such thirty (30) day period shall be extended one day for each day the Required Registration Statement is ineffective due solely to the requirement that a post-effective amendment of the Required Registration Statement which has been filed has not become effective), and (C) no Blackout Period may commence less than thirty (30) days after the end of the preceding Blackout Period.
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36.3.7 Market Stand-Off Agreement. Lessor hereby agrees that it shall not, to the extent requested by Sun and an underwriter in a firm commitment underwritten public offering of Common Stock or securities of Sun convertible into Common Stock, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of any Conversion Shares or any interest therein in a market or other transaction during the 90-day period (or such shorter period, if so notified by Sun in writing) following the closing date of the underwritten offering, provided that all executive officers and directors of Sun are bound by and have entered into similar agreements. If requested to do so by Sun, Lessor shall execute a customary form of underwriter's letter, reasonably acceptable to Lessor, in connection with this undertaking. The obligations described in this Section 36.3.7 shall not a pply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future.
36.4 Covenants of Sun. Sun further covenants and agrees with Lessor as follows:
36.4.1 Listing; Maintenance. Sun shall list the Common Stock issuable upon conversion of the Deferred Base Rent on the Nasdaq National Market or any other national securities exchange at such time as it lists its outstanding Common Stock on such exchange. For so long as Lessor has the right to acquire Common Stock pursuant to this Article XXXVI, and for a period of one (1) year after the final Conversion Closing Date, Sun will use commercially reasonable efforts (i) to maintain the eligibility of the Common Stock for quotation on the OTCBB, NASDAQ national market or any applicable national securities exchange and (ii) regain the eligibility of the Common Stock for listing or quotation on any such market or exchange, in the event that the Common Stock is delisted by any applicable market or exchange; and will use commercially reasonable efforts to (iii) cause all representations and warranties contained in this Master Lease to be and remain true and correct.
36.4.2. Filings. Sun will make all filings specifically referred to in this Article XXXVI and shall use commercially reasonable efforts to make any other filings required by law with respect to the transactions contemplated hereby, as requested by Lessor.
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36.5 Legend. Subject to Section 36.3, Lessor understands that the certificates representing the Common Stock shall bear a restrictive legend in the following form (and a stop transfer order may be placed against transfer of such certificates or other instruments):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, OR (2) THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR (3) THE SALE IS MADE IN ACCORDANCE WITH ANOTHER APPLICABLE EXEMPTION UNDER THE SECURITIES ACT AND THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
The legend set forth above shall be removed and Sun shall issue a certificate without such legend to any holder of Common Stock if, unless otherwise required by state securities laws, (a) such shares are sold pursuant to Rule 144 or an effective Registration Statement under the Securities Act, or (b) such holder provides Sun with an opinion of counsel reasonably satisfactory to Sun that such shares may be publicly sold pursuant to an exemption from such registration requirements without restriction.
36.6 Indemnification.
36.6.1. Indemnification of Lessor. Except with respect to matters as to which Sun is entitled to indemnification pursuant to Section 36.6.2, Sun hereby agrees to indemnify each Lessor Indemnified Party) against any Proceeding, that it may incur in connection with any of the transactions contemplated hereby arising out of or based upon:
(a) any untrue or alleged untrue statement of a material fact in the Required Registration Statement or any Prospectus contained therein or in any SEC filing by Sun or any of its affiliates or any person acting on its or their behalf or omission or alleged omission to state therein any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading by Sun or any of its affiliates or any person acting on its or their behalf;
(b) any of the representations or warranties made by Sun in this Article XXXVI being untrue or incorrect at the time such representation or warranty was made; and
(c) any breach or non-performance by Sun of any of its covenants, agreements or obligations under this Article XXXVI;
and Sun hereby agrees to reimburse each Lessor Indemnified Party for any reasonable legal or other expenses incurred by such Lessor Indemnified Party in investigating or defending any such Proceeding; provided, however, that the foregoing indemnity shall not apply to any Proceeding to the extent that it arises out of, or is based upon, the gross negligence or willful misconduct of Lessor in connection therewith. Furthermore, the foregoing indemnity rights will not take effect unless and until the total amount of the indemnification in the aggregate is ten thousand dollars ($10,000) or greater.
84
36.6.2 Indemnification of Sun. Except with respect to matters as to which Lessor is entitled to indemnification pursuant to Section 36.6.1, Lessor hereby agrees to indemnify Sun against any Proceeding, that it may incur in connection with any of the transactions contemplated hereby arising out of or based upon:
(a) any untrue or alleged untrue statement of a material fact included in the Required Registration Statement or any Prospectus contained therein or in any SEC filing by Sun with the express written consent of Lessor therefor by Lessor or any of its affiliates or any person acting on its or their behalf or omission or alleged omission to state any such material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading by Lessor or any of its affiliates or any person acting on its or their behalf;
(b) any of the representations or warranties made by Lessor herein being untrue or incorrect at the time such representation or warranty was made; and
(c) any breach or non-performance by Lessor of any of its covenants, agreements or obligations under this Master Lease;
and Lessor hereby agrees to reimburse Sun for any reasonable legal or other expenses incurred by such Sun in investigating or defending any such Proceeding; provided, however, that the foregoing indemnity shall not apply to any Proceeding to the extent that it arises out of, or is based upon, the gross negligence or willful misconduct of Sun in connection therewith. Furthermore, the foregoing indemnity rights will not take effect unless and until the total amount of the indemnification in the aggregate is ten thousand dollars ($10,000) or greater.
36.6.3 Conduct of Claims.
(a) Whenever a claim for indemnification shall arise under this Section 36.7, the party seeking indemnification (the "Indemnified Party"), shall notify the party from whom such indemnification is sought (the "Indemnifying Party") in writing of the Proceeding and the facts constituting the basis for such claim in reasonable detail;
(b) Such Indemnifying Party shall have the right to retain the counsel of its choice in connection with such Proceeding and to participate at its own expense in the defense of any such Proceeding; provided, however, that counsel to the Indemnifying Party shall not (except with the consent of the relevant Indemnified Party) also be counsel to such Indemnified Party. In no event shall the Indemnifying Party be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from its own counsel for all Indemnified Parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances; and
(c) No Indemnifying Party shall, without the prior written consent of the Indemnified Parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification could be sought under this Section unless such settlement, compromise or consent (A) includes an unconditional release of each Indemnified Party from all liability arising out of such litigation, investigation, proceeding or claim and (B) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnified Party.
85
36.7 Survival of the Representations, Warranties, etc. The respective representations, warranties, and agreements made in this Article XXXVI or anywhere else in this Master Lease by or on behalf of the parties hereto shall remain in full force and effect, regardless of any investigation made by or on behalf of the other party to this Master Lease or any officer, director or employee of, or person controlling or under common control with, such party and will survive delivery of any Common Stock issuable pursuant to this Article XXXVI.
36.8 Limitation of Remedies. Notwithstanding any provision of this Master Lease to the contrary, with respect to any breach of the provisions of this Article XXXVI, each of the parties shall have any and all rights or remedies available at law or in equity, other than the right (i) to recover incidental and consequential damages or (ii) except as specifically set forth herein to (A) seek any remedy designed to result in a termination of Lessee's leasehold rights hereunder or (B) to enforce the remedies specified in Article XVI hereof (the "Leasehold Remedies"). Notwithstanding the foregoing, Lessor shall be entitled to enforce the Leasehold Remedies (I) in the event of an intentional breach by Lessee of its obligations under this Article XXXVI which is not cured by Lessee within a period of ten (10) days after receipt of written notice from Lessor setting forth in reasonable detail the nature of such breach (the "Article XXXVI Default Notice") and (II) in the event of any other breach by Lessee of its obligations under this Article XXXVI as to which Lessee has not commenced the cure within thirty (30) days after receipt of the Article XXXVI Default Notice and as to which Lessee does not thereafter diligently pursue completion of the cure.
37.1. ; 9; & #9; ; 9; & #9; Survival, Choice of Law. Anything contained elsewhere to the contrary notwithstanding, all claims against, and liabilities of, Lessee or Lessor arising prior to the date of termination of this Master Lease shall survive such termination. If any late charges provided for in any provision of this Master Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. Neither this Master Lease nor any provision thereof may be changed, waived, discharged or terminated except by an instrument in writing and in recordable form signed by Lessor and Lessee. All of the terms and provisions of this Master Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. The headings in this Master Lease are for convenience of reference only and shall not limit or otherwise affect the m eaning hereof. This Master Lease shall be governed by and construed in accordance with the laws of the state of Maryland, except as to matters which, under applicable procedural conflicts of laws rules require the application of laws of the applicable State.
86
LESSEE CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF THE STATES OF MARYLAND, AND AGREES THAT ALL DISPUTES CONCERNING THIS MASTER LEASE BE HEARD IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF MARYLAND. LESSEE FURTHER CONSENTS TO IN PESONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF EACH STATE WITH RESPECT TO ANY ACTION COMMENCED BY LESSOR SEEKING TO RETAKE POSSESSION OF ANY OR ALL OF THE LEASED PROPERTIES. LESSEE AGREES THAT SERVICE OF PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE OF MARYLAND, AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATES OF MARYLAND OR, TO THE EXTENT APPLICABLE IN ACCORDANCE WITH THE TERMS HEREOF, LOCATED IN THE STATES.
37.4 ; 9; & #9; ; 9; & #9; Counterparts. This Master Lease may be executed in separate counterparts, each of which shall be considered an original when each party has executed and delivered to the other one or more copies of this Master Lease.
37.5 ; 9; & #9; ; 9; & #9; Options Personal. The renewal options granted to the Lessee in this Master Lease are granted solely to the Lessee and are not assignable or transferable except in connection with a transfer or assignment of this Master Lease as permitted in Article XXII. Any attempt to assign or transfer such options shall be void and of no force and effect.
37.6 ; 9; & #9; ; 9; & #9; Rights Cumulative. Except as provided herein to the contrary, the respective rights and remedies of the parties specified in this Master Lease shall be cumulative and in addition to any rights and remedies not specified in this Master Lease.
37.7 & #9; ; 9; & #9; ; 9; Entire Agreement/Release. There are no oral or written agreements or representations between the parties hereto affecting this Master Lease. This Master Lease supersedes and cancels any and all previous negotiations, arrangements, representations, brochures, agreements and understandings, if any, between Lessor and Lessee with respect to this Master Lease including, but not limited to, each of the Existing Master Leases and any and all documents executed in contemplation thereof or pursuant thereto, other than the Transition Agreement but specifically including the Forbearance Agreement dated as of October 13, 1999 among Lessor, Lessees, Sun and certain Affiliates thereof (the "Forbearance Agreement"). In furtherance and not in limitation of the foregoing, Lessor acknowledges, agrees and confirms that since Decembe r 1, 2003 Sun and its direct and indirect subsidiaries have not been in default of their respective obligations under the Existing Master Leases and related documents and agreements. Upon the Commencement Date, (i) Lessor for itself and its successors and assigns shall forever release and discharge Lessee and Sun and their current and former officers, directors, partners, shareholders, attorneys, agents, parents, Affiliates, employees, successors and assigns, from any and all actions, claims, debts, demands, duties, expenses, judgments, liabilities and obligations whatever, whether known or unknown, whether from contract or tort, from the beginning of time to the Delivery Date, arising out of or connected with, directly or indirectly, any of the Existing Master Leases, the Original Security Agreements, the Forbearance Agreement, the Guaranty or any other agreement executed by Lessor and Lessee or any Affiliate of either, including without limitation amounts owing under the Existing Master Leases by Lessee t o Lessor through the Delivery Date and (ii) Lessee for itself and its successors and assigns shall forever release and discharge each entity comprising Lessor and their current and former officers, directors, partners, shareholders, attorneys, agents, parents, Affiliates, employees, successors and assigns, from any and all actions, claims, debts, demands, duties, expenses, judgments, liabilities and obligations whatever, whether known or unknown, whether from contract or tort, from the beginning of time to the Delivery Date, arising out of or connected with, directly or indirectly, any of the Existing Master Leases, the Original Security Agreements, the Forbearance Agreement, the Guaranty or any other agreement executed by Lessor and Lessee or any Affiliate of either, including without limitation amounts owing under the Existing Master Leases by Lessor to Lessee through the Delivery Date. Nothing herein shall be construed as affecting or diminishing in any manner any right which Lessor may have to declare a Default or an Event of Default under this Master Lease, including, but not limited to, with respect to events or conditions which occurred during the term of the Existing Master Leases but which give rise to a Default or Event of Default under this Master Lease.
87
37.10 ; 9; & #9; ; 9; & #9; Successors. The term "Lessor" shall mean only the owner or owners at the time in question of fee title to the Leased Properties. In the event of any transfer of the Lessor's interest in this Master Lease, Lessor named in this Master Lease (and in case of any subsequent transfers, the then grantor) shall be relieved from and after the date of the transfer of all liability as respects Lessor's obligations to be performed thereafter. Any funds in the hands of Lessor or the then grantor at the time of the transfer, in which Lessee has an interest, shall be delivered to the grantee. All rights and obligations of Lessor and Lessee under this Master Lease shall extend to and bind the respective heirs, executors, administrators and the permitted concessionaires, successors, subtenants and assignees of the parties. If there is more than one (1) Lessee under this Master Lease, each shall be bound jointly and severally by the terms, covenants and agreements contai ned therein. Lessor agrees that the rights hereunder to convert Deferred Base Rent into Conversion Shares are personal to Lessor and accordingly are not transferable except to a person or entity that acquires Lessor or substantially all of its assets and such transfer shall be conditioned upon receipt of a legal opinion from Lessor's counsel, in a form reasonably satisfactory to Sun, that such transfer may be effected without registration under the Securities Act.
88
89
LESSOR:
DELTA INVESTORS I, LLC, a Maryland limited liability company, and
DELTA INVESTORS II, LLC, a Maryland limited liability company
OHI ASSET, LLC, a Delaware limited liability company
OHI ASSET (CA), LLC, a Delaware limited liability company
By: OMEGA HEALTHCARE INVESTORS, INC., a
Maryland corporation, Its Member
By:
/s/ Daniel J. Booth
Daniel J. Booth
Chief Operating Officer
OMEGA:
OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation,
By: /s/ Daniel J. Booth
Daniel J. Booth
Chief Operating Officer
LESSEE:
CARE ENTERPRISES, INC., a Delaware corporation,
CIRCLEVILLE HEALTH CARE CORP., an Ohio corporation,
BECKLEY HEALTH CARE CORP., a West Virginia corporation,
PUTNAM HEALTH CARE CORP., a West Virginia corporation,
CARE ENTERPRISES WEST, a Utah corporation,
BRASWELL ENTERPRISES, INC., a California corporation,
MEADOWBROOK REHABILITATION CENTER, a California corporation,
REGENCY REHAB HOSPITALS, INC., a California corporation.
DUNBAR HEALTH CARE CORP., a West Virginia corporation,
MARION HEALTH CARE CORP., an Ohio corporation,
SALEM HEALTH CARE CORP., a West Virginia corporation
REGENCY-NORTH CAROLINA, INC., a North Carolina corporation,
COALINGA REHABILITATION CENTER, a California corporation,
FULLERTON REHABILITATION CENTER, a California corporation,
SUNBRIDGE HEALTHCARE CORPORATION, a New Mexico corporation,
1
SAN BERNARDINO REHABILITATION HOSPITAL, INC., a California corporation,
SHANDIN HILLS REHABILITATION CENTER, a California corporation, and
REGENCY-TENNESSEE, INC., a Tennessee corporation
By: /s/ Steven A. Roseman
Steven A. Roseman
Vice President
GUARANTOR:
SUN HEALTHCARE GROUP, INC., a Delaware corporation
By:
/s/ Steven A. Roseman
Steven A. Roseman
Executive Vice President
2
Original Master Leases
S3-1
2
Schedule II
Remaining Transition Facilities
NOTE: THE PARTIES HAVE AGREED THAT THIS SCHEDULE SHALL BE REVISED/COMPLETED WITHIN 15 DAYS OF THE DELIVERY DATE TO CORRECT FACILITY NAMES, IF APPLICABLE, AND TO INCLUDE ADDRESSES AND PRIMARY INTENDED USE OF THE LISTED FACILITIES
3
Schedule III
Future Transition Facilities and Allocated Rent Amounts
Facility Name Allocated Rent Amount
1. Continental Rehab Hospital (CA) $
NOTE: THE PARTIES HAVE AGREED THAT THIS SCHEDULE SHALL BE REVISED/COMPLETED WITHIN 15 DAYS OF THE DELIVERY DATE TO CORRECT FACILITY NAMES, IF APPLICABLE, AND TO INCLUDE ADDRESSES FOR THE FACILITIES AND THE MISSING ALLOCATED RENT AMOUNTS
S3-1
Exhibit A
Facilities
Note: Facilities 4, 14, 15, 16 and 17 are to be transitioned pursuant to the Transition Agreement.
NOTE: THE PARTIES HAVE AGREED THAT THIS EXHIBIT SHALL BE REVISED/COMPLETED WITHIN 15 DAYS OF THE DELIVERY DATE TO CORRECT FACILITY NAMES, IF APPLICABLE, AND TO INCLUDE THE ADDRESSES AND PRIMARY INTENDED USES OF THE LISTED FACILITIES.
A-1
Exhibit B
Leased Properties
Legal Descriptions
NOTE: THE PARTIES HAVE AGREED THAT THIS EXHIBIT SHALL BE COMPLETED WITHIN 15 DAYS OF THE DELIVERY DATE.
C-1
Exhibit C
Minimum Purchase Prices as of the Commencement Date
NOTE: THE PARTIES HAVE AGREED THAT THIS EXHIBIT SHALL BE COMPLETED WITHIN 15 DAYS OF THE DELIVERY DATE.
C-1
Exhibit D
Permitted Encumbrances
NOTE: THE PARTIES HAVE AGREED THAT THIS EXHIBIT SHALL BE COMPLETED WITHIN 15 DAYS OF THE DELIVERY DATE.
F-1
Exhibit E
Form of OTA
NOTE: THE PARTIES HAVE AGREED TO ATTACH THIS EXHIBIT, WHICH IS THE FORM OTA THAT HAS BEEN PREVIOUSLY NEGOTIATED BY THE PARTIES, WITHIN 15 DAYS OF THE DELIVERY DATE.
F-1
Exhibit F
INTENTIONALLY OMITTED
F-1
Exhibit G
Provisions Governing Transfers
Lessee covenants not to Transfer any Leased Property to an assignee or sublessee in respect of which, in Lessor's reasonable opinion, any of the following conditions shall apply and the parties hereby acknowledge that it is reasonable to apply each of these conditions to determine the acceptability of a prospective assignee or sublessee (a "Transferee") having regard to the circumstances of the situation:
1. The financial strength, Tangible Net Worth and creditworthiness of the proposed Transferee, giving effect to the financial strength of any new guarantor, are not at least equal to that of the Lessee and the Guarantor, both at the time of the Proposed Transfer and at the Commencement Date.
2. The business reputation of the proposed Transferee is not in accordance with generally accepted commercial standards or is not at least equal to that of the existing Lessee, both at the time of the Proposed Transfer and at the Commencement Date.
3. The gross revenues and profitability reasonably anticipated to be received from the conduct of the business by the proposed Transferee at the affected Leased Property(ies) are not at least equal to that of the Lessee at the time of the proposed Transfer.
4. The health care experience and reputation for quality care in the particular segment of the health care industry in which the affected Leased Property(ies) is involved or the managerial and operational skills of the proposed Transferee are not at least equal to those of the Lessee, both at the time of the proposed Transfer and on the Commencement Date.
5. The use of the affected Leased Property (ies) is proposed to be changed from the Primary Intended Use.
6. #9; The use of the affected Leased Property (ies) will violate any other agreement affecting the Leased Property(ies).
7. In connection with any assignment, the Transferee shall expressly assume the obligations of Lessee under the Master Lease which are applicable to the affected Leased Property and enter into a direct contractual obligation to pay the Rent allocated to such Leased Property to Lessor.
8. In connection with any Transfer, Lessee shall pay to Lessor a fee equal to $10,000 per affected Facility and reimburse Lessor for its reasonable attorneys fees, provided that such fee shall be subject to reduction in connection with a Transfer of all Leased Properties in a single Transfer.
F-1
Exhibit H
Form of Estoppel Certificate
The undersigned, ______________________________, a _________ corporation ("______") under that certain Amended and Restated Master Lease Agreement (the "Lease") dated March 1, 2004 and effective as of December 1, 2003 and made with ________________________ ( "_________________"), hereby certifies:
1. That it is _____ under this Lease; that attached hereto as Exhibit "A" is a true and correct copy of this Lease; that said Lease is now in full force and effect and has not been amended, modified or assigned except as disclosed or included in Exhibit "A"; and that said Lease constitutes the entire agreement between Lessor and Lessee.
2. That there exist no defenses or offsets to enforcement of this Lease; that there are, as of the date hereof, no breaches or uncured defaults on the part of the undersigned or, to the undersigned's knowledge, on the part of the other party to the Lease; and that the undersigned has no notice or knowledge of any prior assignment, hypothecation, subletting or other transfer of the other party's interest in this Lease, except ____________________.
3.
That the Base Rent for the Lease Year under this Lease is $ . All Rent which is due has been paid, and there are no unpaid Additional Charges owing to or by the undersigned under this Lease as of the date hereof. No Base Rent or other items (including without limitation security deposit and any impound account or funds) have been paid by the undersigned in advance under this Lease except for the security deposit held by Lessor [in the form of an irrevocable letter of credit] in the amount of $_________ and the monthly installment of Base Rent that became due on _______________________. .4. That the undersigned has no claim against the other party to the Lease for any security deposit, impound account or prepaid Rent except as provided in paragraph 3 of this Certificate.
5. That there are no actions, whether voluntary or otherwise, pending against the undersigned under the bankruptcy laws of the United States or any State thereof, nor has the undersigned nor, to the best of the undersigned's knowledge has the other party to the Lease begun any action, or given or received any notice for the purpose of termination of this Lease.
6. That there are, as of the date hereof, no breaches or uncured defaults on the part of The undersigned under any other agreement executed in connection with this Lease.
7. This Estoppel Certificate has been requested for the benefit of ("Relying Party"). The Relying Party is entitled to rely on the statements of The undersigned contained in this certificate.
8. All capitalized terms used herein and not defined herein shall have the meanings for such terms set forth in the Lease.
F-1
9. (Add provision required by Relying Party).
Dated:
(Name of Lessor or Lessee)
By:
Its:
F-1
EXHIBIT 21.1
SUN HEALTHCARE GROUP, INC. SUBSIDIARIES
as of February 26, 2004
|
Jurisdiction of |
|
|
Masthead Corporation |
New Mexico |
|
|
Regency Health Services, Inc. |
Delaware |
Braswell Enterprises, Inc. |
California |
Brittany Rehabilitation Center, Inc. |
California |
Care Enterprises, Inc. |
Delaware |
Americare Homecare, Inc. |
Ohio |
Americare Midwest, Inc. |
Ohio |
Beckley Health Care Corp. |
West Virginia |
Dunbar Health Care Corp. |
West Virginia |
Putnam Health Care Corp. |
West Virginia |
Salem Health Care Corp. |
West Virginia |
Care Enterprises West |
Utah |
Care Home Health Services |
California |
Circleville Health Care Corp. |
Ohio |
Glenville Health Care, Inc. |
West Virginia |
Marion Health Care Corp. |
Ohio |
Carmichael Rehabilitation Center |
California |
Coalinga Rehabilitation Center |
California |
Covina Rehabilitation Center |
California |
Fairfield Rehabilitation Center |
California |
First Class Pharmacy, Inc. |
California |
Fullerton Rehabilitation Center |
California |
Glendora Rehabilitation Center |
California |
Grand Terrace Rehabilitation Center |
California |
Hallmark Health Services, Inc. |
Delaware |
Harbor View Rehabilitation Center |
California |
Heritage Rehabilitation Center |
California |
Huntington Beach Convalescent Hospital |
California |
Meadowbrook Rehabilitation Center |
California |
Newport Beach Rehabilitation Center |
California |
Paradise Rehabilitation Center, Inc. |
California |
Paso Robles Rehabilitation Center |
California |
Regency High School, Inc. |
California |
Regency - North Carolina, Inc. |
North Carolina |
Regency Rehab Hospitals, Inc. |
California |
Orange Rehabilitation Hospital, Inc. |
Delaware |
San Joaquin G. P. Corporation |
New Mexico |
San Bernardino Rehabilitation Hospital, Inc. |
Delaware |
Regency - Tennessee, Inc. |
Tennessee |
Rose Rehabilitation Center |
California |
Shandin Hills Rehabilitation Center |
California |
Stockton Rehabilitation Center, Inc. |
California |
SunPlus Home Health Services, Inc. |
California |
Vista Knoll Rehabilitation Center, Inc. |
California |
1
|
|
Retirement Care Associates, Inc. |
Colorado |
Atlantic Medical Supply Company, Inc. |
Georgia |
Americare Health Services Corp. |
Delaware |
SunChoice.com, Inc. |
Delaware |
Bibb Health & Rehabilitation, Inc. |
Georgia |
Capitol Care Management Company, Inc. |
Georgia |
Ameridyne Corporation |
Tennessee |
Charlton Healthcare, Inc. |
Georgia |
Crescent Medical Services, Inc. |
Georgia |
Duval Healthcare Center, Inc. |
Georgia |
Gardendale Health Care Center, Inc. |
Georgia |
Jeff Davis Healthcare, Inc. |
Georgia |
Lake Forest Healthcare Center, Inc. |
Georgia |
Lake Health Care Center, Inc. |
Georgia |
Libbie Rehabilitation Center, Inc. |
Virginia |
Brent-Lox Hall Nursing Home, Inc. |
Virginia |
Phoenix Associates, Inc. |
Virginia |
Maplewood Health Care Center of Jackson, Tennessee, Inc |
Tennessee |
Mid-Florida, Inc. |
Georgia |
Pine Manor Rest Home, Incorporated |
North Carolina |
Retirement Care G. P. Corporation |
New Mexico |
Riviera Retirement, Inc. |
Georgia |
Southside Health Care Center, Inc. |
Georgia |
Statesboro Health Care Center, Inc. |
Georgia |
Summers Landing, Inc. |
Georgia |
Sun Coast Retirement, Inc. |
Georgia |
Encore G. P. Corporation |
New Mexico |
West Tennessee, Inc. |
Georgia |
|
|
Sun Anacortes, Inc. (96% interest) |
Delaware |
|
|
SHG Netherlands I, Inc. |
New Mexico |
|
|
SHG Services, Inc. |
Delaware |
CareerStaff Unlimited, Inc. |
Delaware |
CareerStaff Management, Inc. |
Delaware |
PRI, Inc. |
Delaware |
|
|
SunDance Rehabilitation Corporation |
Connecticut |
Cal-Med, Inc. |
California |
Accelerated Care Plus, LLC |
Delaware |
HC, Inc. |
Kansas |
SRT, Inc. |
New Mexico |
SunAlliance Healthcare Services, Inc. |
Delaware |
BioPath Clinical Laboratories, Inc. |
California |
Pacific Health Care, Inc. |
Arizona |
U.S. Laboratory Corp. |
Delaware |
SunDance Rehabilitation Agency, Inc. |
Delaware |
|
|
SunScript Pharmacy Corporation |
New Mexico |
SunScript Medical Services, Inc. |
Florida |
Advantage Health Services, Inc. |
Florida |
HoMed Convalescent Equipment, Inc. |
New Jersey |
Pharmacy Factors of California, Inc. |
California |
2
|
|
SunBridge Healthcare Corporation |
New Mexico |
Clipper Home of North Conway, Inc. |
New Hampshire |
Clipper Home of Portsmouth, Inc. |
New Hampshire |
Clipper Home of Rochester, Inc. |
New Hampshire |
Clipper Home of Wolfeboro, Inc. |
New Hampshire |
Goodwin Nursing Home, Inc. |
New Hampshire |
Mountain Care Management, Inc. |
West Virginia |
Nursing Home, Inc. |
Washington |
SunBridge G. P. Corporation |
New Mexico |
SunBridge Healthcare of Colorado, Inc. |
Colorado |
SunBridge Rehab of Colorado, Inc. |
Colorado |
SunHealth Specialty Services, Inc. |
New Mexico |
|
|
SunBridge Healthcare of Florida, Inc. |
Florida |
|
|
SunBridge, Inc. |
New Mexico |
|
|
SunCare Respiratory Services, Inc. |
Indiana |
|
|
SunChoice Medical Supply, Inc. |
New Mexico |
|
|
Sun Healthcare Group International Corporation |
Delaware |
|
|
Sun Lane Purchase Corporation |
New Mexico |
|
|
SunMark Nevada, Inc. |
Nevada |
SHG Finance, LLC (Sun Healthcare Group, Inc.-50% |
|
member; SunMark Nevada, Inc.-50% member) |
New Mexico |
Sun Healthcare Group Finance Company |
New Mexico |
|
|
Sunmark of New Mexico, Inc. |
New Mexico |
|
|
SunSolution, Inc. |
Delaware |
|
|
The Mediplex Group, Inc. |
New Mexico |
Bergen Eldercare, Inc. |
New Jersey |
CareerStaff Services Corporation |
Colorado |
Community Re-Entry Services of Cortland, Inc. |
Delaware |
HTA of New York, Inc. |
New York |
Manatee Springs Nursing Center, Inc. |
Florida |
Mediplex Management, Inc. |
Massachusetts |
Mediplex Management - New Mexico, Inc. |
New Mexico |
Mediplex Management of New Jersey, Inc. |
New Jersey |
Mediplex Management of Palm Beach County, Inc. |
Florida |
Mediplex of Connecticut, Inc. |
Connecticut |
Mediplex of Kentucky, Inc. |
Kentucky |
Mediplex of Maryland, Inc. |
Maryland |
Mediplex of Massachusetts, Inc. |
Massachusetts |
Mediplex of Concord, Inc. |
Massachusetts |
Correctional Care Corp. |
Massachusetts |
Mediplex of New Jersey, Inc. |
New Jersey |
P.M.N.F. Management, Inc. |
New Jersey |
3
|
|
Mediplex of Ohio, Inc. |
Ohio |
Mediplex of Virginia, Inc. |
Virginia |
Mediplex Rehabilitation of Massachusetts, Inc. |
Massachusetts |
New Bedford Nursing Center, Inc. |
Massachusetts |
Quality Care Holding Corp. |
Massachusetts |
Quality Nursing Care of Massachusetts, Inc. |
Massachusetts |
Sun Care Corp. |
Delaware |
SunCare Services Corporation |
Georgia |
SunDance Services Corporation |
Tennessee |
Worcester Nursing Center, Inc. |
Massachusetts |
PARTNERSHIP INTERESTS
` |
|
Jurisdiction of |
SunDance Rehabilitation Texas, Limited Partnership |
SunDance Rehabilitation Corporation - 1% general partner; SRT, Inc. - 99% limited partner |
Texas |
Therapists Unlimited - Chicago, L.P. II |
CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 89% Class A limited partner, PRI, Inc. - 10% Class B limited partner |
Texas |
Therapists Unlimited - Detroit II, L.P. |
CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner |
Texas |
Therapists Unlimited - Fresno, L.P. |
CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner |
Texas |
Therapists Unlimited - Indianapolis, L.P. |
CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner |
Texas |
Therapists Unlimited - Seattle, L.P. |
CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner |
Texas |
West Jersey/Mediplex Rehabilitation, |
Mediplex of New Jersey, Inc. - 89% general partner; Bergen Eldercare, Inc. - 11% Class A limited partner |
New Jersey |
4
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Richard K. Matros, certify that:
1. I have reviewed this annual report on Form 10-K of Sun Healthcare Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 5, 2004 |
/s/ Richard K. Matros |
Richard K. Matros |
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Kevin W. Pendergest, certify that:
1. I have reviewed this annual report on Form 10-K of Sun Healthcare Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 5, 2004 |
/s/ Kevin W. Pendergest |
Kevin W. Pendergest |
EXHIBIT 32.1
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
The undersigned, Richard K. Matros, the Chief Executive Officer, of Sun Healthcare Group, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, hereby certifies that:
(i) the Annual Report on Form 10-K for the year ended December 31, 2003 of the Company (the "Report") fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 5, 2004 |
/s/ Richard K. Matros |
Richard K. Matros |
WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350
The undersigned, Kevin W. Pendergest, the Chief Financial Officer, of Sun Healthcare Group, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, hereby certifies that:
(i) the Annual Report on Form 10-K for the year ended December 31, 2003 of the Company (the "Report") fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 5, 2004 |
/s/ Kevin W. Pendergest |
Kevin W. Pendergest |
EXHIBIT 14.1
CODE OF ETHICS
FOR CHIEF EXECUTIVE OFFICER AND FINANCIAL OFFICERS
OF
SUN HEALTHCARE GROUP, INC.
While we expect honest and ethical conduct in all aspects of our business from all of our employees, we expect the highest possible honest and ethical conduct from our Covered Officers. You are an example for other employees and we expect you to foster a culture of transparency, integrity and honesty. Compliance with this Code is a condition to your employment and any violations of this Code may result in disciplinary action, up to and including termination of your employment.
You have a duty to promptly report any possible violation of this Code or any questionable accounting or auditing matter either to the Audit Committee or to the SUN QUALITY LINE at (800) 761-1226. All calls to the SUN QUALITY LINE are confidential and you may call anonymously if you choose. You can make a report in good faith to the SUN QUALITY LINE without fear of reprisal, retaliation or punishment for your actions. Anyone, including a supervisor, who retaliates against an employee for contacting the SUN QUALITY LINE will be disciplined, including possible dismissal.
· All Company accounting records, as well as reports produced from those records, must be kept and presented in accordance with the laws of each applicable jurisdiction.
· All records must fairly and accurately reflect the transactions or occurrences to which they relate.
· All records must fairly and accurately reflect in reasonable detail Sun's assets, liabilities, revenues and expenses.
· Sun's accounting records must not contain any false or intentionally misleading entries.
· No transaction may be intentionally misclassified as to accounts, departments or accounting periods or in any other manner.
· All transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the proper accounting period.
· No information may be concealed from the internal auditors or the independent auditors.
· Compliance with Generally Accepted Accounting Principles and Sun's system of internal accounting controls and procedures is required at all times.
ACKNOWLEDGMENT FORM
I have received and read the Code of Ethics for the Chief Executive Officer and Financial Officers, and I understand its contents. I agree to comply fully with the standards contained in the Code of Ethics and Sun's related policies and procedures. I understand that I have an obligation to promptly report to the appropriate Sun compliance team, the Audit Committee or the SUN QUALITY LINE any suspected violations of the Code of Ethics.
__________________________
Printed Name
__________________________
Signature
__________________________
Date