-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S+6hiu6zqCGy0F9L8/w8Wy94oEDyabo2oamZ1sGwAaQdVpdVV2FwWrj8k2iOwQVg tvagiuecPJwQohMS8z2MOQ== 0000904978-09-000071.txt : 20090807 0000904978-09-000071.hdr.sgml : 20090807 20090806173903 ACCESSION NUMBER: 0000904978-09-000071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090807 DATE AS OF CHANGE: 20090806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUN HEALTHCARE GROUP INC CENTRAL INDEX KEY: 0000904978 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 850410612 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12040 FILM NUMBER: 09992919 BUSINESS ADDRESS: STREET 1: 101 SUN AVENUE N E CITY: ALBUQUERQUE STATE: NM ZIP: 87109 BUSINESS PHONE: 5058213355 MAIL ADDRESS: STREET 1: 101 SUN LANE N E CITY: ALBUQERQUE STATE: NM ZIP: 87109 10-Q 1 form10q.htm form10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009

or

o     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-12040

SUN HEALTHCARE GROUP, INC.
(Exact name of Registrant as specified in its charter)

Delaware
85-0410612
(State of Incorporation)
(I.R.S. Employer Identification No.)

18831 Von Karman, Suite 400
Irvine, CA  92612
(949) 255-7100
(Address, zip code and telephone number of Registrant)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  x

As of August 4, 2009, there were 43,724,879 shares of the Registrant’s $.01 par value Common Stock outstanding.


 
1
 

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Index
   
Page
Numbers
PART I.  FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements:
  
     
 
Consolidated Balance Sheets (unaudited)
3-4
 
          As of June 30, 2009
  
 
          As of December 31, 2008
  
     
 
Consolidated Income Statements (unaudited)
5-6
 
          For the three months ended June 30, 2009 and 2008
  
 
          For the six months ended June 30, 2009 and 2008
  
     
 
Consolidated Statements of Cash Flows (unaudited)
7
 
          For the three months ended June 30, 2009 and 2008
  
 
          For the six months ended June 30, 2009 and 2008
  
     
 
Notes to Consolidated Financial Statements (unaudited)
8-32
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
33-51
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
     
Item 4.
Controls and Procedures
51
     
   
PART II.  OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
52
     
Item 4.
Submission of Matters to a Vote of Security Holders
52
     
Item 6.
Exhibits
53
     
Signature
  
53

References throughout this document to the Company, “we,” “our,” “ours” and “us” refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Information provided in this Quarterly Report on Form 10-Q (this “10-Q”) 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, business strategy, budgets, the impact of reductions in reimbursement and other changes in government reimbursement programs, projected costs and capital expenditures, growth opportunities, ability to refinance our indebtedness on favorable terms, plans and objectives of management for future operations and words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” "intend,” ”should,” “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 statements 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 referred to below and included 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 factors set forth below. You should also carefully consider the risks described in our 2008 Annual Report on Form 10-K (see Item 1A – “Risk Factors”).  There may be additional risks of which we are presently unaware or that we currently deem immaterial.
_______________________

 
2
 

PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

ASSETS
(in thousands)

   
June 30, 2009
    
December 31, 2008
  
         
(Note 1)
  
Current assets:
            
Cash and cash equivalents
$
95,672
  
$
92,153
  
Restricted cash
  
25,150
    
34,676
  
Accounts receivable, net of allowance for doubtful accounts
            
of $48,386 and $44,830 at June 30, 2009 and
            
December 31, 2008, respectively
  
216,795
    
205,620
  
Prepaid expenses and other assets
  
23,141
    
21,456
  
Assets held for sale
  
959
    
3,654
  
Deferred tax assets
  
58,534
    
57,261
  
             
Total current assets
  
420,251
    
414,820
  
             
Property and equipment, net
  
611,403
    
603,645
  
Intangible assets, net
  
50,723
    
54,388
  
Goodwill
  
327,020
    
326,808
  
Restricted cash, non-current
  
3,308
    
3,303
  
Deferred tax assets
  
121,015
    
134,807
  
Other assets
  
5,068
    
5,563
  
             
Total assets
$
1,538,788
  
$
1,543,334
  





See accompanying notes.


 
3
 

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited) (CONTINUED)

LIABILITIES AND STOCKHOLDERS’ EQUITY
(in thousands, except share data)

   
June 30, 2009
    
December 31, 2008
  
         
(Note 1)
  
Current liabilities:
            
Accounts payable
$
56,821
  
$
62,000
  
Accrued compensation and benefits
  
61,031
    
60,660
  
Accrued self-insurance obligations, current
  
48,619
    
45,293
  
Other accrued liabilities
  
55,831
    
56,857
  
Current portion of long-term debt and capital lease obligations
  
8,260
    
17,865
  
             
Total current liabilities
  
230,562
    
242,675
  
             
Accrued self-insurance obligations, net of current portion
  
112,482
    
114,557
  
Long-term debt and capital lease obligations, net of current portion
  
696,022
    
707,976
  
Unfavorable lease obligations, net
  
14,092
    
15,514
  
Other long-term liabilities
  
59,045
    
58,903
  
             
Total liabilities
  
1,112,203
    
1,139,625
  
             
Commitments and contingencies (Note 5)
            
             
Stockholders’ equity:
            
Preferred stock of $.01 par value, authorized 10,000,000
            
shares, no shares were issued or outstanding as of
            
June 30, 2009 and December 31, 2008
  
-
    
-
  
Common stock of $.01 par value, authorized 125,000,000 
            
shares; 43,720,116 and 43,544,765 shares issued and
            
outstanding as of June 30, 2009 and December 31, 2008,
            
respectively
  
437
    
435
  
Additional paid-in capital
  
652,773
    
650,543
  
Accumulated deficit
  
(222,344
)
  
(242,683
)
Accumulated other comprehensive loss, net
  
(4,281
)
  
(4,586
)
Total stockholders’ equity
  
426,585
    
403,709
  
             
Total liabilities and stockholders’ equity
$
1,538,788
  
$
1,543,334
  





See accompanying notes.

 
4
 

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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


   
For the
  
   
Three Months Ended
  
   
June 30, 2009
    
June 30, 2008
  
             
Total net revenues
$
468,884
  
$
450,933
  
Costs and expenses:
            
Operating salaries and benefits
  
262,039
    
252,088
  
Self-insurance for workers’ compensation and general and
            
professional liability insurance
  
16,815
    
11,697
  
Operating administrative expenses
  
13,192
    
12,944
  
Other operating costs
  
94,563
    
92,179
  
Center rent expense
  
18,268
    
18,534
  
General and administrative expenses
  
15,721
    
16,111
  
Depreciation and amortization
  
11,153
    
9,782
  
Provision for losses on accounts receivable
  
6,294
    
2,877
  
Interest, net of interest income of $96 and $569, respectively
  
12,465
    
13,643
  
Loss on sale of assets
  
40
    
-
  
Total costs and expenses
  
450,550
    
429,855
  
             
Income before income taxes and discontinued operations
  
18,334
    
21,078
  
Income tax expense
  
7,517
    
8,445
  
Income from continuing operations
  
10,817
    
12,633
  
             
Discontinued operations:
            
Loss from discontinued operations, net of related taxes
  
(714
)
  
(1,141
)
Loss on disposal of discontinued operations, net of
            
related taxes
  
(7
)
  
(1,807
)
Loss from discontinued operations, net
  
(721
)
  
(2,948
)
             
Net income
$
10,096
  
$
9,685
  
             
Basic earnings per common and common equivalent share:
            
Income from continuing operations
$
0.25
  
$
0.29
  
Loss from discontinued operations, net
  
(0.02
)
  
(0.07
)
Net income
$
0.23
  
$
0.22
  
             
Diluted earnings per common and common equivalent share:
            
Income from continuing operations
$
0.25
  
$
0.29
  
Loss from discontinued operations, net
  
(0.02
)
  
(0.07
)
Net income
$
0.23
  
$
0.22
  
             
Weighted average number of common and common
            
equivalent shares outstanding:
            
Basic
  
43,851
    
43,188
  
Diluted
  
43,960
    
43,928
  

See accompanying notes.

 
5
 

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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


   
For the
  
   
Six Months Ended
  
   
June 30, 2009
    
June 30, 2008
  
             
Total net revenues
$
937,180
  
$
901,302
  
Costs and expenses:
            
Operating salaries and benefits
  
525,023
    
507,019
  
Self-insurance for workers’ compensation and general and
            
professional liability insurance
  
31,474
    
26,471
  
Operating administrative expenses
  
25,769
    
24,880
  
Other operating costs
  
190,382
    
185,121
  
Center rent expense
  
36,683
    
36,975
  
General and administrative expenses
  
32,471
    
32,697
  
Depreciation and amortization
  
21,876
    
19,389
  
Provision for losses on accounts receivable
  
10,281
    
6,184
  
Interest, net of interest income of $203 and $1,114, respectively
  
25,191
    
28,074
  
Loss (gain) on sale of assets
  
41
    
(76
)
Total costs and expenses
  
899,191
    
866,734
  
             
Income before income taxes and discontinued operations
  
37,989
    
34,568
  
Income tax expense
  
15,575
    
13,833
  
Income from continuing operations
  
22,414
    
20,735
  
             
Discontinued operations:
            
Loss from discontinued operations, net of related taxes
  
(1,760
)
  
(604
)
Loss on disposal of discontinued operations, net of
            
related taxes
  
(315
)
  
(1,869
)
Loss from discontinued operations, net
  
(2,075
)
  
(2,473
)
             
Net income
$
20,339
  
$
18,262
  
             
Basic earnings per common and common equivalent share:
            
Income from continuing operations
$
0.51
  
$
0.48
  
Loss from discontinued operations, net
  
(0.05
)
  
(0.06
)
Net income
$
0.46
  
$
0.42
  
             
Diluted earnings per common and common equivalent share:
            
Income from continuing operations
$
0.51
  
$
0.47
  
Loss from discontinued operations, net
  
(0.05
)
  
(0.06
)
Net income
$
0.46
  
$
0.41
  
             
Weighted average number of common and common
            
equivalent shares outstanding:
            
Basic
  
43,748
    
43,122
  
Diluted
  
43,891
    
44,034
  

See accompanying notes.


 
6
 

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)

   
For the
    
For the
  
   
Three Months Ended
    
Six Months Ended
  
   
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
   
(Unaudited)
    
(Unaudited)
  
Cash flows from operating activities:
                        
Net income
$
10,096
  
$
9,685
  
$
20,339
  
$
18,262
  
Adjustments to reconcile net income to net cash provided by
                        
operating activities, including discontinued operations:
                        
Depreciation and amortization
  
11,153
    
9,883
    
21,876
    
19,600
  
Amortization of favorable and unfavorable lease intangibles
  
(474
)
  
(488
)
  
(876
)
  
(991
)
Provision for losses on accounts receivable
  
6,294
    
3,210
    
10,281
    
6,511
  
Loss on sale of assets, including discontinued
                        
operations, net
  
53
    
1,732
    
575
    
1,716
  
Impairment charge for discontinued operation
  
-
    
1,800
    
-
    
1,800
  
Stock-based compensation expense
  
1,641
    
1,368
    
2,909
    
2,333
  
Deferred taxes
  
6,345
    
6,442
    
12,519
    
8,271
  
Other
  
-
    
79
    
-
    
79
  
Changes in operating assets and liabilities, net of acquisitions:
                        
Accounts receivable
  
(11,599
)
  
(3,512
)
  
(21,667
)
  
(19,552
)
Restricted cash
  
1,415
    
3,058
    
9,521
    
3,063
  
Prepaid expenses and other assets
  
(392
)
  
(1,905
)
  
(238
)
  
(5,321
)
Accounts payable
  
(1,527
)
  
(1,727
)
  
(5,063
)
  
(3,130
)
Accrued compensation and benefits
  
(3,907
)
  
(4,713
)
  
366
    
(3,651
)
Accrued self-insurance obligations
  
344
    
(2,268
)
  
1,251
    
(235
)
Income taxes payable
  
-
    
1,121
    
-
    
1,591
  
Other accrued liabilities
  
(5,571
)
  
(10,049
)
  
(825
)
  
(3,617
)
Other long-term liabilities
  
885
    
4,266
    
1,181
    
6,052
  
Net cash provided by operating activities
  
14,756
    
17,982
    
52,149
    
32,781
  
                         
Cash flows from investing activities:
                        
Capital expenditures
  
(13,137
)
  
(10,223
)
  
(25,002
)
  
(16,139
)
Purchase of leased real estate
  
(3,275
)
  
(727
)
  
(3,275
)
  
(727
)
Proceeds from sale of assets held for sale
  
-
    
180
    
2,174
    
3,957
  
Acquisitions, net of cash acquired
  
-
    
(6
)
  
-
    
(313
)
Insurance proceeds received
  
-
    
75
    
-
    
75
  
Net cash used for investing activities
  
(16,412
)
  
(10,701
)
  
(26,103
)
  
(13,147
)
                         
Cash flows from financing activities:
                        
Borrowings of long-term debt
  
-
    
20,290
    
-
    
20,290
  
Principal repayments of long-term debt and capital lease
                        
obligations
  
(2,075
)
  
(22,115
)
  
(21,687
)
  
(25,199
)
Payment to non-controlling interest
  
-
    
-
    
-
    
(2,035
)
Distribution to non-controlling interest
  
(549
)
  
-
    
(860
)
  
(223
)
Proceeds from issuance of common stock
  
7
    
31
    
20
    
70
  
Net cash used for financing activities
  
(2,617
)
  
(1,794
)
  
(22,527
)
  
(7,097
)
                         
Net (decrease) increase in cash and cash equivalents
  
(4,273
)
  
5,487
    
3,519
    
12,537
  
Cash and cash equivalents at beginning of period
  
99,945
    
62,882
    
92,153
    
55,832
  
Cash and cash equivalents at end of period
$
95,672
  
$
68,369
  
$
95,672
  
$
68,369
  
                         
 
 
See accompanying notes.

 
7
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(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 report 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

Our subsidiaries provide long-term, post-acute and related specialty healthcare in the United States.  We operate through three principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, and (iii) medical staffing services.  Inpatient services represent the most significant portion of our business.  We operated 207 healthcare centers in 25 states as of June 30, 2009.

Other Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with our customary accounting practices and accounting principles generally accepted in the United States for interim financial statements.  In our opinion, the accompanying interim consolidated financial statements are a fair statement of our financial position at June 30, 2009, and our consolidated results of operations and cash flows for the three-month and six-month periods ended June 30, 2009 and 2008, respectively.  These statements are unaudited, and certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations of the Securities and Exchange Commission.  The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of only normal recurring items.  Readers of these statements should refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2008, which are included in our Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”).

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 significant contingent assets and liabilities at the date of the 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, loss accruals, and income taxes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”).  SFAS No. 160 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements; that net income attributable to the parent and the noncontrolling interest be clearly identifiable; that changes in a parent’s ownership interest, while the parent retains its controlling financial interest in its subsidiary, be accounted for as equity transactions and that disclosures be expanded to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  SFAS No. 160 was effective beginning January 1, 2009, and did not have a material impact on our financial position, cash flows or results of operations.

In February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which delayed the effective date of the FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”), for certain nonfinancial assets and nonfinancial liabilities until interim periods for fiscal years beginning after November 15, 2008.  SFAS No. 157 changed the underlying methodology of determining fair value when fair value measurements are required in accounting principles generally accepted in the United States.  SFAS No. 157 also expanded the disclosure requirements about fair value measurements.  The adoption of FSP FAS 157-2 did not have a material impact on our financial position, cash flows or results of operations.
 
8
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”), which expands quarterly disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity (“SFAS No. 133”), about an entity’s derivative instruments and hedging activities. SFAS No. 161 was effective for fiscal years beginning January 1, 2009, and we have included the required disclosures in Note 2 – “Long-Term Debt and Capital Lease Obligations” below.

In April 2008, the FASB issued Staff Position FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). This pronouncement amends Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), regarding the factors that should be considered in developing the useful lives for intangible assets with renewal or extension provisions. FSP FAS 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions, when determining the useful life of an intangible asset. In the absence of such experience, an entity shall consider the assumptions that market participants would use concerning renewal or extension, adjusted for entity-specific factors. FSP FAS 142-3 also requires an entity to disclose information regarding the extent to which the expected future cash flows associated with an intangible asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 is effective for qualifying intangible assets acquired on or after January 1, 2009. The application of FSP FAS 142-3 did not have a material impact on our financial position, cash flows or results of operations; however, it could impact future transactions.  

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”), and Accounting Principles Board Opinion No. 28, Interim Financial Reporting (“APB No. 28”).  This pronouncement was effective for our reporting periods beginning with our June 30, 2009 interim financial statements.  The amendments expand the disclosure requirements of SFAS No. 107 and APB No. 28 about how an entity reports on fair value to be included in the summarized, interim financial statements.  The adoption of SFAS No. 107 and APB No. 28 did not have a material impact on our financial position, cash flows or results of operations.  All required disclosures have been included in our June 30, 2009 interim financial statements.

In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS Nos. 115-2 and 124-2”), which provides guidance for measuring and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in interim and annual financial statements.  As we currently do not own any debt or equity securities, this Staff Position is not expected to impact our financial position, cash flows or results of operations.  Should we own any such securities in the future, the provisions of this Staff Position will be applied.

In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”), which expands quarterly disclosure requirements in SFAS No. 157 about how an entity determines fair value when the volume and level of activity for an asset or liability have significantly decreased and transactions related to such assets and liabilities are not orderly.  This pronouncement was effective beginning with our June 30, 2009 interim financial statements.  The adoption of FSP FAS 157-4 did not have a material impact on our financial position, cash flows or results of operations.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (“SFAS No. 165”), which provides guidance on accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS No. 165 requires companies to evaluate events or transactions taking place after the balance sheet date for recognition in the financial statements prior to issuance.  Additionally, SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued.  SFAS No. 165 became effective for our interim and annual reporting periods on April 1, 2009.  The adoption of SFAS No. 165 did not impact our financial position, cash flows or results of operations.  For the purposes of this reporting
 
9
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 
period, we have evaluated the subsequent events occurring after June 30, 2009 through August 6, 2009, which we consider to be the date that the financial statements were “issued” and “available to be issued”.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS No. 166”), which provides guidance on accounting for and disclosure of  the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  Additionally, SFAS No. 166 eliminates the concept of the “qualified special purpose entity” (as established in Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125) and replaces it with the the concept of a “participating interest”, which is defined as an entity having a proportionate ownership interest in the asset(s) being transferred.  SFAS No. 166 is effective for annual reporting periods beginning after November 15, 2009.  We do not expect SFAS No. 166 to have any impact on our financial position, cash flows or results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments for FASB Interpretation No. 46(R) (“SFAS No. 167”), which provides guidance on determining whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”) based on the power to direct the activities of the VIE and the obligation to absorb losses of the VIE.  SFAS No. 167 requires an entity to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance.  Additionally, SFAS No. 167 requires an entity to assess, on an ongoing basis, whether or not it continues to be the primary beneficiary of a VIE.  SFAS No. 167 is effective for annual reporting periods beginning after November 15, 2009.  We do not expect SFAS No. 167 to have any impact on our financial position, cash flows or results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards CodificationTM (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS No. 168”), which established the Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009.  The impact of SFAS No. 168 will only impact references for accounting guidance.

Reclassifications and Adjustments

Certain reclassifications have been made to the prior period financial statements to conform to the 2009 financial statement presentation.  Primarily, we have reclassified the results of operations of four divested centers (see Note 4 – “Discontinued Operations and Assets Held for Sale”) for all periods presented to discontinued operations within the income statement, in accordance with accounting principles generally accepted in the United States.  As discussed in “Recent Accounting Pronouncements” above, the adoption of SFAS No. 160 did not have a material impact on our financial position, cash flows or results of operations, although we did reclassify $1.5 million previously reported as minority interest payable on our December 31, 2008 consolidated balance sheet in our 2008 Form 10-K to other long-term liabilities to conform to the 2009 financial statement presentation.


 
10
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


(2)  Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following as of the periods indicated (in thousands):

   
June 30, 2009
    
December 31, 2008
  
             
Revolving credit facility
$
-
  
$
-
  
Mortgage notes payable due at various dates through 2037, interest at
            
rates from 3.7% to 11.1%, collateralized by the carrying values of
            
various centers totaling approximately $200,000 (1)
  
172,430
    
178,142
  
Term loan agreement
  
330,786
    
346,359
  
Senior subordinated notes
  
200,000
    
200,000
  
Capital leases
  
1,066
    
1,340
  
Total long-term obligations
  
704,282
    
725,841
  
Less amounts due within one year
  
(8,260
)
  
(17,865
)
Long-term obligations, net of current portion
$
696,022
  
$
707,976
  

(1)
The mortgage notes payable balance includes fair value premiums of $0.7 million related to acquisitions.


The scheduled or expected maturities of long-term obligations, excluding premiums, as of June 30, 2009, were as follows (in thousands):

For the twelve months ending June 30:
  
       
2010    
$
8,260
  
2011
  
62,227
  
2012
  
6,664
  
2013
  
6,789
  
2014
  
351,568
  
Thereafter
  
268,087
  
 
$
703,595
  

We manage interest expense using a mix of fixed and variable rate debt, and to help manage borrowing costs, we may enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. We use interest rate swaps to manage interest rate risk related to borrowings.  Our intent is to only enter such arrangements that qualify for hedge accounting treatment in accordance with SFAS No. 133.  Accordingly, we designate all such arrangements as cash-flow hedges and perform initial and quarterly effectiveness testing using the hypothetical derivative method.  To the extent that such arrangements are effective hedges, changes in fair value are recognized through other comprehensive loss.  Ineffectiveness, if any, would be recognized in earnings.

We entered into interest rate swap agreements in July 2008 and July 2007 for interest rate risk management purposes.  The interest rate swap agreements effectively modify our exposure to interest rate risk by converting a portion of our floating rate debt to a fixed rate.  These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.  The July 2008 agreement is based on a notional amount of $50.0 million and has a term of two years.  Settlement occurs on a quarterly basis, which is based upon a floating rate of LIBOR and an annual fixed rate of 3.65%.  The July 2007 agreement is based on a notional amount of $100.0 million and has a term of three years.  Settlement occurs on a quarterly basis, which is based upon a floating rate of LIBOR and an annual fixed rate of 5.388%.
 
11
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

The interest rate swap agreements qualify for hedge accounting treatment under SFAS No. 133 and have been designated as cash flow hedges.  Hedge effectiveness testing for the three and six months ended June 30, 2009 and 2008 indicates that the swaps are highly effective hedges and as such, there is no amount related to hedging ineffectiveness to expense.  We do not anticipate our 2009 other comprehensive loss to be reclassified into earnings within the next year.

The fair values of our interest rate swap agreements as presented in the consolidated balance sheets are as follows (in thousands):

   
Liability Derivatives
   
June 30, 2009
  
December 31, 2008
   
Balance Sheet
        
Balance Sheet
        
   
Location
    
Fair Value
  
Location
    
Fair Value
  
Derivatives designated as
                      
hedging instruments:
                      
Interest rate swap
  
Other Long Term
        
Other Long Term
        
agreements
  
Liabilities
  
$
7,135
  
Liabilities
  
$
7,644
  


The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the three months ended June 30, is as follows (in thousands):

       
Gain/(Loss) Reclassified from
   
Amount of Gain/(Loss) Recognized in
  
Accumulated Other Comprehensive
   
Other Comprehensive Income/(Loss)
  
Loss to Income (effective portion)
   
2009
    
2008
  
2009
    
2008
  
Derivatives designated as cash
                      
flow hedges:
                      
Interest rate swap agreements
$
374
  
$
1,580
$
                       -
  
$
                   -
  


The effect of the interest rate swap agreements on our consolidated comprehensive income, net of related taxes, for the six months ended June 30, is as follows (in thousands):

       
Gain/(Loss) Reclassified from
   
Amount of Gain/(Loss) Recognized in
  
Accumulated Other Comprehensive
   
Other Comprehensive Income/(Loss)
  
Loss to Income (effective portion)
   
2009
    
2008
  
2009
    
2008
  
Derivatives designated as cash
                      
flow hedges:
                      
Interest rate swap agreements
$
305
  
$
(141)
$
                       -
  
$
                   -
  


 
12
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


(3)  Fair Value of Financial Instruments

The estimated fair values of our financial instruments were as follows (in thousands):

   
June 30, 2009
  
December 31, 2008
   
Carrying
      
Carrying
    
   
Amount
  
Fair Value
  
Amount
  
Fair Value
                 
Cash and cash equivalents
$
95,672
$
95,672
$
92,153
$
92,153
Restricted cash
$
28,458
$
28,458
$
37,979
$
37,979
Long-term debt and capital lease obligations,
                
   including current portion
$
704,282
$
667,715
$
725,841
$
645,434
Interest rate swap agreements
$
7,135
$
7,135
$
7,644
$
7,644

The cash and cash equivalents and restricted cash carrying amounts approximate fair value because of the short maturity of these instruments. At June 30, 2009 and December 31, 2008, the fair value of our long-term debt, including current maturities, and our interest rate swap agreements 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.

SFAS No. 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value, and expands disclosures about such fair value measurements.  Issued in February 2008, FASB Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, removed leasing transactions accounted for under Statement No. 13 and related guidance from the scope of SFAS No. 157.  FASB Staff Position No. 157-2, Partial Deferral of the Effective Date of Statement 157, deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

SFAS No. 157 establishes a hierarchy for ranking the quality and reliability of the information used to determine fair values.  The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:
Unadjusted quoted market prices in active markets for identical assets or liabilities.
   
Level 2:
Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
   
Level 3:
Unobservable inputs for the asset or liability.
 
 
13
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 
We endeavor to utilize the best available information in measuring fair value.  The following tables summarize the valuation of our financial instruments by the above SFAS No. 157 pricing levels as of June 30, 2009 and December 31, 2008, respectively (in thousands):

   
June 30, 2009
   
Total
  
Unadjusted Quoted
Market Prices
(Level 1)
  
Significant Other
Observable Inputs
(Level 2)
             
Cash equivalents – money market
            
  funds/certificate of deposit
$
51,905
$
20,496
$
31,409
Restricted cash – money market funds
$
1,695
$
1,695
$
-
Interest rate swap agreements – liability
$
7,135
$
-
$
7,135


   
December 31, 2008
   
Total
  
Unadjusted Quoted
Market Prices
(Level 1)
  
Significant Other
Observable Inputs
(Level 2)
             
Cash equivalents – money market
            
  funds/certificate of deposit
$
10,098
$
5,053
$
5,045
Restricted cash – money market funds
$
1,272
$
1,272
$
-
Interest rate swap agreements – liability
$
7,644
$
-
$
7,644

We currently have no other financial instruments subject to fair value measurement on a recurring basis.


(4) Discontinued Operations and Assets Held for Sale

(a) Discontinued Operations

In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of operations of assets to be disposed of, disposed assets and the gains (losses) related to these divestitures have been classified as discontinued operations for all periods presented in the accompanying consolidated income statements as their operations and cash flows have been (or will be) eliminated from our ongoing operations and we will not have any significant continuing involvement in their operations after their disposal.

As a result of June 2008 flooding in the Midwest, our center in Terre Haute, Indiana was severely damaged and the operation permanently discontinued, at which time we recorded a $1.8 million fixed assets impairment charge for the three months ended June 30, 2008 due to the damage to the building and contents.  This center was sold during March 2009 for cash proceeds of $2.2 million.  We recorded a $0.5 million loss on disposal during the three months ended March 31, 2009.

During 2008, we reclassified six skilled nursing centers into discontinued operations because they were divested, sold or otherwise qualified as assets held for sale. In the second quarter of 2008, we sold two hospitals that were classified as held for sale since 2007 for $10.1 million and recorded a net loss of $2.7 million. In the third quarter of 2008, we exercised an option to purchase a skilled nursing center in Indiana that was classified as held for sale since 2007 and simultaneously sold the asset for a net $0.4 million and recorded a net loss of $0.2 million.  In the third quarter of 2008, we exercised options to purchase two skilled nursing centers in Oklahoma that were classified as held for sale.  We sold these two centers and one other Oklahoma skilled nursing center for $7.6 million and recorded a net loss of $0.9 million.  We also transferred operations of a leased skilled nursing center in Tennessee to an outside party. In the fourth quarter of 2008, we transferred operations of a leased skilled nursing center in Utah to an outside party.  We also sold a subsidiary that provided adolescent rehabilitation and special education services.
 
14
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

 
A summary of the discontinued operations for the periods presented is as follows (in thousands):

   
For the Three Months Ended
  
   
June 30, 2009
  
   
Inpatient
              
   
Services
    
Other
    
Total
  
                   
Net operating revenues
$
10
  
$
-
  
$
10
  
                   
Loss from discontinued operations, net (1)
$
(705
)
$
(9
)
$
(714
)
(Loss) gain on disposal of discontinued operations, net (2)
  
(20
)
  
13
    
(7
)
(Loss) income from discontinued operations, net
$
(725
)
$
4
  
$
(721
)

(1)  Net of related tax benefit of $496
(2)  Net of related tax benefit of $5

   
For the Three Months Ended
  
   
June 30, 2008
  
   
Inpatient
              
   
Services
    
Other
    
Total
  
                   
Net operating revenues
$
17,518
  
$
5,271
  
$
22,789
  
                   
(Loss) income from discontinued operations, net (1)
$
(1,356
)
$
215
  
$
(1,141
)
Loss on disposal of discontinued operations, net (2)
  
(1,807
)
  
-
    
(1,807
)
(Loss) income from discontinued operations, net
$
(3,163
)
$
215
  
$
(2,948
)

(1)  Net of related tax benefit of $784
(2)  Net of related tax benefit of $1,204

   
For the Six Months Ended
  
   
June 30, 2009
  
   
Inpatient
              
   
Services
    
Other
    
Total
  
                   
Net operating revenues
$
53
  
$
-
  
$
53
  
                   
Loss from discontinued operations, net (1)
$
(1,744
)
$
(16
)
$
(1,760
)
Loss on disposal of discontinued operations, net (2)
  
(299
)
  
(16
)
  
(315
)
Loss from discontinued operations, net
$
(2,043
)
$
(32
)
$
(2,075
)
 
(1)  Net of related tax benefit of $1,223
      
(2)  Net of related tax benefit of $219
 
15
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 
   
For the Six Months Ended
  
   
June 30, 2008
  
   
Inpatient
              
   
Services
    
Other
    
Total
  
                   
Net operating revenues
$
37,527
  
$
9,590
  
$
47,117
  
                   
Loss from discontinued operations, net (1)
$
(441
)
$
(163
)
$
(604
)
Loss on disposal of discontinued operations, net (2)
  
(1,823
)
  
(46
)
  
(1,869
)
Loss from discontinued operations, net
$
(2,264
)
$
(209
)
$
(2,473
)

(1)  Net of related tax benefit of $389
(2)  Net of related tax benefit of $1,195

(b) Assets Held for Sale

As of June 30, 2009, assets held for sale consisted of an undeveloped parcel of land valued at $1.0 million, which is classified in our Corporate segment in our consolidated financial statements.

(5)  Commitments and Contingencies

Insurance

We self-insure for certain insurable risks, including general and professional liabilities, workers' compensation liabilities and employee health insurance liabilities 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 a risk that amounts funded to our self-insurance programs may not be sufficient to respond to all claims asserted under those programs. Insurance reserves represent estimates of future claims payments.  This liability includes an estimate of the development of reported losses and losses incurred but not reported.  Provisions for changes in insurance reserves are made in the period of the related coverage.  An independent actuarial analysis is prepared twice a year to assist management in determining the adequacy of the self-insurance obligations booked as liabilities in our financial statements.  The methods of making such estimates and establishing the resulting reserves are reviewed periodically and are based on historical paid claims information and nationwide nursing home trends. Any adjustments resulting from such reviews are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

We evaluate the adequacy of our self-insurance reserves on a quarterly basis and perform detailed actuarial analyses semi-annually in the second and fourth quarters. The analyses use generally accepted actuarial methods in evaluating the workers’ compensation reserves and general and professional liability reserves.  For both the workers’ compensation reserves and the general and professional liability reserves, those methods include reported and paid loss development methods, expected loss method and the reported and paid Bornhuetter-Ferguson methods.  Reported loss methods focus on development of case reserves for incurred losses through claims closure.  Paid loss methods focus on development of claims actually paid to date.  Expected loss methods are based upon an anticipated loss per unit of measure.  The Bornhuetter-Ferguson method is a combination of loss development methods and expected methods.

The foundation for most of these methods is our actual historical reported and/or paid loss data, over which we have effective internal controls.  We utilize third-party administrators (“TPAs”) to process claims and to provide us with the data utilized in our semi-annual actuarial analyses.  The TPAs are under the oversight of our in-house risk management and legal functions.  These functions ensure that the claims are properly administered so that the historical data is reliable for estimation purposes.  Case reserves, which are approved by our legal and risk management departments, are determined based on our estimate of the ultimate settlement of individual claims.  In cases where our historical data are not statistically credible, stable, or mature, we supplement our experience with skilled nursing industry benchmark reporting and payment patterns.
 
16
 
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 
The use of multiple methods tends to eliminate any biases that one particular method might have.  Management’s judgment based upon each method’s inherent limitation is applied when weighting the results of each method.  The results of each of the methods are estimates of ultimate losses which include the case reserves plus an estimate for future development of these reserves based on past trends, and an estimate for losses incurred but not reported.   These results are compared by accident year, and an estimated unpaid loss and allocated loss adjustment expense is determined for the open accident years based on judgment reflecting the range of estimates produced by the methods.

During the three and six months ended June 30, 2009, we determined that the previous estimates for general and professional liabilities reserves for accident years prior to 2009 were understated, based on currently available information, by $4.9 million or 5.5%.  Of that amount, $4.3 million related to continuing operations and $0.6 million related to discontinued operations.  There were no large or unusual settlements or significant new claims during the period. Professional liability claims have a reporting tail that exceeds one year.  A significant component of our reserves is estimates for incidents that have been incurred but not reported. The increase in prior period reserves is driven in part by an increase in our estimate of incurred but not reported claims.

Activity in our insurance reserves as of and for the three and six months ended June 30, 2009 and 2008 is as follows (in thousands):

   
Professional
    
Workers’
        
   
Liability
    
Compensation
    
Total
  
                   
Balance as of January 1, 2008
$
86,291
  
$
61,439
  
$
147,730
  
Current year provision, continuing operations
  
8,321
    
6,453
    
14,774
  
Current year provision, discontinued operations
  
465
    
272
    
737
  
Claims paid, continuing operations
  
(4,125
)
  
(4,349
)
  
(8,474
)
Claims paid, discontinued operations
  
(1,249
)
  
(1,016
)
  
(2,265
)
Amounts paid for administrative services and other
  
(1,052
)
  
(2,025
)
  
(3,077
)
Balance as of March 31, 2008
  
88,651
    
60,774
    
149,425
  
                   
Current year provision, continuing operations
  
6,576
    
7,771
    
14,347
  
Current year provision, discontinued operations
  
128
    
475
    
603
  
Prior year reserve adjustments, continuing operations
  
(5,250
)
  
2,600
    
(2,650
)
Prior year reserve adjustments, discontinued operations
(770
)
  
400
    
(370
)
Claims paid, continuing operations
  
(4,234
)
  
(5,420
)
  
(9,654
)
Claims paid, discontinued operations
  
(932
)
  
(669
)
  
(1,601
)
Amounts paid for administrative services and other
  
(1,044
)
  
(1,157
)
  
(2,201
)
Balance as of June 30, 2008
$
83,125
  
$
64,774
  
$
147,899
  
                   

 
17
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



   
Professional
    
Workers’
        
   
Liability
    
Compensation
    
Total
  
                   
Balance as of January 1, 2009
$
87,282
  
$
66,588
  
$
153,870
  
Current year provision, continuing operations
  
7,240
    
7,419
    
14,659
  
Current year provision, discontinued operations
  
306
    
155
    
461
  
Claims paid, continuing operations
  
(4,234
)
  
(5,217
)
  
(9,451
)
Claims paid, discontinued operations
  
(936
)
  
(835
)
  
(1,771
)
Amounts paid for administrative services and other
  
(1,362
)
  
(1,900
)
  
(3,262
)
Balance as of March 31, 2009
  
88,296
    
66,210
    
154,506
  
                   
Current year provision, continuing operations
  
6,040
    
6,475
    
12,515
  
Current year provision, discontinued operations
  
331
    
155
    
486
  
Prior year reserve adjustments, continuing operations
  
4,300
    
-
    
4,300
  
Prior year reserve adjustments, discontinued operations
  
590
    
-
    
590
  
Claims paid, continuing operations
  
(6,858
)
  
(5,538
)
  
(12,396
)
Claims paid, discontinued operations
  
(1,487
)
  
(539
)
  
(2,026
)
Amounts paid for administrative services and other
  
(1,115
)
  
(1,757
)
  
(2,872
)
Balance as of June 30, 2009
$
90,097
  
$
65,006
  
$
155,103
  


A summary of the assets and liabilities related to insurance risks at June 30, 2009 and December 31, 2008 is as indicated (in thousands):

   
June 30, 2009
      
December 31, 2008
  
   
Professional
    
Workers’
        
|
  
Professional
    
Workers’
        
   
Liability
    
Compensation
    
Total
  
|
  
Liability
    
Compensation
    
Total
  
Assets (1):
                  
|
                  
Restricted cash
                  
|
                  
Current
$
3,589
  
$
13,062
  
$
16,651
  
|
$
3,439
  
$
22,131
  
$
25,570
  
Non-current
  
-
    
-
    
-
  
|
  
-
    
-
    
-
  
Total
$
3,589
  
$
13,062
  
$
16,651
  
|
$
3,439
  
$
22,131
  
$
25,570
  
                   
|
                  
Liabilities (2)(3):
        
|
                  
Self-insurance
                  
|
                  
Liabilities
                  
|
                  
Current
$
22,544
  
$
20,077
  
$
42,621
  
|
$
20,739
  
$
18,574
  
$
39,313
  
Non-current
  
67,553
    
44,929
    
112,482
  
|
  
66,543
    
48,014
    
114,557
  
Total
$
90,097
  
$
65,006
  
$
155,103
  
|
$
87,282
  
$
66,588
  
$
153,870
  

(1)
  
Total restricted cash includes cash collateral deposits posted and other cash deposits held by third parties.  Total restricted cash above excludes $11,807 and $12,409 at June 30, 2009 and December 31, 2008, respectively, held for bank collateral, various mortgages, bond payments and capital expenditures on HUD insured buildings.
     
(2)
  
Total self-insurance liabilities above excludes $5,998 and $5,980 at June 30, 2009 and December 31, 2008, respectively, related to our employee health insurance liabilities.
     
(3)
  
Total self-insurance liabilities are collateralized, in addition to the restricted cash, by letters of credit of $750 and $56,472 for general and professional liability insurance and workers’ compensation, respectively, as of June 30, 2009 and $750 and $48,172 for general and professional liability insurance and workers’ compensation, respectively, as of December 31, 2008.
 
 
18
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6)  Income Taxes

The provision for income taxes of $7.5 million and $15.6 million for the three and six months, respectively, ended June 30, 2009 is based on a combined federal and state income tax rate of approximately 41%.  The provision for income taxes of $8.4 million and $13.8 million for the three and six months, respectively, ended June 30, 2008 was based on a combined income tax rate of approximately 40%.

During the three months ended June 30, 2009, the Internal Revenue Service commenced an examination of the tax returns for 2006 and the short-period ended April 19, 2007 of Harborside Healthcare Corporation (“Harborside”), a business we acquired in 2007.  At this time, we are unable to determine what impact, if any, this examination will have on our financial statements.

The realization of our deferred tax assets is dependent upon generation of taxable income during periods in which deductions and/or credits can be utilized.  As a result, we consider the level of historical taxable income, historical non-recurring credits and charges, the scheduled reversal of deferred tax liabilities, tax-planning strategies and projected future taxable income in determining the amount of the valuation allowance.  Based on these considerations, we significantly reduced our valuation allowance in 2007 and 2008.  The remaining valuation allowance of $34.3 million relates primarily to state net operating loss (“NOL”) carryforwards and other deferred tax assets for which realization is uncertain.

The Internal Revenue Code (“IRC”) Section 382 annual base limitation to be applied to our tax attribute carryforwards is approximately $24.9 million, which includes approximately $14.6 million due to a significant acquisition in 2007. Accordingly, our net operating loss (“NOL”), capital loss, and tax credit carryforwards have been reduced to take into account this limitation and the respective carryforward periods for these tax attributes.  As a result of unused IRC Section 382 limitations from prior years and post-ownership change NOLs, there is approximately $134.9 million of NOLs which can be used to offset U.S. taxable income in 2009. Considering annual Section 382 limitations and built-in gains, we have a total of $285.5 million of utilizable NOL carryforwards to offset taxable income in 2009 and future years.

(7)  Other Events

(a)  Litigation

We are a party to various 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 centers and claims relating to employment and commercial matters. Although we intend to vigorously defend ourselves in these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on our results of operations, financial condition and cash flows.

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 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 found 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 continue 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.

        In December 2006, Harborside was notified by the United States Department of Justice (“DOJ”) that one of its subsidiaries is one of a significant number of unrelated defendants in a qui tam lawsuit filed under the Federal False Claims Act. It is our understanding that Harborside’s involvement relates to its Medicare billings for durable medical equipment. Although the complaint remains under seal pending completion of the DOJ’s investigation, it is our understanding that
 
19
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 

neither Sun Healthcare Group, Inc. nor any of its other subsidiaries is a defendant in this litigation.  We have met with a representative of the DOJ to discuss the litigation and intend to continue to cooperate with the investigation and respond to the litigation in a timely fashion.  Based on our understanding of the allegations as described by the DOJ, we do not believe that the litigation will have a material impact on our operations, financial condition and cash flows.

The Kentucky Attorney General’s office commenced an investigation in 2008 that relates to potentially all of our 20 centers in Kentucky, which we acquired in April 2007.  The investigation appears to be focused on resident care provided at certain centers, although we have not been informed of the complete scope of the investigation.  We continue to cooperate with the Attorney General’s office, although we have not been aware of any activity for several months.  At this time we are unable to predict the outcome of the investigation.

(b)  Other Inquiries

From time to time, fiscal intermediaries and Medicaid agencies examine cost reports filed by predecessor operators of our skilled nursing centers. 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 centers, may be held financially responsible for such overpayments. At this time, we are unable to predict the outcome of any existing or future examinations.

(8)  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.

The following summarizes the services provided by our reportable 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 centers by registered nurses, licensed practical nurses and certified nursing aids.  At June 30, 2009, we operated 207 healthcare centers (consisting of 184 skilled nursing centers, 15 assisted living and independent living centers and eight mental health centers) in 25 states with 23,345 licensed beds as compared with 211 healthcare centers (consisting of 188 skilled nursing centers, 15 assisted living and independent living centers, and eight mental health centers) with 23,678 licensed beds at June 30, 2008.

Rehabilitation Therapy Services:  This segment provides primarily physical, occupational and speech and respiratory therapy supplies and services to affiliated and nonaffiliated skilled nursing centers.  At June 30, 2009, this segment provided services in 32 states to 447 centers, of which 326 were nonaffiliated and 121 were affiliated, as compared to 425 centers, of which 317 were nonaffiliated and 108 were affiliated at June 30, 2008.

Medical Staffing Services: As of June 30, 2009, this segment provided services in 36 states and derived 56.5% of its revenues from hospitals and other providers, 24.2% from skilled nursing centers, 15.8% from schools and 3.5% from prisons. We provide (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians, (iv) physicians, and (v) related medical personnel. As of June 30, 2009, this segment had 28 branch offices, which provided temporary therapy, nursing, and pharmacy staffing services in major metropolitan areas and one division office, which specializes in the placement of temporary traveling therapists, and one office servicing locum tenens.

Corporate assets primarily consist of cash and cash equivalents, receivables from subsidiary segments, notes receivable, property and equipment and unallocated intangible assets. Although corporate assets include unallocated intangible assets, the amortization, if applicable, is reflected in the results of operations of the associated segment.
 
The accounting policies of the segments are the same as those described in Note 2 – “Summary of Significant Accounting Policies” of our 2008 Form 10-K.  We primarily evaluate segment performance based on profit or loss from operations before reorganization and restructuring items, income taxes and extraordinary items (net segment income). Gains or losses on sales of assets and certain items including impairment of assets recorded in connection with SFAS No. 144 and
 
 
20
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
 
SFAS No. 142, and restructuring costs are not considered in the evaluation of segment performance.  Interest expense is recorded in the segment carrying the obligation to which the interest relates.

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, distribution channels and capital resource needs.
 
21
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

The following tables summarize, for the periods indicated, operating results and other financial information, by business segment (in thousands):

As of and for the
                                    
Three Months Ended
                                    
June 30, 2009
                                    
         
Rehabilitation
    
Medical
                    
   
Inpatient
    
Therapy
    
Staffing
          
Intersegment
        
   
Services
    
Services
    
Services
    
Corporate
    
Eliminations
    
Consolidated
  
                                     
Revenues from external customers
$
416,622
  
$
26,155
  
$
26,097
  
$
10
  
$
-
  
$
468,884
  
                                     
Intersegment revenues
  
-
    
18,360
    
563
    
-
    
(18,923
)
  
-
  
                                     
Total revenues
  
416,622
    
44,515
    
26,660
    
10
    
(18,923
)
  
468,884
  
                                     
Operating salaries and benefits
  
206,603
    
36,801
    
18,635
    
-
    
-
    
262,039
  
                                     
Self-insurance for workers’
                                    
compensation and general and
                                    
professional liability insurance
  
15,850
    
542
    
320
    
103
    
-
    
16,815
  
                                     
Other operating costs
  
107,416
    
1,930
    
4,140
    
-
    
(18,923
)
  
94,563
  
                                     
General and administrative expenses
  
10,691
    
1,777
    
723
    
15,722
    
-
    
28,913
  
                                     
Provision for losses on accounts
                                    
receivable
  
6,096
    
109
    
89
    
-
    
-
    
6,294
  
                                     
Segment operating income (loss)
$
69,966
  
$
3,356
  
$
2,753
  
$
(15,815
)
$
-
  
$
60,260
  
                                     
Center rent expense
  
17,921
    
114
    
233
    
-
    
-
    
18,268
  
                                     
Depreciation and amortization
  
10,118
    
131
    
232
    
672
    
-
    
11,153
  
                                     
Interest, net
  
3,111
    
-
    
(1
)
  
9,355
    
-
    
12,465
  
                                     
Net segment income (loss)
$
38,816
  
$
3,111
  
$
2,289
  
$
(25,842
)
$
-
  
$
18,374
  
                                     
Identifiable segment assets
$
1,164,361
  
$
14,612
  
$
26,651
  
$
861,749
  
$
(528,446
)
$
1,538,927
  
                                     
Goodwill
$
322,412
  
$
75
  
$
4,533
  
$
-
  
$
-
  
$
327,020
  
                                     
Segment capital expenditures
$
12,146
  
$
123
  
$
10
  
$
858
  
$
-
  
$
13,137
  
 
______________________________________
 
General and administrative expenses include operating administrative expenses.
 
The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, net gain (loss) on sale of assets, income tax expense and discontinued operations.
 
The term “net segment income (loss)” is defined as earnings before gain (loss) on sale of assets, net, income tax expense and discontinued operations.
 
22
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



As of and for the
                                    
Three Months Ended
                                    
June 30, 2008
                                    
         
Rehabilitation
    
Medical
                    
   
Inpatient
    
Therapy
    
Staffing
          
Intersegment
        
   
Services
    
Services
    
Services
    
Corporate
    
Eliminations
    
Consolidated
  
                                     
Revenues from external customers
$
399,686
  
$
21,142
  
$
30,096
  
$
9
  
$
-
  
$
450,933
  
                                     
Intersegment revenues
  
-
    
14,462
    
794
    
-
    
(15,256
)
  
-
  
                                     
Total revenues
  
399,686
    
35,604
    
30,890
    
9
    
(15,256
)
  
450,933
  
                                     
Operating salaries and benefits
  
201,010
    
28,847
    
22,231
    
-
    
-
    
252,088
  
                                     
Self-insurance for workers’
                                    
compensation and general and
                                    
professional liability insurance
  
10,654
    
527
    
401
    
115
    
-
    
11,697
  
                                     
Other operating costs
  
101,415
    
1,758
    
4,262
    
-
    
(15,256
)
  
92,179
  
                                     
General and administrative expenses
  
10,382
    
1,515
    
1,047
    
16,111
    
-
    
29,055
  
                                     
Provision for losses on accounts
                                    
receivable
  
2,652
    
164
    
61
    
-
    
-
    
2,877
  
                                     
Segment operating income (loss)
$
73,573
  
$
2,793
  
$
2,888
  
$
(16,217
)
$
-
  
$
63,037
  
                                     
Center rent expense
  
18,195
    
99
    
240
    
-
    
-
    
18,534
  
                                     
Depreciation and amortization
  
8,733
    
132
    
200
    
717
    
-
    
9,782
  
                                     
Interest, net
  
3,263
    
-
    
(8
)
  
10,388
    
-
    
13,643
  
                                     
Net segment income (loss)
$
43,382
  
$
2,562
  
$
2,456
  
$
(27,322
)
$
-
  
$
21,078
  
                                     
Identifiable segment assets
$
1,114,877
  
$
13,462
  
$
37,133
  
$
725,825
  
$
(521,050
)
$
1,370,247
  
                                     
Goodwill
$
319,744
  
$
-
  
$
4,533
  
$
-
  
$
-
  
$
324,277
  
                                     
Segment capital expenditures
$
9,178
  
$
46
  
$
76
  
$
893
  
$
-
  
$
10,193
  
 
______________________________________
 
General and administrative expenses include operating administrative expenses.
 
The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, net gain (loss) on sale of assets, income tax expense and discontinued operations.
 
The term “net segment income (loss)” is defined as earnings before gain (loss) on sale of assets, net, income tax expense and discontinued operations.


 
23
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



As of and for the
                                    
Six Months Ended
                                    
June 30, 2009
                                    
         
Rehabilitation
    
Medical
                    
   
Inpatient
    
Therapy
    
Staffing
          
Intersegment
        
   
Services
    
Services
    
Services
    
Corporate
    
Eliminations
    
Consolidated
  
                                     
Revenues from external customers
$
832,025
  
$
51,670
  
$
53,471
  
$
14
  
$
-
  
$
937,180
  
                                     
Intersegment revenues
  
-
    
36,576
    
1,123
    
-
    
(37,699
)
  
-
  
                                     
Total revenues
  
832,025
    
88,246
    
54,594
    
14
    
(37,699
)
  
937,180
  
                                     
Operating salaries and benefits
  
413,703
    
72,991
    
38,329
    
-
    
-
    
525,023
  
                                     
Self-insurance for workers’
                                    
compensation and general and
                                    
professional liability insurance
  
29,500
    
1,077
    
692
    
205
    
-
    
31,474
  
                                     
Other operating costs
  
215,764
    
3,720
    
8,596
    
1
    
(37,699
)
  
190,382
  
                                     
General and administrative expenses
  
20,556
    
3,693
    
1,520
    
32,471
    
-
    
58,240
  
                                     
Provision for losses on accounts
                                    
receivable
  
9,753
    
279
    
249
    
-
    
-
    
10,281
  
                                     
Segment operating income (loss)
$
142,749
  
$
6,486
  
$
5,208
  
$
(32,663
)
$
-
  
$
121,780
  
                                     
Center rent expense
  
35,977
    
229
    
477
    
-
    
-
    
36,683
  
                                     
Depreciation and amortization
  
19,846
    
259
    
422
    
1,349
    
-
    
21,876
  
                                     
Interest, net
  
6,322
    
(2
)
  
(1
)
  
18,872
    
-
    
25,191
  
                                     
Net segment income (loss)
$
80,604
  
$
6,000
  
$
4,310
  
$
(52,884
)
$
-
  
$
38,030
  
                                     
Identifiable segment assets
$
1,164,361
  
$
14,612
  
$
26,651
  
$
861,749
  
$
(528,446
)
$
1,538,927
  
                                     
Goodwill
$
322,412
  
$
75
  
$
4,533
  
$
-
  
$
-
  
$
327,020
  
                                     
Segment capital expenditures
$
23,573
  
$
259
  
$
50
  
$
1,120
  
$
-
  
$
25,002
  
 
______________________________________
 
General and administrative expenses include operating administrative expenses.
 
The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, net gain (loss) on sale of assets, income tax expense and discontinued operations.
 
The term “net segment income (loss)” is defined as earnings before gain (loss) on sale of assets, net, income tax expense and discontinued operations.


 
24
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



As of and for the
                                    
Six Months Ended
                                    
June 30, 2008
                                    
         
Rehabilitation
    
Medical
                    
   
Inpatient
    
Therapy
    
Staffing
          
Intersegment
        
   
Services
    
Services
    
Services
    
Corporate
    
Eliminations
    
Consolidated
  
                                     
Revenues from external customers
$
798,666
  
$
42,851
  
$
59,764
  
$
21
  
$
-
  
$
901,302
  
                                     
Intersegment revenues
  
-
    
28,752
    
1,328
    
-
    
(30,080
)
  
-
  
                                     
Total revenues
  
798,666
    
71,603
    
61,092
    
21
    
(30,080
)
  
901,302
  
                                     
Operating salaries and benefits
  
403,542
    
58,772
    
44,705
    
-
    
-
    
507,019
  
                                     
Self-insurance for workers’
                                    
compensation and general and
                                    
professional liability insurance
  
24,444
    
1,054
    
743
    
230
    
-
    
26,471
  
                                     
Other operating costs
  
203,810
    
3,260
    
8,131
    
-
    
(30,080
)
  
185,121
  
                                     
General and administrative expenses
  
19,889
    
3,132
    
1,858
    
32,698
    
-
    
57,577
  
                                     
Provision for losses on accounts
                                    
receivable
  
5,538
    
253
    
393
    
-
    
-
    
6,184
  
                                     
Segment operating income (loss)
$
141,443
  
$
5,132
  
$
5,262
  
$
(32,907
)
$
-
  
$
118,930
  
                                     
Center rent expense
  
36,302
    
185
    
488
    
-
    
-
    
36,975
  
                                     
Depreciation and amortization
  
17,332
    
258
    
395
    
1,404
    
-
    
19,389
  
                                     
Interest, net
  
6,582
    
(1
)
  
(9
)
  
21,502
    
-
    
28,074
  
                                     
Net segment income (loss)
$
81,227
  
$
4,690
  
$
4,388
  
$
(55,813
)
$
-
  
$
34,492
  
                                     
Identifiable segment assets
$
1,114,877
  
$
13,462
  
$
37,133
  
$
725,825
  
$
(521,050
)
$
1,370,247
  
                                     
Goodwill
$
319,744
  
$
-
  
$
4,533
  
$
-
  
$
-
  
$
324,277
  
                                     
Segment capital expenditures
$
14,446
  
$
101
  
$
110
  
$
1,375
  
$
-
  
$
16,032
  
 
______________________________________
 
General and administrative expenses include operating administrative expenses.
 
The term “segment operating income (loss)” is defined as earnings before center rent expense, depreciation and amortization, interest, net gain (loss) on sale of assets, income tax expense and discontinued operations.
 
The term “net segment income (loss)” is defined as earnings before gain (loss) on sale of assets, net, income tax expense and discontinued operations.


 
25
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


Measurement of Segment Income

We evaluate financial performance and allocate resources primarily based on income or loss from operations before income taxes, excluding any unusual items. The following table reconciles net segment income to consolidated income before income taxes and discontinued operations (in thousands):

   
For the Three Months Ended
  
   
June 30,
  
   
2009
    
2008
  
             
Net segment income
$
18,374
  
$
21,078
  
Loss on sale of assets
  
(40
)
  
-
  
Consolidated income before income taxes and
            
discontinued operations
$
18,334
  
$
21,078
  

   
For the Six Months Ended
  
   
June 30,
  
   
2009
    
2008
  
             
Net segment income
$
38,030
  
$
34,492
  
(Loss) gain on sale of assets
  
(41
)
  
76
  
Consolidated income before income taxes and
            
discontinued operations
$
37,989
  
$
34,568
  

(9) Summarized Consolidating Information

In connection with the Company's offering of 9-1/8% Senior Subordinated Notes due 2015 (the “Notes”) in April 2007, certain 100% owned subsidiaries of the Company (the “Guarantors”) have, jointly and severally, unconditionally guaranteed the Notes. These guarantees are subordinated to all existing and future senior debt and senior guarantees of the Guarantors and are unsecured.

The Company conducts all of its business through and derives virtually all of its income from its subsidiaries. Therefore, the Company's ability to make required payments with respect to its indebtedness (including the Notes) and other obligations depends on the financial results and condition of its subsidiaries and its ability to receive funds from its subsidiaries.

Pursuant to Rule 3-10 of Regulation S-X, the following summarized consolidating information is provided for the Company (the “Parent”), the Guarantors, and the Company's non-Guarantor subsidiaries with respect to the Notes. This summarized financial information has been prepared from the books and records maintained by the Company, the Guarantors and the non-Guarantor subsidiaries. The summarized financial information may not necessarily be indicative of the results of operations or financial position had the Guarantors or non-Guarantor subsidiaries operated as independent entities. The separate financial statements of the Guarantors are not presented because management has determined they would not be material to investors. In addition, intercompany activities between subsidiaries and the Parent are presented within operating activities on the condensed consolidating statement of cash flows.

Condensed consolidating financial statements for the Company and its subsidiaries, including the Parent only, the combined Guarantor Subsidiaries and the combined Non-Guarantor Subsidiaries are as follows:
 
26
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


CONDENSED CONSOLIDATING BALANCE SHEETS

As of June 30, 2009
(in thousands)


         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Current assets:
                              
Cash and cash equivalents
$
77,693
  
$
16,295
  
$
1,684
  
$
-
  
$
95,672
  
Restricted cash
  
16,651
    
4,946
    
3,553
    
-
    
25,150
  
Accounts receivable, net
  
-
    
213,940
    
2,873
    
(18
)
  
216,795
  
Prepaid expenses and other assets
  
8,968
    
15,023
    
649
    
(1,499
)
  
23,141
  
Assets held for sale
  
959
    
-
    
-
    
-
    
959
  
Deferred tax assets
  
-
    
65,816
    
1,234
    
(8,516
)
  
58,534
  
Total current assets
  
104,271
    
316,020
    
9,993
    
(10,033
)
  
420,251
  
Property and equipment, net
  
7,647
    
536,361
    
67,395
    
-
    
611,403
  
Intangible assets, net
  
34,952
    
11,348
    
1,428
    
2,995
    
50,723
  
Goodwill
  
-
    
323,062
    
3,958
    
-
    
327,020
  
Restricted cash, non-current
  
2,966
    
342
    
-
    
-
    
3,308
  
Deferred tax assets
  
14,888
    
118,516
    
-
    
(12,389
)
  
121,015
  
Other assets
  
412
    
4,725
    
-
    
(69
)
  
5,068
  
Intercompany balances
  
318,698
    
-
    
12,228
    
(330,926
)
  
-
  
Investment in subsidiaries
  
591,201
    
-
    
-
    
(591,201
)
  
-
  
Total assets
$
1,075,035
  
$
1,310,374
  
$
95,002
  
$
(941,623
)
$
1,538,788
  
                               
Current liabilities:
                              
Accounts payable
$
8,369
  
$
47,510
  
$
960
  
$
(18
)
$
56,821
  
Accrued compensation and benefits
  
5,058
    
54,929
    
1,044
    
-
    
61,031
  
Accrued self-insurance obligations, current
  
4,295
    
44,324
    
-
    
-
    
48,619
  
Other accrued liabilities          
  
16,018
    
37,264
    
4,048
    
(1,499
)
  
55,831
  
Deferred tax liability
  
8,516
    
-
    
-
    
(8,516
)
  
-
  
Current portion of long-term debt and capital lease
                              
  obligations
  
3,358
    
3,653
    
1,249
    
-
    
8,260
  
Total current liabilities
  
45,614
    
187,680
    
7,301
    
(10,033
)
  
230,562
  
Accrued self-insurance obligations, net of current
  
43,184
    
68,869
    
429
    
-
    
112,482
  
Deferred tax liability
  
-
    
-
    
12,389
    
(12,389
)
  
-
  
Long-term debt and capital lease obligations, net of current portion
  
 
527,967
    
 
104,289
    
 
63,766
    
 
-
    
 
696,022
  
Unfavorable lease obligations, net
  
-
    
17,087
    
-
    
(2,995
)
  
14,092
  
Other long-term liabilities
  
31,685
    
24,145
    
3,215
    
-
    
59,045
  
Intercompany balances
  
-
    
325,005
    
-
    
(325,005
)
  
-
  
Total liabilities
  
648,450
    
727,075
    
87,100
    
(350,422
)
  
1,112,203
  
                               
Stockholders’ equity:
                              
Common stock
  
437
    
-
    
-
    
-
    
437
  
Additional paid-in capital
  
652,773
    
-
    
-
    
-
    
652,773
  
Accumulated deficit
  
(222,344
)
  
583,299
    
7,902
    
(591,201
)
  
(222,344
)
Accumulated other comprehensive loss, net
  
(4,281
)
  
-
    
-
    
-
    
(4,281
)
Total stockholders' equity
  
426,585
    
583,299
    
7,902
    
(591,201
)
  
426,585
  
Total liabilities and stockholders' equity
$
1,075,035
  
$
1,310,374
  
$
95,002
  
$
(941,623
)
$
1,538,788
  

 
27
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


CONDENSED CONSOLIDATING BALANCE SHEETS

As of December 31, 2008
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Current assets:
                              
Cash and cash equivalents
$
72,529
  
$
17,952
  
$
1,672
  
$
-
  
$
92,153
  
Restricted cash
  
25,570
    
5,135
    
3,971
    
-
    
34,676
  
Accounts receivable, net
  
-
    
201,390
    
4,251
    
(21
)
  
205,620
  
Prepaid expenses and other assets
  
8,909
    
13,229
    
496
    
(1,178
)
  
21,456
  
Assets held for sale
  
951
    
2,693
    
10
    
-
    
3,654
  
Deferred tax assets 
  
-
    
64,445
    
1,261
    
(8,445
)
  
57,261
  
Total current assets  
  
107,959
    
304,844
    
11,661
    
(9,644
)
  
414,820
  
Property and equipment, net
  
7,877
    
527,413
    
68,355
    
-
    
603,645
  
Intangible assets, net
  
37,202
    
12,681
    
4,505
    
-
    
54,388
  
Goodwill
  
-
    
323,062
    
3,746
    
-
    
326,808
  
Restricted cash, non-current
  
2,963
    
340
    
-
    
-
    
3,303
  
Deferred tax assets
  
15,140
    
132,718
    
-
    
(13,051
)
  
134,807
  
Other assets
  
912
    
4,643
    
16
    
(8
)
  
5,563
  
Intercompany balances
  
372,179
    
-
    
3,730
    
(375,909
)
  
-
  
Investment in subsidiaries
  
539,385
    
-
    
-
    
(539,385
)
  
-
  
Total assets
$
1,083,617
  
$
1,305,701
  
$
92,013
  
$
(937,997
)
$
1,543,334
  
                               
Current liabilities:
                              
Accounts payable             
$
14,630
  
$
46,107
  
$
1,284
  
$
(21
)
$
62,000
  
Accrued compensation and benefits
  
9,271
    
50,433
    
956
    
-
    
60,660
  
Accrued self-insurance obligations, current
  
4,001
    
40,735
    
557
    
-
    
45,293
  
Other accrued liabilities
  
14,741
    
42,585
    
709
    
(1,178
)
  
56,857
  
Deferred tax liability
  
8,445
    
-
    
-
    
(8,445
)
  
-
  
Current portion of long-term debt and capital lease
                              
  obligations
  
10,255
    
6,394
    
1,216
    
-
    
17,865
  
Total current liabilities
  
61,343
    
186,254
    
4,722
    
(9,644
)
  
242,675
  
Accrued self-insurance obligations, net of current
  
43,159
    
70,969
    
429
    
-
    
114,557
  
Deferred tax liability
  
-
    
-
    
13,051
    
(13,051
)
  
-
  
Long-term debt and capital lease obligations, net of current
                    
portion
  
543,214
    
100,360
    
64,402
    
-
    
707,976
  
Unfavorable lease obligations, net
  
-
    
15,514
    
-
    
-
    
15,514
  
Other long-term liabilities
  
32,192
    
26,711
    
-
    
-
    
58,903
  
Intercompany balances
  
-
    
375,917
    
-
    
(375,917
)
  
-
  
Total liabilities   
  
679,908
    
775,725
    
82,604
    
(398,612
)
  
1,139,625
  
                               
Stockholders’ equity:
                              
Common stock
  
435
    
-
    
-
    
-
    
435
  
Additional paid-in capital
  
650,543
    
-
    
-
    
-
    
650,543
  
Accumulated deficit
  
(242,683
)
  
529,976
    
9,409
    
(539,385
)
  
(242,683
)
Accumulated other comprehensive loss, net
  
(4,586
)
  
-
    
-
    
-
    
(4,586
)
Total stockholders' equity
  
403,709
    
529,976
    
9,409
    
(539,385
)
  
403,709
  
Total liabilities and stockholders' equity
$
1,083,617
  
$
1,305,701
  
$
92,013
  
$
(937,997
)
$
1,543,334
  


 
28
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


CONDENSED CONSOLIDATING INCOME STATEMENTS

For the Three Months Ended June 30, 2009
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Total net revenues
$
10
  
$
480,519
  
$
7,278
  
$
(18,923
)
$
468,884
  
Costs and expenses:
                              
Operating salaries and benefits
  
-
    
257,942
    
4,097
    
-
    
262,039
  
Self-insurance for workers’ compensation and
                              
general and professional liability insurance
  
103
    
16,553
    
159
    
-
    
16,815
  
General and administrative expenses (1)
  
16,093
    
12,820
    
-
    
-
    
28,913
  
Other operating costs
  
-
    
111,676
    
1,810
    
(18,923
)
  
94,563
  
Center rent expense
  
-
    
18,083
    
185
    
-
    
18,268
  
Depreciation and amortization
  
672
    
9,900
    
581
    
-
    
11,153
  
Provision for losses on accounts receivable
  
-
    
6,152
    
142
    
-
    
6,294
  
Interest, net
  
9,219
    
2,127
    
1,119
    
-
    
12,465
  
Loss on sale of assets, net
  
-
    
47
    
(7
)
  
-
    
40
  
Income from investment in subsidiaries
  
(25,481
)
  
-
    
-
    
25,481
    
-
  
Total costs and expenses
  
606
    
435,300
    
8,086
    
6,558
    
450,550
  
                               
(Loss) income before income taxes and
                              
discontinued operations
  
(596
)
  
45,219
    
(808
)
  
(25,481
)
  
18,334
  
Income tax (benefit) expense
  
(10,692
)
  
18,540
    
(331
)
  
-
    
7,517
  
Income (loss) from continuing operations
  
10,096
    
26,679
    
(477
)
  
(25,481
)
  
10,817
  
                               
Discontinued operations:
                              
Loss from discontinued operations, net
  
-
    
(135
)
  
(579
)
  
-
    
(714
)
(Loss) gain on disposal of discontinued
                              
operations, net
  
-
    
(12
)
  
5
    
-
    
(7
)
Loss on discontinued operations, net
  
-
    
(147
)
  
(574
)
  
-
    
(721
)
                               
Net income (loss)
$
10,096
  
$
26,532
  
$
(1,051
)
$
(25,481
)
$
10,096
  
 
(1) Includes operating administrative expenses

 
29
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


CONDENSED CONSOLIDATING INCOME STATEMENTS

For the Three Months Ended June 30, 2008
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Total net revenues
$
8
  
$
459,319
  
$
6,862
  
$
(15,256
)
$
450,933
  
Costs and expenses:
                              
Operating salaries and benefits
  
-
    
249,176
    
2,912
    
-
    
252,088
  
Self-insurance for workers’ compensation and
                              
general and professional liability insurance
  
114
    
11,421
    
162
    
-
    
11,697
  
General and administrative expenses (1)
  
16,112
    
12,943
    
-
    
-
    
29,055
  
Other operating costs
  
-
    
105,916
    
1,519
    
(15,256
)
  
92,179
  
Center rent expense
  
-
    
18,366
    
168
    
-
    
18,534
  
Depreciation and amortization
  
716
    
8,503
    
563
    
-
    
9,782
  
Provision for losses on accounts receivable
  
-
    
2,832
    
45
    
-
    
2,877
  
Interest, net
  
10,389
    
2,108
    
1,146
    
-
    
13,643
  
Gain on sale of assets
  
-
    
-
    
-
    
-
    
-
  
Income from investment in subsidiaries
  
(26,079
)
  
-
    
-
    
26,079
    
-
  
Total costs and expenses
  
1,252
    
411,265
    
6,515
    
10,823
    
429,855
  
                               
(Loss) income before income taxes and
                              
discontinued operations
  
(1,244
)
  
48,054
    
347
    
(26,079
)
  
21,078
  
Income tax (benefit) expense
  
(10,929
)
  
19,235
    
139
    
-
    
8,445
  
Income (loss) from continuing operations
  
9,685
    
28,819
    
208
    
(26,079
)
  
12,633
  
                               
Discontinued operations:
                              
(Loss) income from discontinued operations, net
  
-
    
(2,457
)
  
1,316
    
-
    
(1,141
)
(Loss) gain on disposal of discontinued
                              
operations, net
  
-
    
(3,011
)
  
1,204
    
-
    
(1,807
)
(Loss) income on discontinued operations, net
  
-
    
(5,468
)
  
2,520
    
-
    
(2,948
)
                               
Net income (loss)
$
9,685
  
$
23,351
  
$
2,728
  
$
(26,079
)
$
9,685
  
 
(1)   Includes operating administrative expenses

 
30
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


CONDENSED CONSOLIDATING INCOME STATEMENTS

For the Six Months Ended June 30, 2009
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Total net revenues
$
14
  
$
960,400
  
$
14,465
  
$
(37,699
)
$
937,180
  
Costs and expenses:
                              
Operating salaries and benefits
  
-
    
516,919
    
8,104
    
-
    
525,023
  
Self-insurance for workers’ compensation and
                              
general and professional liability insurance
  
205
    
30,950
    
319
    
-
    
31,474
  
General and administrative expenses (1)
  
33,214
    
25,026
    
-
    
-
    
58,240
  
Other operating costs
  
-
    
224,484
    
3,597
    
(37,699
)
  
190,382
  
Center rent expense
  
-
    
36,313
    
370
    
-
    
36,683
  
Depreciation and amortization
  
1,349
    
19,367
    
1,160
    
-
    
21,876
  
Provision for losses on accounts receivable
  
-
    
10,031
    
250
    
-
    
10,281
  
Interest, net
  
18,597
    
4,357
    
2,237
    
-
    
25,191
  
Loss on sale of assets, net
  
-
    
48
    
(7
)
  
-
    
41
  
Income from investment in subsidiaries
  
(51,816
)
  
-
    
-
    
51,816
    
-
  
Total costs and expenses
  
1,549
    
867,495
    
16,030
    
14,117
    
899,191
  
                               
(Loss) income before income taxes and
                              
discontinued operations
  
(1,535
)
  
92,905
    
(1,565
)
  
(51,816
)
  
37,989
  
Income tax (benefit) expense
  
(21,874
)
  
38,091
    
(642
)
  
-
    
15,575
  
Income (loss) from continuing operations
  
20,339
    
54,814
    
(923
)
  
(51,816
)
  
22,414
  
                               
Discontinued operations:
                              
Loss from discontinued operations, net
  
-
    
(957
)
  
(803
)
  
-
    
(1,760
)
(Loss) gain on disposal of discontinued
                              
operations, net
  
-
    
(534
)
  
219
    
-
    
(315
)
Loss on discontinued operations, net
  
-
    
(1,491
)
  
(584
)
  
-
    
(2,075
)
                               
Net income (loss)
$
20,339
  
$
53,323
  
$
(1,507
)
$
(51,816
)
$
20,339
  
 
(1) Includes operating administrative expenses

 
31
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


CONDENSED CONSOLIDATING INCOME STATEMENTS

For the Six Months Ended June 30, 2008
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Total net revenues
$
21
  
$
917,363
  
$
13,998
  
$
(30,080
)
$
901,302
  
Costs and expenses:
                              
Operating salaries and benefits
  
-
    
501,049
    
5,970
    
-
    
507,019
  
Self-insurance for workers’ compensation and
                              
general and professional liability insurance
  
229
    
25,921
    
321
    
-
    
26,471
  
General and administrative expenses (1)
  
32,697
    
24,880
    
-
    
-
    
57,577
  
Other operating costs
  
-
    
212,218
    
2,983
    
(30,080
)
  
185,121
  
Center rent expense
  
-
    
36,645
    
330
    
-
    
36,975
  
Depreciation and amortization
  
1,405
    
16,861
    
1,123
    
-
    
19,389
  
Provision for losses on accounts receivable
  
-
    
6,020
    
164
    
-
    
6,184
  
Interest, net
  
21,502
    
4,262
    
2,310
    
-
    
28,074
  
Gain on sale of assets
  
(76
)
  
-
    
-
    
-
    
(76
)
Income from investment in subsidiaries
  
(51,703
)
  
-
    
-
    
51,703
    
-
  
Total costs and expenses
  
4,054
    
827,856
    
13,201
    
21,623
    
866,734
  
                               
(Loss) income before income taxes and
                              
discontinued operations
  
(4,033
)
  
89,507
    
797
    
(51,703
)
  
34,568
  
Income tax (benefit) expense
  
(22,295
)
  
35,809
    
319
    
-
    
13,833
  
Income (loss) from continuing operations
  
18,262
    
53,698
    
478
    
(51,703
)
  
20,735
  
                               
Discontinued operations:
                              
(Loss) income from discontinued operations, net
  
-
    
(1,689
)
  
1,085
    
-
    
(604
)
(Loss) gain on disposal of discontinued
                              
operations, net
  
-
    
(3,015
)
  
1,146
    
-
    
(1,869
)
(Loss) income on discontinued operations, net
  
-
    
(4,704
)
  
2,231
    
-
    
(2,473
)
                               
Net income (loss)
$
18,262
  
$
48,994
  
$
2,709
  
$
(51,703
)
$
18,262
  
 
(1)   Includes operating administrative expenses



 
32
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2009
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Net cash provided by operating activities
$
21,916
  
$
25,134
  
$
5,099
  
$
-
    
52,149
  
                               
Cash flows from investing activities:
                              
Capital expenditures                 
  
(1,118
)
  
(23,802
)
  
(82
)
  
-
    
(25,002
)
Purchase of lease real estate             
  
-
    
(3,275
)
  
-
    
-
    
(3,275
)
Proceeds from sale of assets held for sale
  
-
    
2,174
    
-
    
-
    
2,174
  
Net cash used for investing activities
  
(1,118
)
  
(24,903
)
  
(82
)
  
-
    
(26,103
)
                               
Cash flows from financing activities:
                              
Principal repayments of long-term debt and capital
                              
lease obligations .
  
(15,654
)
  
(1,888
)
  
(4,145
)
  
-
    
(21,687
)
Distribution to non-controlling interest
  
-
    
-
    
(860
)
  
-
    
(860
)
Proceeds from issuance of common stock
  
20
    
-
    
-
    
-
    
20
  
Net cash used for financing activities
  
(15,634
)
  
(1,888
)
  
(5,005
)
  
-
    
(22,527
)
Net increase (decrease) in cash and cash equivalents
  
5,164
    
(1,657
)
  
12
    
-
    
3,519
  
Cash and cash equivalents at beginning of period
  
72,529
    
17,952
    
1,672
    
-
    
92,153
  
Cash and cash equivalents at end of period
$
77,693
  
$
16,295
  
$
1,684
  
$
-
    
95,672
  



For the Six Months Ended June 30, 2008
(in thousands)

         
Combined
    
Combined
              
   
Parent
    
Guarantor
    
Non-Guarantor
              
   
Company
    
Subsidiaries
    
Subsidiaries
    
Elimination
    
Consolidated
  
                               
Net cash provided by operating activities
$
12,609
  
$
17,824
  
$
2,348
  
$
-
  
$
32,781
  
                               
Cash flows from investing activities:
                              
Capital expenditures
  
(1,375
)
  
(14,719
)
  
(45
)
  
-
    
(16,139
)
Purchase of lease real estate
  
-
    
(727
)
  
-
    
-
    
(727
)
Proceeds from sale of assets held for sale
  
3,777
    
180
    
-
    
-
    
3,957
  
Acquisitions
  
-
    
(313
)
  
-
    
-
    
(313
)
Insurance proceeds received
  
75
    
-
    
-
    
-
    
75
  
        Net cash provided by (used for) investing                              
   activities
  
2,477
    
(15,579
)
  
(45
)
  
-
    
(13,147
)
                               
Cash flows from financing activities:
                              
Borrowings of long-term debt
  
-
    
20,290
    
-
    
-
    
20,290
  
        Principal repayments of long-term debt and                              
   capital lease obligations
  
(1,854
)
  
(22,778
)
  
(567
)
  
-
    
(25,199
)
Payment to non-controlling interest
  
-
    
-
    
(2,035
)
  
-
    
(2,035
)
Distribution to non-controlling interest
  
-
    
-
    
(223
)
  
-
    
(223
)
Proceeds from issuance of common stock
  
70
    
-
    
-
    
-
    
70
  
Net cash used for financing activities
  
(1,784
)
  
(2,488
)
  
(2,825
)
  
-
    
(7,097
)
Net increase (decrease) in cash and cash equivalents
  
13,302
    
(243
)
  
(522
)
  
-
    
12,537
  
Cash and cash equivalents at beginning of period
  
30,221
    
23,547
    
2,064
    
-
    
55,832
  
Cash and cash equivalents at end of period
$
43,523
  
$
23,304
  
$
1,542
  
$
-
  
$
68,369
  
 

 
33
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Sun Healthcare Group, Inc.’s subsidiaries are providers of nursing, rehabilitative and related specialty healthcare services primarily to the senior population in the United States. Our core business is providing inpatient services, primarily through 184 skilled nursing centers, 15 assisted and independent living centers and eight mental health centers with 23,345 licensed beds located in 25 states as of June 30, 2009. Our subsidiaries also provide hospice services, rehabilitation therapy services and temporary medical staffing services to skilled nursing centers.

Revenues from Medicare, Medicaid and Other Sources

We receive revenues from Medicare, Medicaid, commercial insurance, self-pay residents, other third party payors and healthcare centers 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 centers, the acuity level of patients and the rates of reimbursement among payors. Federal and state governments continue to focus on methods to curb spending on health care programs such as Medicare and Medicaid, and pressures on state budgets resulting from the current economic conditions in the United States may intensify these efforts. This focus has not been limited to skilled nursing centers, but includes specialty services provided by us, such as skilled therapy services, to third parties. We cannot at this time predict the extent to which proposals limiting federal or state expenditures 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 addition, we have experienced, and may continue to experience, due to current economic conditions, reduced demand for the specialty services that we provide to third parties.  We are unable to predict the future impact or extent of such reduced demand.

The following table sets forth the revenues and percentage of revenues by payor source for our continuing operations, on a consolidated and on an inpatient operations only basis, for the periods indicated (data is in thousands and includes revenues for acquired centers following the date of acquisition only):

   
For the
    
For the
  
   
Three Months Ended
    
Six Months Ended
  
Sources of Revenues
  
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
                                         
Consolidated:
                                        
Medicaid
$
188,030
  
40.1
%
$
179,166
  
39.7
%
$
369,480
  
39.4
%
$
358,083
  
39.7
%
Medicare
  
137,863
  
29.4
    
129,151
  
28.6
    
279,739
  
29.8
    
258,308
  
28.7
  
Private pay and other
  
117,202
  
25.0
    
118,896
  
26.4
    
235,763
  
25.2
    
239,168
  
26.5
  
Managed care and
                                        
  commercial insurance
  
25,789
  
5.5
    
23,720
  
5.3
    
52,198
  
5.6
    
45,743
  
5.1
  
Total
$
468,884
  
100.00
%
$
450,933
  
100.0
%
$
937,180
  
100.0
%
$
901,302
  
100.0
%
                                         
Inpatient Only:
                                        
Medicaid
$
187,990
  
45.1
%
$
179,123
  
44.8
%
$
369,400
  
44.4
%
$
358,021
  
44.8
%
Medicare
  
133,766
  
32.1
    
126,372
  
31.6
    
271,630
  
32.6
    
252,785
  
31.7
  
Private pay and other
  
69,244
  
16.7
    
70,613
  
17.7
    
139,106
  
16.8
    
142,415
  
17.8
  
Managed care and
                                        
  commercial insurance
  
25,622
  
6.1
    
23,578
  
5.9
    
51,889
  
6.2
    
45,445
  
5.7
  
Total
$
416,622
  
100.0
%
$
399,686
  
100.0
%
$
832,025
  
100.0
%
$
798,666
  
100.0
%
                                         

 
34
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
Medicare

Medicare is available to nearly every United States citizen 65 years of age and older. 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 or those having end-stage renal disease. Medicare is comprised of four related health insurance programs.  Medicare Part A provides for inpatient services including hospital, skilled long-term care, and home healthcare.  Medicare Part B provides for outpatient services including physicians’ services, diagnostic service, durable medical equipment, skilled therapy services and medical supplies.  Medicare Part C is a managed care option (“Medicare Advantage”) for beneficiaries who are entitled to Part A and enrolled in Part B.  Medicare Part D is a benefit that provides prescription drug benefits for both Medicare and Medicare/Medicaid dually eligible patients.

Medicare reimburses our skilled nursing centers for Medicare Part A services under the Prospective Payment System (“PPS”) as defined by the Balanced Budget Act of 1997 and subsequently refined in 1999, 2000 and 2005.  PPS regulations predetermine a payment amount per patient, per day, based on the 1995 costs of treating patients indexed forward. The amount to be paid is determined by classifying each patient into one of 53 Resource Utilization Group (“RUG”) categories that are based upon each patient’s acuity level.

The following table sets forth the average amounts of inpatient Medicare Part A revenues per patient, per day, recorded by our healthcare centers for the periods indicated:

 
For the
    
For the
  
 
Three Months Ended
    
Six Months Ended
  
 
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
$
454.42
  
$
415.73
  
$
452.39
  
$
414.31
  

On July 31, 2008, the Centers for Medicare and Medicaid Services (“CMS”) issued a final rule to implement a 3.4% market basket increase for the 2009 federal fiscal year, which commenced on October 1, 2008.  The rule also contained an update of the wage indices.   The net impact of these changes was approximately a 3.3% increase in our reimbursement rates, which resulted in increased revenues of approximately $3.8 million per quarter. 

On July 31, 2009, CMS issued its final rule for skilled nursing facilities for the 2010 federal fiscal year, which will commence on October 1, 2009.  This rule provides for a market basket increase of 2.2% in our reimbursement rates and a 3.3% reduction for a forecast error/parity adjustment.  We estimate that the net result of the two adjustments, based on Sun’s current acuity mix, is a decrease of 0.85% in our reimbursement rates.

On July 31, 2009, CMS also issued its final rule for hospice services for the 2010 federal fiscal year.  The rule includes a market basket increase of 2.1% and a 0.7% decrease resulting from a phase out of the wage index budget neutrality factor.  We estimate that the net impact on our hospice service operations of these two adjustments is an increase of 1.52% in our reimbursement rates.

In addition to the changes that affect the upcoming 2010 federal fiscal year, the rule also contains provisions for the 2011 federal fiscal year which commences on October 1, 2010.  We are not able to predict whether these changes will occur but are able to confirm that CMS has determined that the changes will be budget neutral.

The Balanced Budget Act of 1997 established limits on reimbursement provided under Medicare Part B for therapy services.  An automatic exception is currently in place for patients residing in skilled nursing centers until at least December 31, 2009.

Medicaid

Medicaid is a state-administered program financed by state funds and federal matching funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods. Each state in which we operate nursing and rehabilitation centers has its own unique Medicaid reimbursement system.
 
35
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
        The following table sets forth the average amounts of inpatient Medicaid revenues per patient, per day (excluding any impact of individually identifiable state-imposed provider taxes), recorded by our healthcare centers for the periods indicated:

 
For the
    
For the
  
 
Three Months Ended
    
Six Months Ended
  
 
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
$
171.77
  
$
165.45
  
$
170.25
  
$
165.25
  
 
For comparison purposes, the inclusion of the impact from individually identifiable state-imposed provider taxes on the average amounts of inpatient Medicaid revenues per patient, per day recorded by our healthcare centers for the periods indicated results in the following:

 
For the
    
For the
  
 
Three Months Ended
    
Six Months Ended
  
 
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
$
160.12
  
$
155.66
  
$
159.36
  
$
155.37
  

Medicaid outlays are a significant component of state budgets, and there have been cost containment pressures on Medicaid outlays for nursing homes.  The current economic downturn has caused many states to institute freezes on or reductions in Medicaid spending to address state budget concerns.

Twenty-one of the states in which we operate impose a provider tax on nursing homes as a method of increasing federal matching funds paid to those states for Medicaid.  Those states that have imposed the provider tax have used some or all of the matching funds to fund Medicaid reimbursement to nursing homes.

Managed Care and Insurance

During the three months ended June 30, 2009, we received 5.5% of our revenues from managed care and insurance, of which the Medicare Advantage program is the primary component.  As discussed above, Medicare Advantage is the Medicare Part C managed care option for beneficiaries entitled to Part A and enrolled in Part B.  Medicare Advantage is administered by contracted third party payors.  The managed care and insurance payors are continuing their efforts to control healthcare costs through direct contracts with healthcare providers and increased utilization review.  These payors are increasingly demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk.

The following table sets forth the average amounts of inpatient revenues per patient, per day, recorded by our healthcare centers from these revenue sources for the periods indicated:

 
 
For the
    
For the
  
 
Three Months Ended
    
Six Months Ended
  
 
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
$
376.44
  
$
348.64
  
$
375.17
  
$
345.87
  

Private Payors, Veterans and Other

During the three months ended June 30, 2009, we received 25.0% of our revenues from private payors, veterans’ coverage, healthcare centers that utilize our specialty medical services, self-pay center residents and other third party payors. These private and other payors are continuing their efforts to control healthcare costs.  Private payor rates are set at a price point that enables continued competition; they are driven by the markets in which our healthcare centers operate.
 
36
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
The following table sets forth the average amounts of inpatient revenues per patient, per day, recorded by our healthcare centers from these revenue sources for the periods indicated:

 
 
For the
    
For the
  
 
Three Months Ended
    
Six Months Ended
  
 
June 30, 2009
    
June 30, 2008
    
June 30, 2009
    
June 30, 2008
  
$
177.50
  
$
171.96
  
$
177.90
  
$
171.57
  

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.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”).  SFAS No. 160 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements; that net income attributable to the parent and the noncontrolling interest be clearly identifiable; that changes in a parent’s ownership interest, while the parent retains its controlling financial interest in its subsidiary, be accounted for as equity transactions and that disclosures be expanded to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  SFAS No. 160 was effective beginning January 1, 2009, and did not have a material impact on our financial position, cash flows or results of operations.

In February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”), which delayed the effective date of the FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”), for certain nonfinancial assets and nonfinancial liabilities until interim periods for fiscal years beginning after November 15, 2008.  SFAS No. 157 changed the underlying methodology of determining fair value when fair value measurements are required in accounting principles generally accepted in the United States.  SFAS No. 157 also expanded the disclosure requirements about fair value measurements.  The adoption of FSP FAS 157-2 did not have a material impact on our financial position, cash flows or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”), which expands quarterly disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, about an entity’s derivative instruments and hedging activities. SFAS No. 161 was effective for fiscal years beginning January 1, 2009, and we have included the required disclosures in Note 2 – “Long-Term Debt and Capital Lease Obligations” of our consolidated financial statements.

In April 2008, the FASB issued Staff Position FAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). This pronouncement amends Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, regarding the factors that should be considered in developing the useful lives for intangible assets with renewal or extension provisions. FSP FAS 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements, regardless of whether those arrangements have explicit renewal or extension provisions, when determining the useful life of an intangible asset. In the absence of such experience, an entity shall consider the assumptions that market participants would use concerning renewal or extension, adjusted for entity-specific factors. FSP FAS 142-3 also requires an entity to disclose information regarding the extent to which the expected future cash flows associated with an intangible asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. FSP FAS 142-3 is effective for qualifying intangible assets acquired on or after January 1, 2009. The application of FSP FAS
 
37
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
142-3 did not have a material impact on our financial position, cash flows or results of operations; however, it could impact future transactions.  

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”), and Accounting Principles Board Opinion No. 28, Interim Financial Reporting (“APB No. 28”).  This pronouncement was effective for our reporting periods beginning with our June 30, 2009 interim financial statements.  The amendments expand the disclosure requirements of SFAS No. 107 and APB No. 28 about how an entity reports on fair value to be included in the summarized, interim financial statements.  The adoption of SFAS No. 107 and APB No. 28 did not have a material impact on our financial position, cash flows or results of operations.  All required disclosures have been included in our June 30, 2009 interim financial statements.
 
In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and 124-2”), which provides guidance for measuring and expands the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in interim and annual financial statements.  As we currently do not own any debt or equity securities, this Staff Position is not expected to impact our financial position, cash flows or results of operations.  Should we own any such securities in the future, the provisions of this Staff Position will be applied.

In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS No. 157-4”), which expands quarterly disclosure requirements in SFAS No. 157 about how an entity determines fair value when the volume and level of activity for an asset or liability have significantly decreased and transactions related to such assets and liabilities are not orderly.  This pronouncement was effective for our reporting periods beginning with our June 30, 2009 interim financial statements.  The adoption of FSP FAS 157-4 did not have a material impact on our financial position, cash flows or results of operations.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (“SFAS No. 165”), which provides guidance on accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS No. 165 requires companies to evaluate events or transactions taking place after the balance sheet date for recognition in the financial statements prior to issuance.  Additionally, SFAS No. 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued.  SFAS No. 165 became effective for our interim and annual reporting periods on April 1, 2009.  The adoption of SFAS No. 165 did not impact our financial position, cash flows or results of operations.  For the purposes of this reporting period, we have evaluated the subsequent events occurring after June 30, 2009 through August 6, 2009, which we consider to be the date that the financial statements were “issued” and “available to be issued”.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140 (“SFAS No. 166”), which provides guidance on accounting for and disclosure of  the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.  Additionally, SFAS No. 166 eliminates the concept of the “qualified special purpose entity” (as established in Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125) and replaces it with the the concept of a “participating interest”, which is defined as an entity having a proportionate ownership interest in the asset(s) being transferred.  SFAS No. 166 is effective for annual reporting periods beginning after November 15, 2009.  We do not expect SFAS No. 166 to have any impact on our financial position, cash flows or results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments for FASB Interpretation No. 46(R) (“SFAS No. 167”), which provides guidance on determining whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”) based on the power to direct the activities of the VIE and the obligation to absorb losses of the VIE.  SFAS No. 167 requires an entity to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance.  Additionally, SFAS No.
 
38
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

167 requires an entity to assess, on an ongoing basis, whether or not it continues to be the primary beneficiary of a VIE.  SFAS No. 167 is effective for annual reporting periods beginning after November 15, 2009.  We do not expect SFAS No. 167 to have any impact on our financial position, cash flows or results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards CodificationTM (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS No. 168”), which established the Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009.  The adoption of SFAS No. 168 will only impact references for accounting guidance.
 
 
 
39
 
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
Results of Operations

The following table sets forth our unaudited historical consolidated income statements and certain percentage relationships for the periods presented (dollars in thousands):

   
For the Three
    
For the Three
  
As a Percentage of Net Revenues
  
   
Months Ended
    
Months Ended
            
   
June 30, 2009
    
June 30, 2008
  
June 30, 2009
    
June 30, 2008
  
                       
Total net revenues
$
468,884
  
$
450,933
  
100.0
%
  
100.0
%
Costs and expenses:
                      
Operating salaries and benefits
  
262,039
    
252,088
  
55.8
    
55.9
  
Self-insurance for workers’ compensation and
                      
general and professional liabilities
  
16,815
    
11,697
  
3.6
    
2.6
  
Other operating costs (1)
  
107,755
    
105,123
  
23.0
    
23.3
  
Center rent expense
  
18,268
    
18,534
  
3.9
    
4.1
  
General and administrative expenses
  
15,721
    
16,111
  
3.4
    
3.6
  
Depreciation and amortization
  
11,153
    
9,782
  
2.4
    
2.2
  
Provision for losses on accounts receivable
  
6,294
    
2,877
  
1.3
    
0.6
  
Interest, net
  
12,465
    
13,643
  
2.7
    
3.0
  
Other loss
  
40
    
-
  
-
    
-
  
Income before income taxes and discontinued
                      
operations
  
18,334
    
21,078
  
3.9
    
4.7
  
Income tax expense
  
7,517
    
8,445
  
1.6
    
1.9
  
Income from continuing operations
  
10,817
    
12,633
  
2.3
    
2.8
  
Loss from discontinued operations, net
  
(721
)
  
(2,948
)
(0.1
)
  
(0.7
)
Net income
$
10,096
  
$
9,685
  
2.2
%
  
2.1
%
 
(1)   Operating administrative expenses are included in “other operating costs” above.

   
For the Six
    
For the Six
  
As a Percentage of Net Revenues
  
   
Months Ended
    
Months Ended
            
   
June 30, 2009
    
June 30, 2008
  
June 30, 2009
    
June 30, 2008
  
                       
Total net revenues
$
937,180
  
$
901,302
  
100.0
%
  
100.0
%
Costs and expenses:
                      
Operating salaries and benefits
  
525,023
    
507,019
  
55.9
    
56.3
  
Self-insurance for workers’ compensation and
                      
general and professional liabilities
  
31,474
    
26,471
  
3.4
    
2.9
  
Other operating costs (1)
  
216,151
    
210,001
  
23.0
    
23.3
  
Center rent expense
  
36,683
    
36,975
  
3.9
    
4.1
  
General and administrative expenses
  
32,471
    
32,697
  
3.5
    
3.6
  
Depreciation and amortization
  
21,876
    
19,389
  
2.4
    
2.2
  
Provision for losses on accounts receivable
  
10,281
    
6,184
  
1.1
    
0.7
  
Interest, net
  
25,191
    
28,074
  
2.7
    
3.1
  
Other loss (income)
  
41
    
(76
)
-
    
-
  
Income before income taxes and discontinued
                      
operations
  
37,989
    
34,568
  
4.1
    
3.8
  
Income tax expense
  
15,575
    
13,833
  
1.7
    
1.5
  
Income from continuing operations
  
22,414
    
20,735
  
2.4
    
2.3
  
Loss from discontinued operations, net
  
(2,075
)
  
(2,473
)
(0.2
)
  
(0.3
)
Net income
$
20,339
  
$
18,262
  
2.2
%
  
2.0
%
 
(1)   Operating administrative expenses are included in “other operating costs” above.
 
40
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

The following discussion of the “Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008” is based, in part, on the financial information presented in Note 8 – “Segment Information” in our interim consolidated financial statements.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

The following summarizes our results of operations on a consolidated basis.  A more detailed discussion and analysis of the results of operations of each of our segments (Inpatient Services, Rehabilitation Therapy Services, Medical Staffing Services and Corporate) is provided below under “Segment Information.”

Net revenues increased $18.0 million, or 4.0%, to $468.9 million for the three months ended June 30, 2009 from $450.9 million for the three months ended June 30, 2008. We reported net income for the three months ended June 30, 2009 of $10.1 million compared to net income of $9.7 million for the three months ended June 30, 2008.

The increase in net revenues for the 2009 period included $16.9 million of additional revenue in our Inpatient Services segment primarily due to increases in Medicare Part A and Part B rates, higher customer base and rates in managed care and commercial insurance revenues, and improved Medicaid rates.  The remainder of the increase primarily resulted from a $8.9 million increase in revenue from our Rehabilitation Therapy segment due primarily to increases in billable minutes and billing rates, partially offset by a $4.2 million decrease in revenue from our Medical Staffing segment mainly due to a decrease in billable nursing hours.

Operating salaries and benefits, excluding workers’ compensation insurance costs, increased $9.9 million, or 3.9%, to $262.0 million (55.8% of net revenues) for the three months ended June 30, 2009 from $252.1 million (55.9% of net revenues) for the three months ended June 30, 2008.  The increase resulted primarily from $5.6 million in our Inpatient Services segment driven by wage increases and an $8.0 million increase from our Rehabilitation Therapy segment attributable to wage rate increases and business growth.  These increases were offset by a $3.6 million decrease in our Medical Staffing segment due to a decline in staffing levels resulting from a decrease in the nurse staffing and pharmacy business.

Self-insurance for workers’ compensation and general and professional liability insurance increased $5.1 million, or 43.6%, to $16.8 million (3.6% of net revenues) for the three months ended June 30, 2009 from $11.7 million (2.6% of net revenues) for the three months ended June 30, 2008 primarily due to increased medical, legal and administrative costs associated with prior period claims.

Other operating costs increased $2.7 million, or 2.6%, to $107.8 million (23.0% of net revenues) for the three months ended June 30, 2009 from $105.1 million (23.3% of net revenues) for the three months ended June 30, 2008.  The increase was primarily due to an increase in our Inpatient Services segment primarily driven by increased therapy costs due to an increase in higher acuity patients requiring more rehabilitation therapy and an increase in purchased services.

Center rent expense decreased $0.2 million, or 1.1%, to $18.3 million (3.9% of net revenues) for the three months ended June 30, 2009 from $18.5 million (4.1% of net revenues) for the three months ended June 30, 2008.

General and administrative expenses decreased $0.4 million, or 2.5%, to $15.7 million (3.3% of net revenues) for the three months ended June 30, 2009 from $16.1 million (3.6% of net revenues) for the three months ended June 30, 2008.  The decrease was primarily due to cost reductions in professional and consultant fees, utilities and benefits expenses.

Depreciation and amortization increased $1.4 million, or 14.3%, to $11.2 million (2.4% of net revenues) for the three months ended June 30, 2009 from $9.8 million (2.2% of net revenues) for the three months ended June 30, 2008.  The increase was attributable to additional depreciation expense due to the purchase of previously leased centers and for property and equipment acquired during the period.

The provision for losses on accounts receivable increased $3.4 million, or 117.2%, to $6.3 million (1.3% of net revenues) for the three months ended June 30, 2009 from $2.9 million (0.6% of net revenues) for the three months ended June 30, 2008.  The increase resulted from slower cash collections.
 
41
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 

Net interest expense decreased $1.1 million, or 8.1%, to $12.5 million (2.7% of net revenues) for the three months ended June 30, 2009 from $13.6 million (3.0% of net revenues) for the three months ended June 30, 2008 due to lower interest rates on variable rate indebtedness in the current quarter coupled with reduced debt balances.

Segment Information

The following table sets forth the amount and percentage of certain elements of total net revenues for the three months ended June 30 (dollars in thousands):

   
2009
    
2008
  
                         
Inpatient Services
$
416,622
    
88.8
%
$
399,686
    
88.6
%
Rehabilitation Therapy Services
  
44,515
    
9.5
    
35,604
    
7.9
  
Medical Staffing Services
  
26,660
    
5.7
    
30,890
    
6.9
  
Corporate
  
10
    
-
    
9
    
-
  
Intersegment Eliminations
  
(18,923
)
  
(4.0
)
  
(15,256
)
  
(3.4
)
                         
Total net revenues
$
468,884
    
100.0
%
$
450,933
    
100.0
%

Inpatient Services revenues include revenues billed to patients for therapy and medical staffing provided by our affiliated operations.  The following table sets forth a summary of the intersegment revenues for the three months ended June 30 (in thousands):

   
2009
    
2008
  
             
Rehabilitation Therapy Services
$
18,360
  
$
14,462
  
Medical Staffing Services
  
563
    
794
  
Total intersegment revenue
$
18,923
  
$
15,256
  

The following table sets forth the amount of net segment income for the three months ended June 30 (in thousands):

   
2009
    
2008
  
             
Inpatient Services
$
38,816
  
$
43,382
  
Rehabilitation Therapy Services
  
3,111
    
2,562
  
Medical Staffing Services
  
2,289
    
2,456
  
Net segment income before Corporate
  
44,216
    
48,400
  
Corporate
  
(25,842
)
  
(27,322
)
Net segment income
$
18,374
  
$
21,078
  

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, distribution channels and capital resource needs.  We evaluate the operational strengths and performance of each segment based on financial measures, including net segment income.  Net segment income is defined as earnings before loss on sale of assets, income tax expense and discontinued operations. Net segment income for the three months ended June 30, 2009 for (1) our Inpatient Services segment decreased $4.6 million, or 10.6%, to $38.8 million, (2) our Rehabilitation Therapy Services segment increased $0.5 million, or 19.2%, to $3.1 million and (3) our Medical Staffing Services segment decreased $0.2 million, or 8.0%, to $2.3 million in comparison to the three months ended June 30, 2008, due to the factors discussed below for each segment.  We use the measure of net segment income to help identify opportunities for improvement and assist in allocating resources to each segment. 



 
42
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Inpatient Services

Net revenues increased $16.9 million, or 4.2%, to $416.6 million for the three months ended June 30, 2009 from $399.7 million for the three months ended June 30, 2008.  The increase was primarily the result of:

-
an increase of $4.4 million in Medicare revenues as result of a $10.0 million increase from higher Medicare Part A rates, a $2.1 million increase in Medicare Part B revenues and a $7.7 million decrease in revenues due to a lower customer base;
   
-
a $2.0 million increase in managed care and commercial insurance revenues driven by higher rates, which contributed $1.9 million of the increase, and higher customer base, which drove the remaining $0.1 million of the increase;
   
-
an increase of $8.8 million in Medicaid revenues consisting of $6.8 million related to improved rates and $2.0 million from an increase in customer base; and
   
-
a $3.3 million increase in hospice Medicare revenues, resulting in part from an acquisition of a hospice company in September 2008;
   
 
Offset in part by:
   
-
a $1.6 million decrease in private pay revenues due to a decline in revenues of $3.3 million as a result of a lower customer base, offset in part by a $1.7 million increase attributable to higher rates.

Operating salaries and benefits expenses increased $5.6 million, or 2.8%, to $206.6 million for the three months ended June 30, 2009 from $201.0 million for the three months ended June 30, 2008.  The increase was attributable to the following:

-
wage increases and related benefits and taxes of $7.4 million; and
   
-
an increase of $0.9 million in health insurance expense;
   
 
Offset in part by:
   
-
a decrease of $2.1 million in overtime pay; and
   
-
a decrease of $0.6 million in bonus expense.

Self-insurance for workers’ compensation and general and professional liability insurance increased $5.2 million, or 48.6%, to $15.9 million for the three months ended June 30, 2009 as compared to $10.7 million for the three months ended June 30, 2008.  General and professional liability insurance increased $9.1 million due to increased legal and administrative costs associated with claims, $4.3 million of which related to prior periods’ claims.  Workers’ compensation insurance decreased $3.9 million due to decreased exposures.

Other operating costs increased $6.0 million, or 5.9%, to $107.4 million for the three months ended June 30, 2009 from $101.4 million for the three months ended June 30, 2008.  The increase was attributable to the following:
 
-
a $3.3 million increase in therapy costs due to an increase in higher acuity patients requiring more rehabilitation therapy;
   
-
a $2.3 million increase in taxes primarily related to provider and real estate taxes;
   
-
a $1.9 million increase in supplies, due to higher costs for medical, incontinency and Medicare Part A drugs; and
   
-
a $1.2 million increase in purchased services related to medical, software maintenance and service contracts;
   
 
 
43
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
   
 
Offset in part by:
   
-
a $1.1 million decrease in nursing contract labor due to lower volume and more in-house availability of staff;
   
-
a $0.7 million decrease in education and training;
   
-
a $0.3 million decrease in utilities primarily related to a decrease in gas and oil offset by an increase in water and sewer;
   
-
a $0.3 million decrease in recruiting expenses; and
   
-
a $0.3 million increase in rebates and discounts.

General and administrative expenses increased $0.3 million, or 2.9%, to $10.7 million for the three months ended June 30, 2009 from $10.4 million for the three months ended June 30, 2008. The increase is primarily due to the increase in salaries and benefits (net of decrease in contract labor) and travel partially offset by a decrease in utilities.

The provision for losses on accounts receivable increased $3.4 million, or 125.9%, to $6.1 million for the three months ended June 30, 2009 from $2.7 million for the three months ended June 30, 2008.  The increase resulted from slower cash collections.

Center rent expense decreased $0.3 million, or 1.6%, to $17.9 million for the three months ended June 30, 2009 from $18.2 million for the three months ended June 30, 2008.  The decrease is attributable to the purchase of previously leased centers.

Depreciation and amortization increased $1.4 million, or 16.1%, to $10.1 million for the three months ended June 30, 2009 from $8.7 million for the three months ended June 30, 2008.  The increase was attributable to additional depreciation expense on property and equipment acquired during the period.

Net interest expense decreased $0.2 million, or 6.1%, to $3.1 million for the three months ended June 30, 2009 from $3.3 million for the three months ended June 30, 2008.  The decrease is a result of lower borrowing costs and lower aggregate borrowings.

Rehabilitation Therapy Services

Total revenues from the Rehabilitation Therapy Services segment increased $8.9 million, or 25.0%, to $44.5 million for the three months ended June 30, 2009 from $35.6 million for the three months ended June 30, 2008. The revenue increase was the result of:

-
an increase of $7.4 million attributable to increased billable minutes, of which 22 new contracts, net of lost contracts, accounted for $0.4 million, or 5%, and 425 existing contracts accounted for $7.0 million, or 95%;
   
-
an increase of $1.2 million attributable to a higher revenue per minute rate due to our renegotiation of certain customer contract rates and a shift in payor mix; and
   
-
an increase of $0.3 million in revenue earned for contract management fees.

Operating salaries and benefits expenses increased $8.0 million, or 27.8%, to $36.8 million for the three months ended June 30, 2009 from $28.8 million for the three months ended June 30, 2008. The increase was primarily driven by wage rate increases coupled with the increase in service volume mentioned above.
 
44
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
Medical Staffing Services

Total revenues from the Medical Staffing Services segment decreased $4.2 million, or 13.6%, to $26.7 million for the three months ended June 30, 2009 from $30.9 million for the three months ended June 30, 2008.  The decrease was primarily the result of:

-
a decrease of $2.1 million attributable to a decline in demand for our nurse staffing business;
   
-
a decrease of $1.4 million due to a decline in hours for therapy and pharmacy;
   
-
a decrease of $1.1 million related to closed offices; and
   
-
a decrease of $0.2 million in school business revenue;
   
 
Offset in part by:
   
-
an increase of $0.6 million due to higher fees earned from the temporary placement of physicians.

Operating salaries and benefits expenses were $18.6 million for the three months ended June 30, 2009 as compared to $22.2 million for the three months ended June 30, 2008, a decrease of $3.6 million, or 16.2%. The decrease in operating salaries and benefits is a direct result of the decline in staffing levels from nurse staffing, therapy staffing and pharmacy businesses.
 
Other operating costs decreased $0.2 million, or 4.7%, to $4.1 million for the three months ended June 30, 2009 from $4.3 million for the three months ended June 30, 2008. The decrease was primarily attributable to costs paid for travel and lodging for travel nurses and therapists.

Corporate

General and administrative expenses not directly attributed to segments decreased $0.4 million, or 2.5%, to $15.7 million for the three months ended June 30, 2009 from $16.1 million for the three months ended June 30, 2008. The decrease was primarily due to cost reductions in professional and consultant fees, utilities and benefits expense.

Interest expense

Interest expense not directly attributed to operating segments decreased $1.0 million, or 9.6%, to $9.4 million for the three months ended June 30, 2009 from $10.4 million for the three months ended June 30, 2008 due to lower interest rates on variable rate indebtedness in the current quarter coupled with a decrease in aggregate indebtedness since June 30, 2008.


Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

The following summarizes our results of operations on a consolidated basis.  A more detailed discussion and analysis of the results of operations of each of our segments (Inpatient Services, Rehabilitation Therapy Services, Medical Staffing Services and Corporate) is provided below under “Segment Information.”

Net revenues increased $35.9 million, or 4.0%, to $937.2 million for the six months ended June 30, 2009 from $901.3 million for the six months ended June 30, 2008. We reported net income for the six months ended June 30, 2009 of $20.3 million compared to net income of $18.3 million for the six months ended June 30, 2008.

The increase in net revenues for the 2009 period included $33.4 million of additional revenue in our Inpatient Services segment primarily due to increases in Medicare Part A and Part B rates, higher customer base and rates in managed care and commercial insurance revenues, and improved Medicaid rates.  The remainder of the increase primarily resulted from a $16.6 million increase in revenue from our Rehabilitation Therapy segment due primarily to increases in billable minutes and billing rates, partially offset by a $6.5 million decrease in revenue from our Medical Staffing segment mainly due to a decrease in billable nursing hours.
 
45
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Operating salaries and benefits, excluding workers’ compensation insurance costs, increased $18.0 million, or 3.6%, to $525.0 million (55.9% of net revenues) for the six months ended June 30, 2009 from $507.0 million (56.3% of net revenues) for the six months ended June 30, 2008.  The increase resulted primarily from $10.2 million of wage increases in our Inpatient Services segment and a $14.2 million increase from our Rehabilitation Therapy segment attributable to wage rate increases and business growth.  These increases were offset by a $6.4 million decrease in our Medical Staffing segment due to a decline in staffing levels resulting from a decrease in the nurse staffing and pharmacy business.

Self-insurance for workers’ compensation and general and professional liability insurance increased $5.0 million, or 18.9%, to $31.5 million (3.4% of net revenues) for the six months ended June 30, 2009 from $26.5 million (2.9% of net revenues) for the six months ended June 30, 2008 primarily due to increased medical, legal and administrative costs associated with prior period claims.

Other operating costs increased $6.1 million, or 2.9%, to $216.1 million (23.0% of net revenues) for the six months ended June 30, 2009 from $210.0 million (23.3% of net revenues) for the six months ended June 30, 2008.  The increase was primarily due to an increase in our Inpatient Services segment primarily driven by increased therapy costs due to an increase in higher acuity patients requiring more rehabilitation therapy and an increase in purchased services.

Center rent expense decreased  $0.3 million, or 0.8%, to $36.7 million (3.9% of net revenues) for the six months ended June 30, 2009 from $37.0 million (4.1% of net revenues) for the six months ended June 30, 2008.

General and administrative expenses decreased $0.2 million, or 0.6%, to $32.5 million (3.5% of net revenues) for the six months ended June 30, 2009 from $32.7 million (3.6% of net revenues) for the six months ended June 30, 2008.  The decrease was due to lower costs in our Corporate segment, primarily from reductions in professional and consultant fees, utilities and benefits expenses.

Depreciation and amortization increased $2.5 million, or 12.9%, to $21.9 million (2.4% of net revenues) for the six months ended June 30, 2009 from $19.4 million (2.2% of net revenues) for the six months ended June 30, 2008.  The increase was attributable to additional depreciation expense due to the purchase of previously leased centers and for property and equipment acquired during the period.

The provision for losses on accounts receivable increased $4.1 million, or 66.1%, to $10.3 million (1.1% of net revenues) for the six months ended June 30, 2009 from $6.2 million (0.7% of net revenues) for the six months ended June 30, 2008.  The increase resulted from slower cash collections.

Net interest expense decreased $2.9 million, or 10.3%, to $25.2 million (2.7% of net revenues) for the six months ended June 30, 2009 from $28.1 million (3.1% of net revenues) for the six months ended June 30, 2008 due to lower interest rates on variable rate indebtedness in the current quarter coupled with reduced debt balances.
 
Segment Information

The following table sets forth the amount and percentage of certain elements of total net revenues for the six months ended June 30 (dollars in thousands):

   
2009
    
2008
  
                         
Inpatient Services
$
832,025
    
88.8
%
$
798,666
    
88.6
%
Rehabilitation Therapy Services
  
88,246
    
9.4
    
71,603
    
7.9
  
Medical Staffing Services
  
54,594
    
5.8
    
61,092
    
6.8
  
Corporate
  
14
    
-
    
21
    
-
  
Intersegment Eliminations
  
(37,699
)
  
(4.0
)
  
(30,080
)
  
(3.3
)
                         
Total net revenues
$
937,180
    
100.0
%
$
901,302
    
100.0
%



 
46
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
Inpatient services revenues include revenues billed to patients for therapy and medical staffing provided by our affiliated operations.  The following table sets forth a summary of the intersegment revenues for the six months ended June 30 (in thousands):

   
2009
    
2008
  
             
Rehabilitation Therapy Services
$
36,576
  
$
28,752
  
Medical Staffing Services
  
1,123
    
1,328
  
Total intersegment revenue
$
37,699
  
$
30,080
  

The following table sets forth the amount of net segment income for the six months ended June 30 (in thousands):

   
2009
    
2008
  
             
Inpatient Services
$
80,604
  
$
81,227
  
Rehabilitation Therapy Services
  
6,000
    
4,690
  
Medical Staffing Services
  
4,310
    
4,388
  
Net segment income before Corporate
  
90,914
    
90,305
  
Corporate
  
(52,884
)
  
(55,813
)
Net segment income
$
38,030
  
$
34,492
  

Inpatient Services

Net revenues increased $33.3 million, or 4.2%, to $832.0 million for the six months ended June 30, 2009 from $798.7 million for the six months ended June 30, 2008.  The increase was primarily the result of:

-
an increase of $13.1 million in Medicare revenues as a result of a $20.2 million increase  in Medicare Part A rates, a $3.6 million increase in Medicare Part B revenues and a $10.7 million decrease due to a lower customer base;
   
-
a $6.4 million increase in managed care and commercial insurance revenues driven by higher rates, which contributed $4.0 million of the increase, and higher customer base, which drove the remaining $2.4 million of the increase;
   
-
an increase of $11.2 million in Medicaid revenues consisting of $10.7 million related to improved rates and $0.5 million from an increase in customer base;
   
-
a $6.2 million increase in hospice Medicare revenues, resulting in part from an acquisition of a hospice company in September 2008; and
   
-
an increase of $1.0 million in other revenues;
   
 
Offset in part by:
   
-
a $4.1 million decrease in private pay revenues due to a decline in revenues of $8.2 million as a result of a lower customer base, offset in part by a $4.1 million increase in revenues resulting from higher rates; and
   
-
a $0.5 million decrease in revenues related to our Medicare Part B billing company.

Operating salaries and benefits expenses increased $10.2 million, or 2.5%, to $413.7 million for the six months ended June 30, 2009 from $403.5 million for the six months ended June 30, 2008.  The increase was attributable to the following:

-
wage increases and related benefits and taxes of $13.0 million; and
   
-
an increase of $1.6 million in health insurance expense;
   

 
 
47
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
 
Offset in part by:
   
-
a decrease of  $4.2 million in overtime pay; and
   
-
a decrease of $0.2 million in bonus expense.
 
Self-insurance for workers’ compensation and general and professional liability insurance increased $5.1 million, or 20.9%, to $29.5 million for the six months ended June 30, 2009 as compared to $24.4 million for the six months ended June 30, 2008. General and professional liability insurance increased $8.1 million due to increased legal and administrative costs associated with claims, $4.3 million of which related to prior periods’ claims.  Workers’ compensation insurance decreased $3.0 million due to decreased exposures.

Other operating costs increased $12.0 million, or 5.9%, to $215.8 million for the six months ended June 30, 2009 from $203.8 million for the six months ended June 30, 2008.  The increase was attributable to the following:

-
a $6.7 million increase in therapy costs due to an increase in higher acuity patients requiring more rehabilitation therapy;
   
-
a $3.2 million increase in taxes primarily related to real estate, provider and gross receipts;
   
-
a $2.7 million increase in purchased services including software maintenance and service contracts;
   
-
a $2.1 million increase in supplies, due to higher costs for medical, IV, oxygen and office supplies; and
   
-
a $0.7 million increase in legal fees;
   
 
Offset in part by:
   
-
a $1.2 million decrease in nursing contract labor due to lower volume and improved labor management;
   
-
a $1.0 million decrease in education training;
   
-
a $0.6 million decrease in civil monetary penalties; and
   
-
a $0.6 million decrease in recruiting expenses.

General and administrative expenses increased $0.7 million, or 3.5%, to $20.6 million for the six months ended June 30, 2009 from $19.9 million for the six months ended June 30, 2008. The increase is primarily due to the increase in salaries and benefits (net of decrease in contract labor) and travel.

The provision for losses on accounts receivable increased $4.3 million, or 78.2%, to approximately $9.8 million for the six months ended June 30, 2009 from $5.5 million for the six months ended June 30, 2008.  The increase resulted from slower cash collections.

Center rent expense decreased $0.3 million, or 0.8%, to $36.0 million for the six months ended June 30, 2009 from $36.3 million for the six months ended June 30, 2008.  The decrease is attributable to the purchase of previously leased centers.

Depreciation and amortization increased $2.5 million, or 14.5%, to $19.8 million for the six months ended June 30, 2009 from $17.3 million for the six months ended June 30, 2008. The increase was attributable to additional depreciation expense due to the purchase of previously leased centers and for property and equipment acquired during the period.
 
48
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Net interest expense decreased $0.3 million, or 4.5%, to $6.3 million for the six months ended June 30, 2009 from $6.6 million for the six months ended June 30, 2008.  The decrease is a result of lower borrowing costs and lower aggregate borrowings.

Rehabilitation Therapy Services

Total revenues from the Rehabilitation Therapy Services segment increased $16.6 million, or 23.2%, to $88.2 million for the six months ended June 30, 2009 from $71.6 million for the six months ended June 30, 2008. The revenue increase was the result of:

-
an increase of $14.2 million attributable to increased billable minutes, of which 22 new contracts, net of lost contracts, accounted for $.7 million, or 5%, and 425 existing contracts accounted for $13.6 million, or 95%;
   
-
an increase of $1.8 million attributable to a higher revenue per minute rate due to our renegotiation of certain customer contract rates and a shift in payor mix; and
   
-
an increase of $0.6 million in revenue earned for contract management fees.

Operating salaries and benefits expenses increased $14.2 million, or 24.1%, to $73.0 million for the six months ended June 30, 2009 from $58.8 million for the six months ended June 30, 2008. The increase was primarily driven by wage rate increases coupled with the increase in service volume mentioned above.

Medical Staffing Services

Total revenues from the Medical Staffing Services segment decreased $6.5 million, or 10.6%, to $54.6 million for the six months ended June 30, 2009 from $61.1 million for the six months ended June 30, 2008.  The decrease was primarily the result of:

-
a decrease of $5.0 million attributable to a decline in demand for our nurse staffing business;
   
-
a decrease of $1.1 million due to a decline in hours for therapy and pharmacy;
   
-
a decrease of $2.1 million related to closed offices; and
   
-
a decrease of $0.2 million in school business revenue;
   
 
Offset in part by:
   
-
an increase of $1.9 million due to higher fees earned from the temporary placement of physicians.

Operating salaries and benefits expenses were $38.3 million for the six months ended June 30, 2009 as compared to $44.7 million for the six months ended June 30, 2008, a decrease of $6.4 million, or 14.3%. The decrease in operating salaries and benefits resulted from a decline in staffing levels due to a decrease in the nurse staffing, therapy staffing and pharmacy businesses.

Other operating costs increased $0.5 million, or 6.2%, to $8.6 million for the six months ended June 30, 2009 from $8.1 million for the six months ended June 30, 2008. The increase was primarily attributable to costs paid for temporary independent contractors that are physicians.

Corporate

General and administrative expenses not directly attributed to segments decreased $0.2 million, or 0.6%, to $32.5 million for the six months ended June 30, 2009 from $32.7 million for the three months ended June 30, 2008.  The decrease was primarily due to cost reductions in professional and consultant fees and benefits expense.
 
49
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Interest expense

Interest expense not directly attributed to operating segments decreased $2.6 million, or 12.1%, to $18.9 million for the six months ended June 30, 2009 from $21.5 million for the six months ended June 30, 2008 due to lower interest rates on variable rate indebtedness in the current quarter coupled with a decrease in aggregate indebtedness since June 30, 2008.

Liquidity and Capital Resources

There have been no material changes to our liquidity and capital resources since December 31, 2008.  For the three and six months ended June 30, 2009, our net income was $10.1 million and $20.3 million, respectively.  As of June 30, 2009, our working capital was $189.7 million. As of June 30, 2009, we had cash and cash equivalents of $95.7 million, $704.3 million in borrowings and $50.0 million available under our revolving credit facility.  As of June 30, 2009, we were in compliance with the covenants contained in the credit agreement governing the revolving credit facility and our term loan indebtedness, and the indenture governing our 9-1/8% Senior Subordinated Notes due 2015.

Based on current levels of operations, we believe that our operating cash flows (which were $87.8 million for the year ended December 31, 2008 and $52.1 million for the six months ended June 30, 2009), existing cash reserves and availability for borrowing under our revolving credit facility will provide sufficient funds for our operations, capital expenditures (both discretionary and nondiscretionary) as discussed under “Capital Expenditures”, scheduled debt service payments and our other commitments described in the table under “Obligations and Commitments” at least through the next twelve months.  We believe our long term liquidity needs will be satisfied by these same sources, as well as borrowings as required to refinance indebtedness.  Although our credit agreement, which is described under “Loan Agreements”, contains restrictions on our ability to incur indebtedness, we currently believe that we will be able to refinance existing indebtedness or incur additional indebtedness, if needed.  However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing debt or equity securities, on terms that are acceptable to us or at all.

We have not drawn on our revolving credit facility since April 2007, and have since that time relied on our cash flows to provide for operational needs and capital expenditures.  However, there can be no assurance that our operations will continue to provide sufficient cash flow or that refinancing sources will be available in the future, particularly given current economic conditions.  We anticipate that we will be able to utilize our revolving credit facility if needed, as we expect to remain in compliance with the covenants contained in our credit agreement for at least the next twelve months.  However, recent issues involving the stability of financial institutions generally have called into question credit availability, and under the terms of our revolving credit facility, if one lender defaults on a borrowing request, then the other lenders are not required to fund that lender’s share.  While we do not anticipate that any of our lenders will be unable to lend under the revolving credit facility if we determine to borrow funds, no assurance can be given that one or more of our lenders will be able to fulfill their commitments.  We do not depend on cash flows from discontinued operations or sales of assets to provide for future liquidity.

In April 2009, we purchased a leased center in Oklahoma that we operate but did not own.  The purchase price of $3.3 million was funded through available cash.

Cash Flows

During the three months ended June 30, 2009, net cash provided by operating activities decreased by $3.2 million as compared to the same period last year. This decrease was the result of (i) our quarter-over-quarter increase in net income of $0.4 million, (ii) our quarter-over-quarter decrease in working capital changes of $4.6 million, driven by changes in accounts receivable, restricted cash, prepaid expenses and other assets, income taxes payable, accrued compensation and benefits and other accrued liabilities and (iii) a $1.0 million increase in non-cash adjustments to net income, principally related to deferred taxes.

Net cash used for investing activities of $16.4 million for the three months ended June 30, 2009 is comprised of (i) $13.1 million used for capital expenditures and (ii) $3.3 million used to purchase leased real estate.
 
50
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

Net cash used for financing activities of $2.6 million for the three months ended June 30, 2009 is comprised of (i) $2.1 million used to repay long-term debt and capital lease obligations and (ii) $0.5 million used for distributions to non-controlling interests.

Capital Expenditures

We incurred capital expenditures, related primarily to improvements in continuing operations, as reflected in our consolidated statements of cash flows, of $13.1 million and $10.2 million for the three months ended June 30, 2009 and 2008, respectively, and $25.0 million and $16.1 million for the six months ended June 30, 2009 and 2008, respectively.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk because we have issued 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 of interest on our debt. The following table provides information regarding our market sensitive financial instruments and constitutes a forward-looking statement.

                                             
Fair Value
    
Fair Value
  
   
Expected Maturity Dates
    
June 30,
    
December 31,
  
   
2010
    
2011
    
2012
    
2013
    
2014
    
Thereafter
    
Total
    
2009 (1)
    
2008 (1)
  
     
(Dollars in thousands)
      
Long-term debt:
                                                      
Fixed rate debt (2)
$
6,230
  
$
35,829
  
$
5,054
  
$
5,179
  
$
199,435
  
$
268,087
  
$
519,814
  
$
489,828
  
$
442,992
  
  Rate
  
8.1
%
  
9.1
%
  
7.4
%
  
7.4
%
  
6.8
%
  
8.6
%
                  
                                                       
Variable rate debt
$
2,030
  
$
26,398
  
$
1,610
  
$
1,610
  
$
152,133
  
$
-
  
$
183,781
  
$
177,887
  
$
202,442
  
  Rate
  
3.3
%
  
3.6
%
  
3.3
%
  
3.3
%
  
3.3
%
  
-
%
                  
                                                       
Interest rate swaps:
                                                      
Variable to fixed
$
150,000
  
$
-
  
$
-
  
$
-
  
$
-
  
$
-
        
$
7,135
  
$
7,644
  
Average pay rate
  
4.8
%
  
-
    
-
    
-
    
-
    
-
                    
Average receive rate
  
1.1
%
  
-
    
-
    
-
    
-
    
-
                    
 
(1)
The fair value of fixed and variable rate debt was determined based on the current rates offered for debt with similar risks and maturities.
   
(2)
Excludes fair value premiums of $0.7 million related to acquisitions.


ITEM 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management, including our principal executive officer (Richard Matros) and our principal financial officer (L. Bryan Shaul), conducted an evaluation of the effectiveness of our disclosure controls and procedures.  Disclosure controls and procedures are defined as controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include, without limitation, controls and procedures designed to ensure that information is accumulated  and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding  required disclosure.  Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2009.  No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
51
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In 2004, we commenced a declaratory relief action in the Orange County, California Superior Court in which two subsidiaries of American International Group (“AIG”) are parties. The action sought, among other things, a determination that the AIG subsidiary that was the carrier providing coverage under our excess/umbrella insurance policy for the 2000 through 2002 policy years is obligated to provide first dollar insurance coverage for those three policy years pursuant to the terms of the excess/umbrella policy.   Trial of this matter commenced in January 2009.  In June 2009, after conclusion of the liability phase of the trial, the judge ruled in favor of AIG and dismissed our claims.  We are currently evaluating whether to appeal.

 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)  The annual meeting of our stockholders was held on June 10, 2009.

(b)  Gregory S. Anderson, Tony M. Astorga, Christian K. Bement, Michael J. Foster, Barbara B. Kennelly, Steven M. Looney, Richard K. Matros, and Milton J. Walters were each elected to a one-year term on the Board of Directors that will expire at the Annual Meeting of Stockholders in June 2010. The following table sets forth the number of votes cast for, the number of votes cast against and the number of abstentions with respect to each director nominee:

   
For
  
Against
  
Abstain
Anderson
  
39,837,345
  
435,404
  
5,238
Astorga
  
39,627,983
  
644,684
  
5,320
Bement
  
35,449,563
  
4,823,107
  
5,317
Foster
  
39,786,843
  
485,829
  
5,315
Kennelly
  
39,554,805
  
717,870
  
5,312
Looney
  
39,093,508
  
1,179,155
  
5,324
Matros
  
39,529,595
  
743,076
  
5,315
Walters
  
39,037,695
  
1,234,969
  
5,323

(c)  The 2009 Performance Incentive Plan was approved and the results were as follows:

For
  
Against
  
Abstain    
  
Broker Non-Votes
27,300,948
  
10,923,295
  
8,926
  
2,044,818

(d)  The other matter voted on at the meeting was the ratification of the appointment of PricewaterhouseCoopers LLP as our independent public accountants for the fiscal year ending December 31, 2009 and the results were as follows:

For
  
Against
  
Abstain    
40,264,530
  
11,579
  
1,698


 
52
 
SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
 
ITEM 6. EXHIBITS

3.1
Amended and Restated Certificate of Incorporation of Sun Healthcare Group, Inc., as amended (incorporated by reference from exhibits to our Form 10-K filed on March 7, 2008).
   
3.2
Amended and Restated Bylaws of Sun Healthcare Group, Inc. (incorporated by reference from exhibits to our Form 8-K filed on December 27, 2007).
   
10.1
Amended and Restated Severance Benefits Agreement dated as of December 17, 2008 by and between Richard L. Peranton and CareerStaff Unlimited, Inc.
   
10.2
2009 Incentive Bonus Plan for President of CareerStaff Unlimited, Inc.
   
31.1
Section 302 Sarbanes-Oxley Certification by Chief Executive Officer
   
31.2
Section 302 Sarbanes-Oxley Certification by Chief Financial Officer
   
32.1
Section 906 Sarbanes-Oxley Certification by Chief Executive Officer
   
32.2
Section 906 Sarbanes-Oxley Certification by Chief Financial Officer


SIGNATURE

Pursuant to the requirements 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/ L. Bryan Shaul                                        
L. Bryan Shaul
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

August 6, 2009

 
53
 

EX-10.1 2 ex10-1.htm ex10-1.htm
EXHIBIT 10.1
AMENDED AND RESTATED
SEVERANCE BENEFITS AGREEMENT

THIS AMENDED AND RESTATED SEVERANCE BENEFITS AGREEMENT (“Agreement”) is entered into as of the 17th day of December, 2008 by and between CAREERSTAFF UNLIMITED, INC., a Delaware corporation (“Employer”) and RICHARD L. PERANTON (“Employee”) with reference to the following facts:
 
A.           Employer is a wholly-owned subsidiary of SHG Services, Inc., a Delaware corporation that is itself a wholly-owned subsidiary of Sun Healthcare Group, Inc., a Delaware corporation (“Parent”, which corporation, is referred to herein, collectively with its various direct and indirect subsidiaries, as “Sun”).
 
B.           Employer and Employee are parties to that certain Severance Benefits Agreement dated as of November 1, 2004, as amended as of August 22, 2007  (the “Existing Agreement”); and
 
C.           Employer and Employee wish to amend and restate the Existing Agreement upon the terms set forth in this Agreement to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), effective as of the date hereof.
 
NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, Employer and Employee agree as follows:
 
I.           SEVERANCE BENEFITS
 
Employee shall be entitled to the severance benefits described below upon execution of Employer’s then standard separation agreement and mutual release (the “Release”) and delivery of such executed Release to Employer within 21 days following the effective date of the Qualifying Termination (as defined in Section II) or Change in Control (as defined in Section IV), as applicable.
 
A. Cash Payments.
 
The following cash payments shall be made to Employee following a Qualifying Termination or a Change in Control, as applicable (the below provisions do not alter or affect the legal obligations of Employer to pay Employee upon a  termination of employment that does not constitute a Qualifying Termination or a Change in Control):
 
1. Lump Sum Severance Payment.  In the event of a Qualifying Termination or a Change in Control, Employee shall be entitled to a lump sum severance payment in an amount equal to one hundred percent (100%) of his annual base salary, at the rate then in effect, less applicable federal and state tax withholding and any other deductions required by law or otherwise authorized by Employee, with such amount to be paid to Employee in the month immediately following the month in which Employee’s Qualifying Termination or Change in Control occurs, as applicable.
 
1
 
 
2. Earned Salary; Reimbursable Expenses. In the event of a Qualifying Termination, Employer shall pay Employee the full amount of any earned but unpaid salary through the date of such termination, plus a cash payment (calculated on the basis of Employee’s salary at the rate then in effect) for all unused vacation that Employee has earned as of the date of such termination, together with a cash payment for any unreimbursed expenses, with such amount to be paid to Employee upon or promptly following (but in all events within 30 days after) the date of the Qualifying Termination.  Employee agrees to provide documentation of any such expenses promptly after such expenses are incurred.
 
B. Health Care Coverage. In the event of a Qualifying Termination, Employee and Employee’s eligible dependents shall be entitled to continued coverage under Employer’s health insurance plans on the same basis as active employees until the earlier of (1) the last day of the twelfth month to commence on or after the date of termination; or (2) the date Employee or Employee’s eligible dependents become eligible to participate in a plan of a successor employer.
 
C. Other Plans. Except as expressly provided to the contrary in Section I.B, upon any termination of employment, including without limitation a Qualifying Termination, Employee’s right to participate in any retirement or benefits plans and perquisites shall cease as of the date of termination.
 
II.           QUALIFYING TERMINATION.
 
Employee will have incurred a Qualifying Termination for purposes of this Agreement if either of the following events occurs during the term of Employee’s employment.
 
A. Termination by Employer. Any termination of Employee’s employment by Employer other than for “Good Cause” or “Disability” (as each such term is defined in Section IV, below); or
 
B. Termination by Employee. Employee’s termination of his employment with Employer for “Good Reason” within one (1) year after the occurrence of a “Change in Control” (as each such term is defined in Section IV below).
 
III.           EFFECT OF NON-QUALIFYING TERMINATIONS.
 
If Employee’s employment with Employer terminates for any reason other than a Qualifying Termination, Employer shall pay Employee the full amount of any earned but unpaid salary through the date of such termination, plus a cash payment (calculated on the basis of Employee’s salary at the rate then in effect) for all unused paid time off which Employee has earned as of the date of such termination and a cash payment for any unreimbursed expenses, with such amount to be paid to Employee upon or promptly following (but in all events within 30 days after) the date of such termination. Employee agrees to provide documentation of any such expenses promptly after such expenses are incurred.  As of the date of such termination, Employee shall immediately relinquish the right to any additional payments of benefits from Employer under this Agreement or otherwise. Employee’s right to participate in any retirement or benefits plans and perquisites shall cease as of the date of termination. Employee and Employee’s eligible dependents may elect to continue coverage under COBRA of any health, dental and vision plans in effect at the time.
 
2
 
 
IV.           DEFINITIONS.
 
The following capitalized terms shall have the meanings specified below:
 
A. “Good Cause” shall mean any one of the following:
 
(1) Any criminal conviction of the Employee under the laws of the United States or any state or other political subdivision thereof which, in the good faith determination of the Chief Executive Officer of Parent (the “CEO”), renders Employee unsuitable as an employee or legal representative of Employer and/or Sun.
 
(2) Employee’s continued failure substantially to perform the duties reasonably requested by the CEO and commensurate with. Employee’s position and within Employee’s control as President of CSUI (other than any such failure resulting from Employee’s incapacity due to Employee’s Disability) after a written demand for substantial performance is delivered to Employee by the CEO, which demand specifically identifies the manner in which the CEO believes that Employee has not substantially performed his duties, and which performance is not substantially corrected by Employee within thirty (30) days of receipt of such demand; and
 
(3) Any material workplace misconduct or willful failure by Employee to comply with Employer’s and Sun’s general policies and procedures as they may exist from time to time which, in the good faith determination of the CEO, renders Employee unsuitable as an employee or legal representative of Employer and/or Sun.
 
B. “Change in Control” shall mean the occurrence of any one or more of the following events:
 
(1) Any “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “1934 Act”)), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of more than 33 1/3% of the then outstanding voting stock of Employer;
 
(2) A merger or consolidation of Employer with any other corporation not affiliated with Employer; and
 
(3) A sale or other disposition by Employer of all or substantially all of Employer’s assets;
 
provided, however, in no event shall any acquisition of securities, or a merger or other consolidation pursuant to a plan of reorganization under chapter 11 of the Bankruptcy Code with respect to Employer (“Chapter 11 Plan”), or a liquidation under the Bankruptcy Code constitute a Change in Control. In addition, notwithstanding the above, a Change in Control shall not be deemed to have occurred in the event of any transaction undertaken for the purpose of reincorporating Employer under the laws of another jurisdiction, if such transaction does not materially affect the beneficial ownership of Employer’s capital stock. Employee’s continued employment without objection following a Change in Control shall not, by itself, constitute consent to or a
 
 
 
3
 
 
waiver of rights with respect to any circumstances constituting Good Reason hereunder. A Change in Control shall not, by itself, constitute Good Reason hereunder. A termination of Employee’s employment with Employer without Good Cause (other than by reason of Employee’s death or Disability) within six (6) months preceding a Change in Control shall be treated as if such termination occurred on the date of such Change in Control if it is reasonably demonstrated that the termination was at the request of the third party who has taken steps reasonably calculated to effect such Change in Control or otherwise arose in connection with or in anticipation of such Change in Control.
 
C. “Disability” means Employee’s inability to engage in substantial gainful activity by reason of any medically determinable mental or physical impairment which can be expected to result in death or which has lasted or can be expected to last for a period of 120 substantially consecutive calendar days.
 
D. “Good Reason” means a resignation of Employee’s employment with Employer (or any person succeeding to the assets of Employer or any substantial portion thereof) as a result and within 60 days after the occurrence of any of the following without Employee’s written consent:
 
(1) a meaningful and detrimental reduction in Employee’s authority, duties or responsibilities, or a meaningful and detrimental change in Employee’s reporting responsibilities, as in effect immediately prior to Employee’s delivery of a “Good Reason Notice” (as defined below) to Employer;
 
(2) a material reduction in Employee’s annual base salary as in effect immediately prior to the Employee’s delivery of a Good Reason Notice to Employer, a material reduction in Employee’s target annual bonus (expressed as a percentage of base salary) as in effect immediately prior to the delivery of the Good Reason Notice, or a material failure to provide Employee with any other form of compensation or material employment benefit being provided to Employee immediately prior to the circumstances described in the Good Reason Notice (excluding however, any reduction in the amount of any annual bonus or the granting or withholding of incentive compensation (including without limitation options or stock units) but including a material reduction to the target amount of the bonus); or
 
(3) a relocation of Employee’s principal place of employment by more than fifty (50) miles (or the requirement that Employee be based at a different location), provided that such relocation results in a longer commute (measured by actual mileage) for Employee from his primary residence to such new location;
 
provided, however, that an event described in clauses (1), (2) and (3) above shall not constitute Good Reason unless (A) the existence of the aforementioned circumstance is communicated to Employer and to its successor in writing in a notice delivered within 60 days of the commencement of such circumstance and stating the basis for Employee’s allegation that Good Reason exists (the “Good Reason Notice”), (B) the circumstance is not corrected by Employer or such successor in a manner which is reasonably satisfactory to Employee (including full retroactive correction with respect to any monetary matter)
 
 
4
 
 
within 30 days of Employer’s receipt of such written notice from Employee, and (C) Employee terminates his employment with Employer within the 60 day time period described above.
 
V.           PROTECTION OF SUN’S INTERESTS.
 
In consideration for Employer’s promise to pay the benefits described in Section I of this Agreement upon the occurrence of a Qualifying Termination, and without requirement for Employee to receive such benefits if a Qualifying Termination has not occurred, Employee agrees to be fully bound by each of the following covenants:
 
A. Confidentiality. Employee agrees that he will not at any time, during or after the term of his employment, except in performance of his obligations to Employer or Sun hereunder or with the prior written consent of the Chief Executive Officer of Sun, directly or indirectly disclose to any person or organization any secret or “Confidential, Information” that Employee may learn or have learned by reason of Employee’s association with Sun. The term “Confidential Information” means any information not previously disclosed to the public or to the trade by Sun’s management with respect to Sun’s products, services, business practices, facilities and methods, salary and benefit information, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, pricing information, customer lists, financial information (including revenues, costs or profits associated with any of Sun’s products or lines of business), business plans, prospects or opportunities, compliance and clinical processes, policies and procedures.
 
B. Exclusive Property. Employee confirms that all Confidential Information is and shall remain the exclusive property of Sun. All business records, papers and documents kept or made by Employee relating to the business of Sun shall be and remain the property of Sun. Upon the termination of Employee’s employment for any reason or upon the request of Sun at any time, Employee shall promptly deliver to Sun, and shall not without the consent of the President of Employer, retain copies of, Confidential Information, or any written materials not previously made available to the public, or records and documents made by Employee or coming into Employee’s possession concerning the business or affairs of Sun.
 
C. Nonsolicitation. Employee shall not, during Employee’s employment with Employer, and for twelve (12) months following the termination of that employment, for whatever reason, in any manner induce, attempt to induce, or assist others to induce, or attempt to induce, any employee, agent, representative or other person associated with Sun or any customer, patient or client of Sun to terminate his association or contract with Sun, nor in any manner, directly or indirectly, interfere with the relationship between Sun and any of such persons or entities.
 
D. Non-Disparagement. Employee shall not during Employee’s employment with Employer and for one year following termination of that employment, for whatever reason, make any statements that are intended to or that would reasonably be expected to harm Sun or, any of its subsidiaries or affiliates, their respective predecessors, successors, assigns and employees and their respective past, present or future officers, directors, shareholders, employees, trustees, fiduciaries, administrators, agents or representatives.
 
5
 
 
E. Relief. Without intending to limit the remedies available to Sun or Employer, Employee acknowledges that a breach of any of the covenants in this Section V may result in material irreparable injury to Sun and/or Employer for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, Sun shall be entitled to obtain a temporary restraining order, and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by these covenants or such other relief as may be required to specifically enforce any of the covenants set forth in this Section V.
 
VI.           MISCELLANEOUS.
 
A. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas applicable to contracts entered into and performed in such State.
 
B. Dispute Resolution; Jurisdiction. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively in arbitration conducted in Dallas, Texas in accordance with the commercial rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Punitive damages shall not be awarded.
 
C. Legal Fees and Expenses. Employer shall pay or reimburse Employee on an after-tax basis for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by Employee as a result of any claim, action or proceeding (a) contesting, disputing, or enforcing any right, benefits, or obligations under this Agreement, or (b) arising out of or challenging the validity, advisability, or enforceability of this Agreement or any provision thereof; provided, however, that this provision shall not apply if the arbitrator(s) rule in Sun’s favor with respect to Employee’s claim or position.
 
D. Successors; Binding Agreement. This Agreement shall be binding upon and inure to the benefit of Employee (and Employee’s personal representatives and heirs), Sun, Employer and any organization that succeeds to substantially all of the business or assets of Employer, or any portion thereof. For the avoidance of any doubt as to such matters, there shall be no termination of Employee’s employment for purposes of this Agreement if Employee shall continue to be employed or engaged by any person or entity that purchases or otherwise succeeds to the assets of Sun (or any portion thereof). This Agreement shall inure to the benefit of and be enforceable by Sun’s and Employer’s successors and assigns and by Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees.  If Employee should die while any amount would still be payable to Employee hereunder if Employee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee’s devisee, legatee, or other designee or, if there is no such designee, to Employee’s estate.
 
E. Effectiveness and Term. On execution by Employer and Employee, this Agreement shall be effective and shall continue so long as Employee remains employed by Sun.
 
6
 
 
F. Prior Severance Benefits Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof and any prior agreement, arrangement or understanding between Employee and Employer, relating to or in connection with the possible payment of severance to Employee upon termination of his employment, is hereby terminated and superseded its entirety by this Agreement.
 
G. Notices. For purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows:
 
If to Employer:
 
CareerStaff Unlimited, Inc.
c/o Sun HealthCare Group, Inc.
Attention: General Counsel
18831 Von Karman, Avenue, Ste 400
Irvine, California 92612
 
 
If to Employee:
 
Mr. Richard L. Peranton
5301 Kensington. Court
Flower Mound, Texas 75022
 
H. Amendments, Waivers, Etc. No provision of, this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.
 
I. Validity. The invalidity or unenforceability of any provision of, this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
 
J. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.
 
K. Source of Payments. Except as expressly provided herein, all payments provided under this Agreement shall be paid in cash from the general. funds of Employer and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. Employee will have no right, title, or interest whatsoever in or to any investments that Employer, may make to aid in it meeting its obligations hereunder. To the extent that any person acquires a
 
7
 
right to receive payments from Employer hereunder, such right shall be not greater, than the tight of an unsecured creditor.
 
L. Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement.
 
M. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby and supersedes all prior agreements and understandings of, the parties with respect to the subject matter hereof.
 
N. Section 409A.
 
(1) If Employee is a “specified employee” within the meaning of Treasury Regulation Section 1.409A-1(i) as of the date of Employee’s separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h)(1), without regard to the optional alternative definitions available thereunder) and any payment or benefit provided in Section I hereof constitutes a “deferral of compensation” within the meaning of Section 409A of the Code, Employee shall not be entitled to any such payment or benefit until the earlier of: (i) the date which is six (6) months after his separation from service for any reason other than death, or (ii) the date of his death.  The provisions of this paragraph shall only apply if, and to the extent, required to avoid the imputation of any tax, penalty or interest pursuant to Section 409A of the Code.  Any amounts otherwise payable to Employee upon or in the six (6) month period following his separation from service that are not so paid by reason of this Section VI(N)(1) shall be paid (without interest) as soon as practicable (and in all events within thirty (30) days) after the date that is six (6) months after Employee’s separation from service (or, if earlier, as soon as practicable, and in all events within thirty (30) days, after the date of his death).
 
(2) To the extent that any reimbursements pursuant to Sections I(B) or VI(C), are taxable to Employee, any reimbursement payment due to Employee pursuant to such provision shall be paid to Employee on or before the last day of Employee’s taxable year following the taxable year in which the related expense was incurred.  The benefits and reimbursements pursuant to Sections I(B) and VI(C) are not subject to liquidation or exchange for another benefit and the amount of such benefits and reimbursements that Employee receives in one taxable year shall not affect the amount of such benefits and reimbursements that Employee receives in any other taxable year.
 
(3) It is intended that any amounts payable under this Agreement and Employer’s, Sun’s and Employee’s exercise of authority or discretion hereunder shall comply with and avoid the imputation of any tax, penalty or interest under Section 409A of the Code.  This Agreement shall be construed and interpreted consistent with that intent.
 
8
 
 
 
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above.
 
“Employer”
 
CAREERSTAFF UNLIMITED, INC.
a Delaware corporation
 

 
By:   /s/ Michael Newman                    
   Michael Newman, Vice President
 

 
“Employee”
 
 
 
/s/ Richard L. Peranton                   
RICHARD L. PERANTON
 
 
 


9
 EX-10.2 3 ex10-2.htm ex10-2.htm
EXHIBIT 10.2
 
 
CareerStaff Unlimited, Inc.
2009 President Incentive Plan
 
 
Objective:
 
To provide an incentive for the CareerStaff President to improve operational and financial performance and to reward success.

Program:
 
    ► Incentive Potential:
·  
Target bonus equal to 60% of annual base salary (as of 12/31/09) with additional incentive potential of up to 45%.
·  
The maximum potential bonus payout is 105% of base salary.
    ► Paid Annually  
·  
Incentive payments will be made after completion of the year-end audit for 2009 and following certification of achievement of financial performance targets by the Compensation Committee of the Board of Directors of Sun Healthcare Group, but no later than March 15, 2010.
    ► Plan Year:  
·  
January 1, 2009 – December 31, 2009
    ► Plan Eligibility:
·  
In order to be eligible for the incentive, the President must be a full-time employee and actively employed on 12/31/09.
·  
If an approved leave of absence occurs during the plan year, the bonus will be prorated.
 
Plan Provisions, Criteria and Weighting:
 
The plan is comprised of two financial components:  a 2009 financial performance target for CareerStaff and a 2009 financial performance target for Sun Healthcare Group.  Both financial performance targets are based on earnings before interest, taxes, depreciation and amortization (EBITDA).  The EB ITDA targets have been established by the Compensation Committee.  These targets are:

·  
CareerStaff  2009 EBITDA of $10.5 million
·  
Sun Healthcare Group 2009 EBITDA of $189.2 million

The two components of the plan are weighted as follows:                                                                                                           
 
Components
Weighting
 
CareerStaff EBITDA goal
85%
 
Sun Healthcare Group EBITDA goal
15%
 
CareerStaff EBITDA Component
 
The amount of the CareerStaff EBITDA bonus shall be based upon actual CareerStaff EBITDA attained as a percentage of the CareerStaff EBITDA target as follows:
 
1
 
 
 
% Achievement of Target for
CareerStaff:
 
85% of target
(2009 EBITDA of
$8.925 million)
100% of target
(2009 EBITDA of
$10.5 million)
115% of target
(2009 EBITDA of
$12.075 million)
 
Percentage of Base Salary Paid as Bonus:
 
10.2%
51.0%
89.5%

 
If actual CareerStaff EBITDA is less than $8.925 million, the CareerStaff EBITDA component of the bonus will be zero.  If actual CareerStaff EBITDA exceeds $12.075 million, the CareerStaff EBITDA component of the bonus will be 89.5% of base salary.  If actual CareerStaff EBITDA is greater than $8.925 million but less than $10.5 million, or greater than $10.5 million but less than $12.075 million, the amount of the CareerStaff EBITDA component of the bonus will be prorated between the amounts shown in the applicable columns of the table.
 
The level of achievement of the CareerStaff EBITDA target shall be determined without regard to changes to CareerStaff EBITDA that may occur as a result of acquisitions made during 2009.
 
Sun Healthcare Group EBITDA Component
 
The amount of the Sun Healthcare Group EBITDA bonus shall be based upon normalized actual EBITDA attained as a percentage of the Sun Healthcare Group EBITDA target as follows:
 
 
% Achievement of Target
 for Sun Healthcare Group:
 
85% of target
(2009 EBITDA of
$160.82 million)
100% of target
(2009 EBITDA of
$189.2 million)
115% of target
(2009 EBITDA of
$217.58 million)
 
Percentage of Base Salary
Paid as Bonus:
 
1.8%
9.0%
15.5%

 
If actual Sun Healthcare Group EBITDA is less than $160.82 million, the Sun Healthcare Group EBITDA component of the bonus will be zero.  If actual Sun Healthcare Group EBITDA exceeds $217.58 million, the Sun Healthcare Group EBITDA component of the bonus will equal 15.5% of Base Salary.  If actual Sun Healthcare Group EBITDA is greater than $160.82 million but less than $189.2 million or greater than $189.2 million but less than $217.58 million, the amount of the Sun Healthcare Group EBITDA component of the bonus will be prorated between the amounts shown in the applicable columns of the table.
 
The Sun Healthcare Group EBITDA component of the bonus shall be determined solely by the normalized actual consolidated EBITDA of Sun, as published by Sun in its press release announcing financial results for 2009.  Normalizing adjustments consist of actuarial adjustments for self insurance for general and professional liability, EBITDA of discontinued operations, and nonrecurring costs related to acquisitions and other similar events.  When determining whether the EBITDA target has been achieved, adjustments shall be made to the EBITDA target to eliminate the effect of discontinued operations or any change in accounting policies or practices.
 
Miscellaneous:
 
In no event shall the amount of the bonus exceed the amount that has been accrued for such bonus in the calculation of either or both of the CareerStaff EBITDA or Sun Healthcare Group EBITDA components of the bonus.
 
2
This Plan neither constitutes a contract of employment nor grants any rights for an employee to be retained in employment.  Rather, all employment remains “at will” unless otherwise required by applicable law.  This document constitutes the entire Plan, supersedes all prior agreements and there are no oral terms or conditions to the contrary.  Sun Healthcare Group retains the discretion to modify the Plan at any time, with or without notice.

The company reserves the right to reduce, eliminate or postpone payments of employees who are on a written performance plan, have engaged in conduct that is in direct violation of the company’s Code of Conduct/Compliance Process or such conduct/performance that is detrimental to the company.



Employee Acknowledgement:

I acknowledge that I have received a copy of the 2009 President Incentive Plan.  I understand that if I have questions about the 2009 President Incentive Plan that I should discuss them with my immediate manager.




/s/ Richard L. Peranton                                       ___________________, 2009
Richard L. Peranton                                                                 Date

 
 3
EX-31.1 4 ex31-1.htm ex31-1.htm
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 quarterly report on Form 10-Q 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)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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;

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: August 6, 2009
/s/ Richard K. Matros
 
Richard K. Matros
Chief Executive Officer (Principal Executive Officer)
 

 EX-31.2 5 ex31-2.htm ex31-2.htm

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, L. Bryan Shaul, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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;

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: August 6, 2009
/s/ L. Bryan Shaul
 
L. Bryan Shaul
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 

 EX-32.1 6 ex32-1.htm ex32-1.htm
EXHIBIT 32.1

WRITTEN STATEMENT
 PURSUANT TO
18 U.S.C. SECTION 1350



   The undersigned, Richard K. Matros, the Chief Executive Officer (Principal Executive Officer), of Sun Healthcare Group, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(i)   the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 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: August 6, 2009
/s/ Richard K. Matros
 
Richard K. Matros

 
 
 
EX-32.2 7 ex32-2.htm ex32-2.htm
EXHIBIT 32.2

WRITTEN STATEMENT
 PURSUANT TO
18 U.S.C. SECTION 1350



   The undersigned, L. Bryan Shaul, the Chief Financial Officer (Principal Financial Officer), of Sun Healthcare Group, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(i)   the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 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: August 6, 2009
/s/ L. Bryan Shaul
 
L. Bryan Shaul

 
 
 

 
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