SUN HEALTHCARE GROUP INC - FORM 8-K - EX-99.1

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8-K - SUN HEALTHCARE GROUP INC	form8k.htm

EXHIBIT 99.1

Sun Healthcare Group, Inc.

Reports 2011 Third-quarter Results and Normalized EPS of $0.32

Contact: Investor Inquiries (505) 468-2341

Media Inquiries (505) 468-4582

Irvine, Calif. (Nov. 1, 2011)—Sun Healthcare Group, Inc. (NASDAQ GS: SUNH) today announced its operating results for the third quarter ended Sept. 30, 2011.

Normalized results for the third quarter period ended Sept. 30, 2011:

·	consolidated revenues rose 2.6 percent to $485.9 million, compared to the same period in 2010, driven primarily by growth in rate and skilled mix in the inpatient services segment;

·	consolidated adjusted EBITDAR increased 5.6 percent to $63.8 million and adjusted EBITDAR margin grew 30 basis points to 13.1 percent, compared to normalized data for the same period in 2010;

·	diluted earnings per share from continuing operations was $0.32 on 26.2 million weighted-average diluted shares;

·	free cash flow was $3.7 million; and

the Company recorded a non-cash, pre-tax impairment charge of $317.1 million associated with the write-down of goodwill and other intangible assets as a result of the impact on the inpatient services business of the final Medicare reimbursement rates for fiscal year 2012 established by the Centers for Medicare and Medicaid Services (CMS), which became effective on Oct. 1, 2011 (the CMS final rule), and a $2.4 million expense related to restructuring initiatives. Both the impairment charge and the restructuring costs have been normalized out of reported results, and the results reported above do not reflect the impact of these charges.

Regarding the Company’s third-quarter results, William A. Mathies, Sun’s chairman and chief executive officer, stated, “Revenue growth and EBITDAR margin expansion in the quarter were in line with our expectations. Our operating metrics showed strength too, with skilled mix days growing 30 basis points year-over-year as our focus on attracting and providing high quality care for high-acuity, short-stay patients continues to have a positive return for the Company. Additionally, the free cash flow we generated in the quarter contributed to bringing our quarter-end cash balance to $91.2 million. The quarter’s strength provides us with a solid footing from which to address the challenges we face related to the CMS final rule for skilled nursing facilities implemented on October 1.”

Mathies concluded, “We have begun our mitigation efforts to offset the impact of the CMS final rule, some of which will impact the fourth quarter of 2011 but most of which will yield results in 2012. Based on our experience thus far, we continue to believe that the net impact of the CMS final rule on our 2012 EBITDAR will be between $45 million and $50 million. We also continue to evaluate strategic uses of our significant cash balance toward enhancing our financial flexibility, as well as other strategic initiatives through which we can strengthen our competitive positioning.”

Segment Updates

SunBridge, Sun’s inpatient services business, reported year-over-year revenue growth in the quarter of $13.7 million, or 3.2 percent, and adjusted EBITDAR of $74.5 million for the quarter, up $5.7 million or 8.2 percent compared to the same quarter during the prior year. Adjusted EBITDAR margin for inpatient services in the quarter was 17.1 percent, up 80 basis points from the same period in 2010. Skilled mix revenue as a percent of total revenue increased by 260 basis points (to 39.8 percent) compared to the same quarter in 2010, driven by continued growth in total skilled admissions. In the quarter, the number of Rehab Recovery Suites® (RRS) beds was increased by an additional 113 beds, enhancing the ability to attract high-acuity patients. These additional beds bring total available RRS beds to 2,185, an increase of 32.7 percent during the same quarter in 2010.

Included in the inpatient segment, revenues from SolAmor, Sun’s hospice business, increased $3.6 million from $11.3 million in the third quarter of 2010 to $14.9 million in the third quarter of 2011. Same-store revenue growth in the quarter was 9.4 percent or $1.1 million. An additional $2.5 million of revenue growth was attributable to the Countryside acquisition. On Oct. 1, 2011, SolAmor acquired a small Ohio-based hospice business which complements SunBridge’s Ohio nursing centers and broadens SolAmor’s footprint to 11 states.

SunDance, Sun’s rehabilitation therapy services business, reported for the quarter revenues of $62.4 million, adjusted EBITDAR of $2.7 million and adjusted EBITDAR margin of 4.3 percent. While revenues were up compared to the same quarter one year ago, EBITDAR and EBITDAR margin were both down year-over-year due to changes in concurrent therapy reimbursement, which was effective on Oct. 1, 2010, and also due to the implementation of the multiple procedure payment reduction (MPPR), which was effective on Jan. 1, 2011.

CareerStaff, Sun’s medical staffing services business, reported revenues of $21.8 million for the quarter, down 2.0 percent compared to revenues in the same quarter of 2010. Despite the decline in revenues, CareerStaff achieved adjusted EBITDAR of $1.6 million and an adjusted EBITDAR margin of 7.3 percent for the quarter.

Cash Flow, Capital Structure, Rent Expense and Taxes

At Sept. 30, 2011, Sun had $91.2 million in cash and $142.6 million of long-term debt. Sun’s free cash flow for the third quarter of 2011 was $3.7 million, after taking into account $14.2 million of cash used for capital expenditures in the quarter. Rent expense in the quarter reflected the third full quarter in which the increased rents, resulting from Sun’s 2010 restructuring, were paid. Rent expense in the third quarter totaled $37.2 million, consistent with second quarter rent of $37.0 million. As a result of the CMS final rule and its expected impact on Sun’s profitability, the effective income tax rate for the nine months ended Sept. 30, 2011, was lowered to 39.0 percent from the 41.0 percent effective tax rate recorded through the end of the second quarter. Lowering the effective tax rate in the third quarter to balance out the year-to-date tax rate at 39.0 percent produced a lower than expected income tax expense (and rate) in the third quarter. The effective income tax rate for the fourth quarter is expected to be 39.0 percent.

Goodwill Impairment Charge and Restructuring Expense

Sun recorded a non-cash, pre-tax impairment charge of $317.1 million associated with the write-down of goodwill and other intangible assets as a result of the impact of the CMS final rule, which became effective on Oct. 1, 2011, on the inpatient services business. Sun also recorded a $1.8 million income tax benefit associated with the impairment charge and an expense of $2.4 million related to restructuring costs from Sun’s mitigation initiatives in response to the CMS final rule. The restructuring costs are expected to be non-recurring.

Conference Call

As previously announced, investors and the general public are invited to listen to a conference call with Sun’s senior management on Wednesday, Nov. 2, 2011, at 10 a.m. Pacific / 1 p.m. Eastern, to discuss the Company’s third-quarter results for the period ended Sept. 30, 2011.

To listen to the conference call, dial (888) 208-1812 and refer to Sun Healthcare Group. A recording of the call will be available from 4 p.m. Eastern on Nov. 2, 2011, until midnight Eastern on Dec. 2, 2011, by calling (888) 203-1112 and using access code 8727814.

About Sun Healthcare Group, Inc.

Sun Healthcare Group, Inc. (NASDAQ: SUNH) is a healthcare services company, serving principally the senior population, with consolidated annual revenues in excess of $1.9 billion and approximately 30,000 employees in 46 states. Sun's services are provided through its subsidiaries: as of Oct. 1, 2011, SunBridge Healthcare and its subsidiaries operate 165 skilled nursing centers, 14 combined skilled nursing, assisted and independent living centers, 10 assisted living centers, two independent living centers and eight mental health centers with an aggregate of 22,997 licensed beds in 25 states; SunDance Rehabilitation provides rehabilitation therapy services to affiliated and non-affiliated centers in 38 states; CareerStaff Unlimited provides medical staffing services in 43 states; and SolAmor Hospice provides hospice services in 11 states. For more information, go to www.sunh.com.

Forward-looking Statements

Statements made in this release that are not historical facts are "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to, statements containing words such as "anticipate," "believe," "plan," "estimate," "expect," "hope," "intend," "may" and similar expressions. Forward-looking statements in this release include all statements regarding the scope, timing and effectiveness of the Company’s efforts to mitigate the impact on the Company’s business of the CMS final rule; the Company’s expectations regarding the amount and recurring nature of restructuring costs associated with the CMS final rule; and the Company’s expectations for the effective income tax rate for the fourth quarter of 2011. Factors that could cause actual results to differ are identified in filings made by the Company with the Securities and Exchange Commission and include changes in Medicare and Medicaid reimbursements, including with respect to the CMS final rule, and the Company’s ability to mitigate the impact of such changes; the impact that healthcare reform legislation will have on the Company's business; the ability to maintain the occupancy rates and payor mix at the Company's healthcare centers; potential liability for losses not covered by, or in excess of, insurance; the effects of government regulations and investigations; the ability of the Company to collect its accounts receivable on a timely basis; the amount of the Company's indebtedness; covenants in debt agreements and leases that may restrict the Company's activities, including the Company's ability to make acquisitions and incur more indebtedness on favorable terms; the impact of the economic downturn on the business; increasing labor costs and the shortage of qualified healthcare personnel; and the Company's ability to receive increases in reimbursement rates from government payors to cover increased costs. More information on factors that could affect the Company's business and financial results are included in Sun's filings made with the Securities and Exchange Commission, including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, copies of which are available on Sun's web site, www.sunh.com. There may be additional risks of which the Company is presently unaware or that it currently deems immaterial.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control. Sun cautions investors that any forward-looking statements made by Sun are not guarantees of future performance and are only made as of the date of this release. Sun disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

EBITDA, adjusted EBITDA, adjusted EBITDAR and free cash flow, as used in this press release and in the accompanying tables, which are non-GAAP financial measures, are each reconciled to their respective GAAP-recognized financial measures in the accompanying tables. In addition, normalizing adjustments to adjusted EBITDAR and other financial measures, as discussed in this press release and shown in the accompanying tables, are non-GAAP adjustments and are reconciled to GAAP financial measures in the accompanying tables.

# # #

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

KEY INCOME STATEMENT FIGURES
CONSOLIDATED
(in thousands, except per share data)

	For the			For the
	Three Months Ended			Three Months Ended
	September 30, 2011			September 30, 2010


Revenue	$	485,850		$	473,411

Center rent expense		37,184			18,954

Depreciation and amortization		8,295			12,639

Interest expense, net		4,835			10,527

Pre-tax (loss) income		(306,797	)		13,592

Income tax expense		1,569			5,559

(Loss) income from continuing operations		(308,366	)		8,033

Loss from discontinued operations		(1,040	)		(477	)

Net (loss) income	$	(309,406	)	$	7,556


Diluted earnings per share	$	(11.81	)	$	0.37



Adjusted EBITDAR	$	63,843		$	55,712
Margin - Adjusted EBITDAR		13.1	%		11.8	%

Adjusted EBITDAR normalized	$	63,843		$	60,459
Margin - Adjusted EBITDAR normalized		13.1	%		12.8	%




Adjusted EBITDA	$	26,659		$	36,758
Margin - Adjusted EBITDA		5.5	%		7.8	%

Adjusted EBITDA normalized	$	26,659		$	41,505
Margin - Adjusted EBITDA normalized		5.5	%		8.8	%




Pre-tax income continuing operations - normalized	$	12,720		$	18,339

Income tax expense - normalized	$	4,317		$	7,505

Income from continuing operations - normalized	$	8,403		$	10,834

Diluted earnings per share from continuing operations - normalized	$	0.32		$	0.53

Net income - normalized	$	7,363		$	10,357

Diluted earnings per share - normalized	$	0.28		$	0.50



See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to Adjusted EBITDA and Adjusted EBITDAR."
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

KEY INCOME STATEMENT FIGURES
CONSOLIDATED
(in thousands, except per share data)

	For the			For the
	Nine Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2010


Revenue	$	1,457,421		$	1,415,734

Center rent expense		111,110			56,306

Depreciation and amortization		23,636			37,449

Interest expense, net		14,689			34,105

Pre-tax (loss) income		(274,911	)		49,451

Income tax expense		14,642			19,990

(Loss) income from continuing operations		(289,553	)		29,461

Loss from discontinued operations		(1,794	)		(1,734	)

Net (loss) income	$	(291,347	)	$	27,727


Diluted earnings per share	$	(11.19	)	$	1.59



Adjusted EBITDAR	$	195,152		$	177,311
Margin - Adjusted EBITDAR		13.4	%		12.5	%

Adjusted EBITDAR normalized	$	195,152		$	184,306
Margin - Adjusted EBITDAR normalized		13.4	%		13.0	%




Adjusted EBITDA	$	84,042		$	121,005
Margin - Adjusted EBITDA		5.8	%		8.5	%

Adjusted EBITDA normalized	$	84,042		$	128,000
Margin - Adjusted EBITDA normalized		5.8	%		9.0	%




Pre-tax income continuing operations - normalized	$	44,606		$	56,446

Income tax expense - normalized	$	17,390		$	22,858

Income from continuing operations - normalized	$	27,216		$	33,588

Diluted earnings per share from continuing operations - normalized	$	1.05		$	1.92

Net income - normalized	$	25,422		$	31,854

Diluted earnings per share - normalized	$	0.98		$	1.82



See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to Adjusted EBITDA and Adjusted EBITDAR."
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)


	September 30, 2011			December 31, 2010
	(unaudited)			(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	91,179		$	81,163
Restricted cash		16,382			15,329
Accounts receivable, net		213,858			218,040
Prepaid expenses and other assets		26,380			16,859
Deferred tax assets		71,996			69,800

Total current assets		419,795			401,191

Property and equipment, net		145,611			139,860
Intangible assets, net		35,317			41,967
Goodwill		35,679			348,047
Restricted cash, non-current		352			350
Deferred tax assets		115,243			126,540
Other assets		45,606			23,803

Total assets	$	797,603		$	1,081,758


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	$	49,659		$	49,993
Accrued compensation and benefits		49,328			61,518
Accrued self-insurance obligations, current portion		62,038			52,093
Other accrued liabilities		56,457			53,945
Current portion of long-term debt and capital lease obligations		11,033			11,050

Total current liabilities		228,515			228,599

Accrued self-insurance obligations, net of current portion		153,471			133,405
Long-term debt and capital lease obligations, net of current portion		131,548			144,930
Unfavorable lease obligations, net		7,771			9,815
Other long-term liabilities		52,394			52,566

Total liabilities		573,699			569,315


Stockholders' equity:

Preferred stock of $.01 par value, authorized 3,333 shares, zero shares were issued and outstanding as of September 30, 2011 and December 31, 2010		-			-
Common stock of $.01 par value, authorized 41,667 shares, 25,146 and 24,974 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		251			250
Additional paid-in capital		724,814			720,854
Accumulated deficit		(500,008	)		(208,661	)
Accumulated other comprehensive loss, net		(1,153	)		-
		223,904			512,443
Total liabilities and stockholders' equity	$	797,603		$	1,081,758

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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

	For the			For the
	Three Months Ended			Three Months Ended
	September 30, 2011			September 30, 2010
	(unaudited)			(unaudited)

Total net revenues	$	485,850		$	473,411
Costs and expenses:
Operating salaries and benefits		273,223			268,501
Self-insurance for workers' compensation and general and professional liability insurance		15,250			14,531
Operating administrative costs		13,157			13,343
Other operating costs		100,636			97,333
Center rent expense		37,184			18,954
General and administrative expenses		14,825			14,146
Depreciation and amortization		8,295			12,639
Provision for losses on accounts receivable		4,916			5,098
Interest, net of interest income of $103 and $59, respectively		4,835			10,527
Transaction costs		-			4,747
Loss on sale of assets, net		809			-
Restructuring costs		2,426			-
Loss on asset impairment		317,091			-
Total costs and expenses		792,647			459,819

(Loss) income before income taxes and discontinued operations		(306,797	)		13,592
Income tax expense		1,569			5,559
(Loss) income from continuing operations		(308,366	)		8,033

Discontinued operations:
Loss from discontinued operations, net of related taxes		(359	)		(477	)
Loss on disposal of discontinued operations, net of related taxes		(681	)		-
Loss from discontinued operations, net		(1,040	)		(477	)

Net (loss) income	$	(309,406	)	$	7,556


Basic income per common and common equivalent share:
(Loss) income from continuing operations	$	(11.77	)	$	0.39
Loss from discontinued operations, net		(0.04	)		(0.02	)
Net (loss) income	$	(11.81	)	$	0.37

Diluted income per common and common equivalent share:
(Loss) income from continuing operations	$	(11.77	)	$	0.39
Loss from discontinued operations, net		(0.04	)		(0.02	)
Net (loss) income	$	(11.81	)	$	0.37

Weighted average number of common and common equivalent shares outstanding:
Basic		26,203			20,529
Diluted		26,203			20,550

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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

	For the			For the
	Nine Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2010
	(unaudited)			(unaudited)

Total net revenues	$	1,457,421		$	1,415,734
Costs and expenses:
Operating salaries and benefits		818,248			799,603
Self-insurance for workers' compensation and general and professional liability insurance		45,779			43,433
Operating administrative costs		39,913			38,932
Other operating costs		298,213			289,079
Center rent expense		111,110			56,306
General and administrative expenses		45,156			44,570
Depreciation and amortization		23,636			37,449
Provision for losses on accounts receivable		14,960			15,811
Interest, net of interest income of $244 and $222, respectively		14,689			34,105
Transaction costs		-			6,995
Loss on sale of assets, net		809			-
Restructuring costs		2,728			-
Loss on asset impairment		317,091			-
Total costs and expenses		1,732,332			1,366,283

(Loss) income before income taxes and discontinued operations		(274,911	)		49,451
Income tax expense		14,642			19,990
(Loss) income from continuing operations		(289,553	)		29,461

Discontinued operations:
Loss from discontinued operations, net of related taxes		(1,113	)		(1,734	)
Loss on disposal of discontinued operations, net of related taxes		(681	)		-
Loss from discontinued operations, net		(1,794	)		(1,734	)

Net (loss) income	$	(291,347	)	$	27,727


Basic income per common and common equivalent share:
(Loss) income from continuing operations	$	(11.12	)	$	1.69
Loss from discontinued operations, net		(0.07	)		(0.10	)
Net (loss) income	$	(11.19	)	$	1.59

Diluted income per common and common equivalent share:
(Loss) income from continuing operations	$	(11.12	)	$	1.68
Loss from discontinued operations, net		(0.07	)		(0.09	)
Net (Loss) income	$	(11.19	)	$	1.59

Weighted average number of common and common equivalent shares outstanding:
Basic		26,038			17,418
Diluted		26,038			17,485

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	For the			For the
	Three Months Ended			Three Months Ended
	September 30, 2011			September 30, 2010
	(unaudited)			(unaudited)

Cash flows from operating activities:
Net (loss) income	$	(309,406	)	$	7,556
Adjustments to reconcile net income to net cash provided by
operating activities, including discontinued operations:
Depreciation and amortization		8,335			12,736
Amortization of favorable and unfavorable lease intangibles		(492	)		(504	)
Provision for losses on accounts receivable		4,975			5,289
Loss on sale of assets, including discontinued operations, net		1,925			-
Loss on asset impairment		317,091			-
Stock-based compensation expense		2,359			1,661
Deferred taxes		(105	)		3,286
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		23			(1,307	)
Restricted cash		52			2,769
Prepaid expenses and other assets		(1,600	)		5,399
Accounts payable		1,595			(4,909	)
Accrued compensation and benefits		(11,717	)		(2,117	)
Accrued self-insurance obligations		3,618			199
Income taxes payable		-			1,267
Other accrued liabilities		2,104			4,429
Other long-term liabilities		(880	)		(676	)
Net cash provided by operating activities		17,877			35,078

Cash flows from investing activities:
Capital expenditures		(14,190	)		(13,774	)
Proceeds from sale of assets		1,809			-
Net cash used for investing activities		(12,381	)		(13,774	)

Cash flows from financing activities:
Borrowings of long-term debt		-			20,500
Principal repayments of long-term debt and capital lease obligations		(2,806	)		(234,116	)
Proceeds from issuance of common stock		-			226,001
Deferred financing costs		-			(2,312	)
Net cash used for financing activities		(2,806	)		10,073

Net increase in cash and cash equivalents		2,690			31,377
Cash and cash equivalents at beginning of period		88,489			106,973
Cash and cash equivalents at end of period	$	91,179		$	138,350

Reconciliation of net cash provided by operating activities to free cash flow:

Net cash provided by operating activities	$	17,877		$	35,078
Capital expenditures		(14,190	)		(13,774	)
Free cash flow	$	3,687		$	21,304

Free cash flow is defined as net cash flow provided by operating activities less cash used for capital expenditures.

Free cash flow is used by management to evaluate discretionary cash flow potentially available for debt service and other financing activities.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	For the			For the
	Nine Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2010
	(unaudited)			(unaudited)

Cash flows from operating activities:
Net (loss) income	$	(291,347	)	$	27,727
Adjustments to reconcile net income to net cash provided by
operating activities, including discontinued operations:
Loss on extinguishment of debt
Depreciation and amortization		23,879			37,744
Amortization of favorable and unfavorable lease intangibles		(1,466	)		(1,452	)
Provision for losses on accounts receivable		15,479			16,428
Loss on sale of assets, including discontinued operations, net		1,925			-
Loss on asset impairment		317,091			-
Stock-based compensation expense		5,160			4,748
Deferred taxes		9,871			14,976
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(12,555	)		(12,500	)
Restricted cash		(1,876	)		5,040
Prepaid expenses and other assets		(1,410	)		8,012
Accounts payable		(1,906	)		(3,628	)
Accrued compensation and benefits		(12,298	)		1,945
Accrued self-insurance obligations		(294	)		5,041
Income taxes payable		-			1,605
Other accrued liabilities		1,158			4,442
Other long-term liabilities		(2,098	)		(5,775	)
Net cash provided by operating activities		49,313			104,353

Cash flows from investing activities:
Capital expenditures		(32,346	)		(41,488	)
Proceeds from sale of assets		1,809			-
Acquisitions, net of cash acquired		(356	)		-
Net cash used for investing activities		(30,893	)		(41,488	)

Cash flows from financing activities:
Borrowings of long-term debt		-			20,500
Principal repayments of long-term debt and capital lease obligations		(8,404	)		(271,093	)
Payment to non-controlling interest		-			(2,025	)
Distribution to non-controlling interest		-			(69	)
Proceeds from issuance of common stock		-			226,001
Deferred financing costs		-			(2,312	)
Net cash used for financing activities		(8,404	)		(28,998	)

Net increase in cash and cash equivalents		10,016			33,867
Cash and cash equivalents at beginning of period		81,163			104,483
Cash and cash equivalents at end of period	$	91,179		$	138,350

Reconciliation of net cash provided by operating activities to free cash flow:

Net cash provided by operating activities	$	49,313		$	104,353
Capital expenditures		(32,346	)		(41,488	)
Free cash flow	$	16,967		$	62,865

Free cash flow is defined as net cash flow provided by operating activities less cash used for capital expenditures.

Free cash flow is used by management to evaluate discretionary cash flow potentially available for debt service and other financing activities.

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SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA and ADJUSTED EBITDAR
(in thousands)

	For the			For the
	Three Months Ended			Three Months Ended
	September 30, 2011			September 30, 2010
	(unaudited)			(unaudited)

Total net revenues	$	485,850		$	473,411

Net (loss) income	$	(309,406	)	$	7,556


(Loss) income from continuing operations		(308,366	)		8,033

Income tax expense		1,569			5,559

Interest, net		4,835			10,527

Depreciation and amortization		8,295			12,639

EBITDA	$	(293,667	)	$	36,758


Loss on sale of assets, net		809			-

Restructuring costs		2,426			-

Loss on asset impairment		317,091			-


Adjusted EBITDA	$	26,659		$	36,758

Center rent expense		37,184			18,954

Adjusted EBITDAR	$	63,843		$	55,712

EBITDA is defined as earnings before loss on discontinued operations, income taxes, interest, net, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before loss on sale of assets, restructuring costs and loss on asset impairment. Adjusted EBITDAR is defined as Adjusted EBITDA before center rent expense. Adjusted EBITDA and Adjusted EBITDAR are used by management to evaluate financial performance and resource allocation for each entity within the operating units and for the Company as a whole. Adjusted EBITDA and Adjusted EBITDAR are commonly used as analytical indicators within the healthcare industry and also serve as measures of leverage capacity and debt service ability. Adjusted EBITDA and Adjusted EBITDAR should not be considered as measures of financial performance under generally accepted accounting principles. As the items excluded from Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing finance performance, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as alternatives to net income, cash flows generated by or used in operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA and Adjusted EBITDAR are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations. Adjusted EBITDA and Adjusted EBITDAR as presented may not be comparable to other similarly titled measures of other companies.

8 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA and ADJUSTED EBITDAR
(in thousands)

	For the			For the
	Nine Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2010
	(unaudited)			(unaudited)

Total net revenues	$	1,457,421		$	1,415,734

Net (loss) income	$	(291,347	)	$	27,727


(Loss) income from continuing operations		(289,553	)		29,461

Income tax expense		14,642			19,990

Interest, net		14,689			34,105

Depreciation and amortization		23,636			37,449

EBITDA	$	(236,586	)	$	121,005

Loss on sale of assets, net		809			-

Restructuring costs		2,728			-

Loss on asset impairment		317,091			-

Adjusted EBITDA	$	84,042		$	121,005

Center rent expense		111,110			56,306

Adjusted EBITDAR	$	195,152		$	177,311

EBITDA is defined as earnings before loss on discontinued operations, income taxes, interest, net, depreciation and amortization. Adjusted EBITDA is defined as EBITDA before loss on sale of assets, restructuring costs and loss on asset impairment. Adjusted EBITDAR is defined as Adjusted EBITDA before center rent expense. Adjusted EBITDA and Adjusted EBITDAR are used by management to evaluate financial performance and resource allocation for each entity within the operating units and for the Company as a whole. Adjusted EBITDA and Adjusted EBITDAR are commonly used as analytical indicators within the healthcare industry and also serve as measures of leverage capacity and debt service ability. Adjusted EBITDA and Adjusted EBITDAR should not be considered as measures of financial performance under generally accepted accounting principles. As the items excluded from Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing finance performance, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as alternatives to net income, cash flows generated by or used in operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Adjusted EBITDA and Adjusted EBITDAR are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations. Adjusted EBITDA and Adjusted EBITDAR as presented may not be comparable to other similarly titled measures of other companies.

9 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR
($ in thousands)

For the Three Months Ended September 30, 2011
(unaudited)

	Inpatient Services			Rehabilitation Therapy Services			Medical Staffing Services			Other & Corp Seg			Elimination of Affiliated Revenue				Consolidated

Nonaffiliated revenue	$	435,271		$	29,568		$	20,996		$	15			$	-		$	485,850

Affiliated revenue		-			32,791			757			-				(33,548	)		-

Total revenue	$	435,271		$	62,359		$	21,753		$	15			$	(33,548	)	$	485,850

Income (loss) from continuing operations	$	(287,174	)	$	2,296		$	1,221		$	(24,709	)		$	-		$	(308,366	)

Income tax expense		-			-			-			1,569				-			1,569

Interest, net		(32	)		-			-			4,867				-			4,835

Depreciation and amortization		6,902			236			187			970				-			8,295

EBITDA	$	(280,304	)	$	2,532		$	1,408		$	(17,303	)		$	-		$	(293,667	)

Loss on sale of assets, net		809			-			-			-				-			809

Restructuring costs		-			-			-			2,426				-			2,426

Loss on asset impairment		317,091			-			-			-				-			317,091

Adjusted EBITDA	$	37,596		$	2,532		$	1,408		$	(14,877	)		$	-		$	26,659

Center rent expense		36,874			140			170			-				-			37,184

Adjusted EBITDAR	$	74,470		$	2,672		$	1,578		$	(14,877	)		$	-		$	63,843


Normalized Adjusted EBITDA	$	37,596		$	2,532		$	1,408		$	(14,877	)		$	-		$	26,659
Normalized Adjusted EBITDAR	$	74,470		$	2,672		$	1,578		$	(14,877	)		$	-		$	63,843


Adjusted EBITDA margin		8.6	%		4.1	%		6.5	%									5.5	%

Adjusted EBITDAR margin		17.1	%		4.3	%		7.3	%									13.1	%

Normalized Adjusted EBITDA margin		8.6	%		4.1	%		6.5	%									5.5	%

Normalized Adjusted EBITDAR margin		17.1	%		4.3	%		7.3	%									13.1	%

See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to
Adjusted EBITDA and Adjusted EBITDAR."
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."

10 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR
($ in thousands)

For the Nine Months Ended September 30, 2011
(unaudited)

	Inpatient Services			Rehabilitation Therapy Services			Medical Staffing Services			Other & Corp Seg			Elimination of Affiliated Revenue				Consolidated

Nonaffiliated revenue	$	1,302,431		$	89,645		$	65,309		$	36			$	-		$	1,457,421

Affiliated revenue		-			98,710			2,079			-				(100,789	)		-

Total revenue	$	1,302,431		$	188,355		$	67,388		$	36			$	(100,789	)	$	1,457,421

Income (loss) from continuing operations	$	(222,322	)	$	8,495		$	4,082		$	(79,808	)		$	-		$	(289,553	)

Income tax expense		-			-			-			14,642				-			14,642

Interest, net		(68	)		-			1			14,756				-			14,689

Depreciation and amortization		19,726			689			561			2,660				-			23,636

EBITDA	$	(202,664	)	$	9,184		$	4,644		$	(47,750	)		$	-		$	(236,586	)

Loss on sale of assets, net		809			-			-			-				-			809

Restructuring costs		302			-			-			2,426				-			2,728

Loss on asset impairment		317,091			-			-			-				-			317,091

Adjusted EBITDA	$	115,538		$	9,184		$	4,644		$	(45,324	)		$	-		$	84,042

Center rent expense		110,203			394			513			-				-			111,110

Adjusted EBITDAR	$	225,741		$	9,578		$	5,157		$	(45,324	)		$	-		$	195,152


Normalized Adjusted EBITDA	$	115,538		$	9,184		$	4,644		$	(45,324	)		$	-		$	84,042
Normalized Adjusted EBITDAR	$	225,741		$	9,578		$	5,157		$	(45,324	)		$	-		$	195,152


Adjusted EBITDA margin		8.9	%		4.9	%		6.9	%									5.8	%

Adjusted EBITDAR margin		17.3	%		5.1	%		7.7	%									13.4	%

Normalized Adjusted EBITDA margin		8.9	%		4.9	%		6.9	%									5.8	%

Normalized Adjusted EBITDAR margin		17.3	%		5.1	%		7.7	%									13.4	%

See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to
Adjusted EBITDA and Adjusted EBITDAR."
See normalizing adjustments in the table "Normalizing Adjustments - Year to Date Comparison."

11 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR
($ in thousands)

For the Three Months Ended September 30, 2010
(unaudited)

	Inpatient Services			Rehabilitation Therapy Services			Medical Staffing Services			Other & Corp Seg			Elimination of Affiliated Revenue				Consolidated

Nonaffiliated revenue	$	421,573		$	30,343		$	21,481		$	14			$	-		$	473,411

Affiliated revenue		-			21,397			724			-				(22,121	)		-

Total revenue	$	421,573		$	51,740		$	22,205		$	14			$	(22,121	)	$	473,411

Income (loss) from continuing operations	$	36,168		$	3,961		$	1,195		$	(33,291	)		$	-		$	8,033

Income tax expense		-			-			-			5,559				-			5,559

Interest, net		2,483			-			-			8,044				-			10,527

Depreciation and amortization		11,536			173			181			749				-			12,639

EBITDA	$	50,187		$	4,134		$	1,376		$	(18,939	)		$	-		$	36,758

Restructuring costs		-			-			-			-				-			-

Adjusted EBITDA	$	50,187		$	4,134		$	1,376		$	(18,939	)		$	-		$	36,758

Center rent expense		18,629			123			202			-				-			18,954

Adjusted EBITDAR	$	68,816		$	4,257		$	1,578		$	(18,939	)		$	-		$	55,712


Normalized Adjusted EBITDA	$	50,187		$	4,134		$	1,376		$	(14,192	)		$	-		$	41,505
Normalized Adjusted EBITDAR	$	68,816		$	4,257		$	1,578		$	(14,192	)		$	-		$	60,459


Adjusted EBITDA margin		11.9	%		8.0	%		6.2	%									7.8	%

Adjusted EBITDAR margin		16.3	%		8.2	%		7.1	%									11.8	%

Normalized Adjusted EBITDA margin		11.9	%		8.0	%		6.2	%									8.8	%

Normalized Adjusted EBITDAR margin		16.3	%		8.2	%		7.1	%									12.8	%

See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to
Adjusted EBITDA and Adjusted EBITDAR."
See normalizing adjustments in the table "Normalizing Adjustments - Quarter Comparison."

12 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

RECONCILIATION OF INCOME (LOSS) FROM CONTINUING OPERATIONS TO ADJUSTED EBITDA and ADJUSTED EBITDAR
($ in thousands)

For the Nine Months Ended September 30, 2010
(unaudited)

	Inpatient Services			Rehabilitation Therapy Services			Medical Staffing Services			Other & Corp Seg			Elimination of Affiliated Revenue				Consolidated

Nonaffiliated revenue	$	1,258,271		$	89,723		$	67,712		$	28			$	-		$	1,415,734

Affiliated revenue		-			63,584			1,364			-				(64,948	)		-

Total revenue	$	1,258,271		$	153,307		$	69,076		$	28			$	(64,948	)	$	1,415,734

Income (loss) from continuing operations	$	113,601		$	11,757		$	4,479		$	(100,376	)		$	-		$	29,461

Income tax expense		-			-			-			19,990				-			19,990

Interest, net		7,826			-			(1	)		26,280				-			34,105

Depreciation and amortization		34,037			484			543			2,385				-			37,449

EBITDA	$	155,464		$	12,241		$	5,021		$	(51,721	)		$	-		$	121,005

Restructuring costs		-			-			-			-				-			-

Adjusted EBITDA	$	155,464		$	12,241		$	5,021		$	(51,721	)		$	-		$	121,005

Center rent expense		55,326			364			616			-				-			56,306

Adjusted EBITDAR	$	210,790		$	12,605		$	5,637		$	(51,721	)		$	-		$	177,311


Normalized Adjusted EBITDA	$	155,464		$	12,241		$	5,021		$	(44,726	)		$	-		$	128,000
Normalized Adjusted EBITDAR	$	210,790		$	12,605		$	5,637		$	(44,726	)		$	-		$	184,306


Adjusted EBITDA margin		12.4	%		8.0	%		7.3	%									8.5	%

Adjusted EBITDAR margin		16.8	%		8.2	%		8.2	%									12.5	%

Normalized Adjusted EBITDA margin		12.4	%		8.0	%		7.3	%									9.0	%

Normalized Adjusted EBITDAR margin		16.8	%		8.2	%		8.2	%									13.0	%

See definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to
Adjusted EBITDA and Adjusted EBITDAR."
See normalizing adjustments in the table "Normalizing Adjustments - Year to Date Comparison."

13 of 16

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

	For the										For the
	Three Months Ended										Nine Months Ended
	September 30,										September 30,
	2011					2010					2011					2010
Consolidated Company

Revenues - Non-affiliated (in thousands)
Skilled Nursing and similar facilities	$	419,878				$	409,709				$	1,257,342				$	1,222,976
Hospice		14,885					11,277					43,647					33,633
Other - Inpatient Services		508					587					1,442					1,662
Inpatient Services		435,271					421,573					1,302,431					1,258,271

Rehabilitation Therapy Services		29,568					30,343					89,645					89,723
Medical Staffing Services		20,996					21,481					65,309					67,712
Other - non-core businesses		15					14					36					28
Total	$	485,850				$	473,411				$	1,457,421				$	1,415,734


Revenue Mix - Non-affiliated (in thousands)
Medicare	$	154,953		32	%	$	137,606		29	%	$	472,652		32	%	$	419,846		30	%
Medicaid		191,821		39	%		193,013		41	%		562,981		39	%		569,222		40	%
Private and Other		109,232		23	%		113,502		24	%		332,338		23	%		339,162		24	%
Managed Care / Insurance		24,387		5	%		24,142		5	%		73,762		5	%		72,476		5	%
Veterans		5,457		1	%		5,148		1	%		15,688		1	%		15,028		1	%
Total	$	485,850		100	%	$	473,411		100	%	$	1,457,421		100	%	$	1,415,734		100	%



Inpatient Services Stats

Number of centers:		199					199					199					199
Number of available beds:		22,045					22,113					22,045					22,113
Occupancy %:		86.3	%				87.1	%				86.6	%				87.1	%


Payor Mix % based on patient days:
Medicare - SNF Beds		15.0	%				14.7	%				15.5	%				15.2	%
Managed care / Ins. - SNF Beds		3.9	%				3.9	%				4.1	%				4.0	%
Total SNF skilled mix		18.9	%				18.6	%				19.6	%				19.2	%

Medicare		13.7	%				13.4	%				14.2	%				13.9	%
Medicaid		62.6	%				62.4	%				62.2	%				62.1	%
Private and Other		18.9	%				19.4	%				18.7	%				19.1	%
Managed Care / Insurance		3.6	%				3.6	%				3.7	%				3.7	%
Veterans		1.2	%				1.2	%				1.2	%				1.2	%

Revenue Mix % of revenues:
Medicare - SNF Beds		33.8	%				31.2	%				34.7	%				32.0	%
Managed care / Ins. - SNF Beds		6.0	%				6.0	%				6.0	%				6.1	%
Total SNF skilled mix		39.8	%				37.2	%				40.7	%				38.1	%

Medicare		34.5	%				31.5	%				35.2	%				32.3	%
Medicaid		44.1	%				45.8	%				43.2	%				45.2	%
Private and Other		14.6	%				15.8	%				14.8	%				15.6	%
Managed Care / Insurance		5.5	%				5.7	%				5.6	%				5.7	%
Veterans		1.3	%				1.2	%				1.2	%				1.2	%


Revenues PPD:
Medicare (Part A)	$	519.12				$	463.45				$	519.70				$	464.51
Medicare Blended Rate (Part A & B)	$	562.41				$	505.71				$	558.66				$	504.00
Medicaid	$	174.89				$	173.11				$	173.73				$	172.91
Medicaid, net of provider taxes	$	159.64				$	159.20				$	158.81				$	159.30
Private and Other	$	183.77				$	182.90				$	187.62				$	184.91
Managed Care / Insurance	$	382.31				$	375.78				$	375.49				$	368.92
Veterans	$	257.15				$	238.74				$	249.90				$	241.06


Rehab contracts

Affiliated		178					132					178					132
Non-affiliated		343					344					343					344

Average Qtrly Revenue per Contract (in thousands)	$	120				$	109				$	121				$	107

14 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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


	AS REPORTED - 3rd QUARTER 2011
	Revenue		Adjusted EBITDAR			Adjusted EBITDA			Pre-tax			Income from Continuing Operations			Disc Ops			Net Income

As Reported 3rd QUARTER 2011	$	485,850	$	63,843		$	26,659		$	(306,797	)	$	(308,366	)	$	(1,040	)	$	(309,406	)
Percent of Revenue				13.1	%		5.5	%		-63.1	%		-63.5	%		-0.2	%		-63.7	%

Normalizing Adjustments:

Restructuring costs		-		-			-			2,426			1,480			-			1,480
Impairment of assets		-		-			-			317,091			315,289			-			315,289

Normalized As Reported - 3rd QUARTER 2011	$	485,850	$	63,843		$	26,659		$	12,720		$	8,403		$	(1,040	)	$	7,363
Percent of Revenue				13.1	%		5.5	%		2.6	%		1.7	%		-0.2	%		1.5	%

As Reported												$	(11.77	)	$	(0.04	)	$	(11.81	)
Diluted EPS: As Normalized												$	0.32		$	(0.04	)	$	0.28





	AS REPORTED - 3rd QUARTER 2010
	Revenue		Adjusted EBITDAR			Adjusted EBITDA			Pre-tax			Income from Continuing Operations			Disc Ops			Net Income

As Reported - 3rd QUARTER 2010	$	473,411	$	55,712		$	36,758		$	13,592		$	8,033		$	(477	)	$	7,556
Percent of Revenue				11.8	%		7.8	%		2.9	%		1.7	%		-0.1	%		1.6	%

Normalizing Adjustments:

REIT separation transaction costs		-		4,747			4,747			4,747			2,801			-			2,801

Normalized As Reported - 3rd QUARTER 2010	$	473,411	$	60,459		$	41,505		$	18,339		$	10,834		$	(477	)	$	10,357
Percent of Revenue				12.8	%		8.8	%		3.9	%		2.3	%		-0.1	%		2.2	%

As Reported												$	0.39		$	(0.02	)	$	0.37
Diluted EPS: As Normalized												$	0.53		$	(0.03	)	$	0.50





See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to Adjusted EBITDA and Adjusted EBITDAR."

Normalizing adjustments are transactions or adjustments not related to ongoing operations and consist of impairment of assets, restructuring costs and REIT separation transaction costs.

Since normalizing adjustments are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations and interpretations, the information presented herein may not be comparable to other similarly described information of other companies.

15 of 16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES

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


	AS REPORTED - NINE MONTHS 2011
	Revenue		Adjusted EBITDAR			Adjusted EBITDA			Pre-tax			Income from Continuing Operations			Disc Ops			Net Income

As Reported - Nine Months 2011	$	1,457,421	$	195,152		$	84,042		$	(274,911	)	$	(289,553	)	$	(1,794	)	$	(291,347	)
Percent of Revenue				13.4	%		5.8	%		-18.9	%		-19.9	%		-0.1	%		-20.0	%

Normalizing Adjustments:

Restructuring costs		-		-			-			2,426			1,480			-			1,480
Impairment of assets		-		-			-			317,091			315,289			-			315,289

Normalized As Reported - Nine Months 2011	$	1,457,421	$	195,152		$	84,042		$	44,606		$	27,216		$	(1,794	)	$	25,422
Percent of Revenue				13.4	%		5.8	%		3.1	%		1.9	%		-0.1	%		1.7	%

As Reported												$	(11.12	)	$	(0.07	)	$	(11.19	)
Diluted EPS: As Normalized												$	1.05		$	(0.07	)	$	0.98





	AS REPORTED - NINE MONTHS 2010
	Revenue		Adjusted EBITDAR			Adjusted EBITDA			Pre-tax			Income from Continuing Operations			Disc Ops			Net Income

As Reported - Nine Months 2010	$	1,415,734	$	177,311		$	121,005		$	49,451		$	29,461		$	(1,734	)	$	27,727
Percent of Revenue				12.5	%		8.5	%		3.5	%		2.1	%		-0.1	%		2.0	%

Normalizing Adjustments:

REIT separation transaction costs		-		6,995			6,995			6,995			4,127			-			4,127

Normalized As Reported - Nine Months 2010	$	1,415,734	$	184,306		$	128,000		$	56,446		$	33,588		$	(1,734	)	$	31,854
Percent of Revenue				13.0	%		9.0	%		4.0	%		2.4	%		-0.1	%		2.2	%


As Reported												$	1.68		$	(0.09	)	$	1.59
Diluted EPS: As Normalized												$	1.92		$	(0.10	)	$	1.82



See definitions of Adjusted EBITDA and Adjusted EBITDAR in the table "Reconciliation of Net Income to Adjusted EBITDA and Adjusted EBITDAR."

Normalizing adjustments are transactions or adjustments not related to ongoing operations and consist of impairment of assets, restructuring costs and REIT separation transaction costs.

Since normalizing adjustments are not measurements determined in accordance with U.S. generally accepted accounting principles and are thus susceptible to varying calculations and interpretations, the information presented herein may not be comparable to other similarly described information of other companies.

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SUN HEALTHCARE GROUP INC - FORM 8-K - EX-99.1 - November 1, 2011

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SUN HEALTHCARE GROUP INC Reports