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

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

Consolidated Results - Fourth Quarter

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

 Actual Results (Dollars in thousands) Quarter Ended Dec. 31, 2008 2007 -------------- -------------- Revenue $ 466,968 $ 442,535 Depreciation and amortization 10,801 7,801 Interest expense, net 13,459 15,479 Pre-tax income 16,365 13,605 Income tax benefit (67,467) (21,251) Income (loss) from continuing operations 83,832 34,856 Income (loss) from discontinued operations (1,411) 496 -------------- -------------- -------------- -------------- Net income (loss) $ 82,421 $ 35,352 ============== ============== -------------- -------------- Diluted earnings per share $ 1.88 $ 0.79 ============== ============== EBITDAR $ 58,054 $ 58,419 ============== ============== Margin - EBITDAR 12.4% 13.2% ============== ============== EBITDAR normalized $ 61,604 $ 54,508 ============== ============== Margin - EBITDAR normalized 13.2% 12.3% ============== ============== EBITDA $ 39,725 $ 40,058 ============== ============== Margin - EBITDA 8.5% 9.1% ============== ============== EBITDA normalized $ 43,275 $ 36,147 ============== ============== Margin - EBITDA normalized 9.3% 8.2% ============== ============== Pre-tax income continuing operations - normalized $ 19,015 $ 12,867 ============== ============== Income tax expense - normalized $ 7,605 $ 6,317 ============== ============== Income from continuing operations - normalized $ 11,410 $ 8,337 ============== ============== Diluted earnings per share - normalized $ 0.26 $ 0.19 ============== ============== Net income - normalized $ 10,449 $ 6,489 ============== ============== Diluted earnings per share - normalized $ 0.24 $ 0.15 ============== ==============

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

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

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

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

Consolidated Results and Consolidated Pro Forma Results - Full Year

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

 Pro Forma Results Actual Results Year Ended (Dollars in thousands) Year Ended Dec. 31, Dec. 31, 2008 2007 2007 ------------ ------------ ------------ Revenue $ 1,824,184 $ 1,558,276 $ 1,719,176 Depreciation and amortization 40,355 31,221 35,922 Interest expense, net 54,603 44,347 48,940 Pre-tax income 66,626 43,174 41,545 Income tax (benefit) (47,348) (10,914) (11,734) Income from continuing operations 113,974 54,088 53,279 (Loss) income from discontinued operations (4,687) 3,422 2,365 ------------ ------------ ------------ ------------ ------------ ------------ Net income $ 109,287 $ 57,510 $ 55,644 ============ ============ ============ ------------ ------------ ------------ Diluted earnings per share $ 2.49 $ 1.33 $ 1.28 ============ ============ ============ EBITDAR $ 234,371 $ 192,470 $ 207,089 ============ ============ ============ Margin - EBITDAR 12.8% 12.4% 12.0% ============ ============ ============ EBITDAR normalized $ 236,740 $ 186,091 $ 207,037 ============ ============ ============ Margin - EBITDAR normalized 13.0% 11.9% 12.0% ============ ============ ============ EBITDA $ 160,607 $ 121,938 $ 129,603 ============ ============ ============ Margin - EBITDA 8.8% 7.8% 7.5% ============ ============ ============ EBITDA normalized $ 162,976 $ 115,559 $ 129,551 ============ ============ ============ Margin - EBITDA normalized 8.9% 7.4% 7.5% ============ ============ ============ Pre-tax income continuing operations - normalized $ 68,095 $ 40,583 $ 45,281 ============ ============ ============ Income tax expense - normalized $ 27,252 $ 14,218 $ 15,612 ============ ============ ============ Income from continuing operations - normalized $ 40,843 $ 26,365 $ 29,669 ============ ============ ============ Diluted earnings per share - normalized $ 0.93 $ 0.61 $ 0.68 ============ ============ ============ Net income - normalized $ 36,384 $ 25,464 $ 27,711 ============ ============ ============ Diluted earnings per share - normalized $ 0.83 $ 0.59 $ 0.64 ============ ============ ============

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

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

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

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

Inpatient Business

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

Quarter ended Dec. 31, 2008:

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

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

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

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

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

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

Ancillary Businesses

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

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

Conference Call

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

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

About Sun Healthcare Group, Inc.

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

Statements made in this release that are not historical facts are "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These forward-looking statements may include, but are not limited to, statements containing words such as "anticipate," "believe," "plan," "estimate," "expect," "hope," "intend," "may" and similar expressions. Factors that could cause actual results to differ are identified in the public filings made by the company with the Securities and Exchange Commission and include changes in Medicare and Medicaid reimbursements; our ability to maintain the occupancy rates and payor mix at our long-term care centers; potential liability for losses not covered by, or in excess of, our insurance; the effects of government regulations and investigations; the significant amount of our indebtedness, covenants in our debt agreements that may restrict our activities and our ability to incur more indebtedness; the impact of the current economic downturn on our business; increasing labor costs and the shortage of qualified healthcare personnel; and our ability to receive increases in reimbursement rates from government payors to cover increased costs. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission, including our Annual Report on Forms 10-K and 10-K/A and Quarterly Reports on Form 10-Q, copies of which are available on Sun's web site, [ www.sunh.com ].

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. We caution investors that any forward-looking statements made by Sun are not guarantees of future performance. We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

EBITDA and EBITDAR as used in this press release, and EBITDAM and EBITDARM as used in the accompanying tables, which are non-GAAP financial measures, are each reconciled to net income (loss) in the accompanying tables. In addition, the normalizing adjustments to EBITDA, EBITDAR, pre-tax income and income from continuing operations discussed in this press release and shown in the accompanying tables are non-GAAP adjustments.

Any documents filed by Sun with the SEC may be obtained free of charge at the SEC's web site at [ www.sec.gov ]. In addition, investors and stockholders of Sun may obtain free copies of the documents filed with the SEC by contacting Sun's investor relations department at (505) 468-2341 (TDD users, please call (505) 468-4458) or by sending a written request to Investor Relations, Sun Healthcare Group, Inc. 101 Sun Avenue N.E., Albuquerque, N.M. 87109. You may also read and copy any reports, statements and other information filed by Sun with the SEC at the SEC public reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 or visit the SEC's web site for further information.

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, December 31, 2008 2007 -------------- -------------- (audited) (audited) ASSETS Current assets: Cash and cash equivalents $ 92,153 $ 55,832 Restricted cash 34,676 37,365 Accounts receivable, net 202,138 188,882 Prepaid expenses and other assets 21,456 13,290 Assets held for sale 3,654 9,924 Deferred tax assets 57,261 35,354 -------------- -------------- Total current assets 411,338 340,647 Property and equipment, net 603,645 585,972 Intangible assets, net 54,388 57,044 Goodwill 326,808 324,277 Restricted cash, non-current 3,303 3,829 Deferred tax assets 134,807 51,892 Other assets 5,562 10,165 -------------- -------------- Total assets $ 1,539,851 $ 1,373,826 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 62,000 $ 52,836 Accrued compensation and benefits 60,660 61,956 Accrued self-insurance obligations, current 45,293 48,646 Income taxes payable - 3,000 Liabilities held for sale - 3,181 Other accrued liabilities 53,374 58,002 Current portion of long-term debt and capital lease obligations 17,865 29,305 -------------- -------------- Total current liabilities 239,192 256,926 Accrued self-insurance obligations, net of current portion 114,557 106,534 Long-term debt and capital lease obligations, net of current portion 707,976 699,963 Unfavorable lease obligations, net 15,514 18,960 Other long-term liabilities 57,454 44,717 -------------- -------------- Total liabilities 1,134,693 1,127,100 Minority interest 1,449 470 Stockholders' equity: Preferred stock of $.01 par value, authorized 10,000,000 shares, no shares were issued and outstanding as of December 31, 2008 and 2007 - - Common stock of $.01 par value, authorized 125,000,000 shares, 43,544,765 and 43,016,042 shares issued and outstanding as of December 31, 2008 and 2007, respectively 435 430 Additional paid-in capital 650,543 600,199 Accumulated deficit (242,683) (351,970) Accumulated other comprehensive loss, net (4,586) (2,403) -------------- -------------- 403,709 246,256 -------------- -------------- Total liabilities and stockholders' equity $ 1,539,851 $ 1,373,826 ============== ============== SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (in thousands, except per share data) For the Three For the Three Months Ended Months Ended December 31, December 31, 2008 2007 -------------- -------------- (unaudited) (unaudited) Total net revenues $ 466,968 $ 442,535 -------------- -------------- Costs and expenses: Operating salaries and benefits 262,837 251,790 Self-insurance for workers' compensation and general and professional liability insurance 18,711 11,279 Operating administrative costs 13,498 11,599 Other operating costs 93,477 91,442 Center rent expense 18,329 18,361 General and administrative expenses 15,774 17,826 Depreciation and amortization 10,801 7,801 Provision for losses on accounts receivable 4,617 180 Interest, net of interest income of $328 and $330, respectively 13,459 15,479 Loss on extinguishment of debt, net - 3,173 Gain on sale of assets, net (900) - -------------- -------------- Total costs and expenses 450,603 428,930 -------------- -------------- Income before income taxes and discontinued operations 16,365 13,605 Income tax benefit (67,467) (21,251) -------------- -------------- Income from continuing operations 83,832 34,856 -------------- -------------- Discontinued operations: (Loss) income from discontinued operations, net of related taxes (933) 1,322 Loss on disposal of discontinued operations, net of related taxes (478) (826) -------------- -------------- (Loss) income from discontinued operations, net (1,411) 496 -------------- -------------- Net income $ 82,421 $ 35,352 ============== ============== Basic income per common and common equivalent share: Income from continuing operations $ 1.92 $ 0.81 (Loss) income from discontinued operations, net (0.03) 0.01 -------------- -------------- Net income $ 1.89 $ 0.82 ============== ============== Diluted income per common and common equivalent share: Income from continuing operations $ 1.91 $ 0.78 (Loss) income from discontinued operations, net (0.03) 0.01 -------------- -------------- Net Income $ 1.88 $ 0.79 ============== ============== Weighted average number of common and common equivalent shares outstanding: Basic 43,602 43,174 Diluted 43,873 44,528 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (in thousands, except per share data) For the For the Year Ended Year Ended December 31, December 31, 2008 2007 -------------- -------------- (audited) (audited) Total net revenues $ 1,824,184 $ 1,558,276 -------------- -------------- Costs and expenses: Operating salaries and benefits 1,029,279 888,370 Self-insurance for workers' compensation and general and professional liability insurance 59,715 44,535 Operating administrative costs 51,171 39,950 Other operating costs 373,238 319,133 Center rent expense 73,764 70,532 General and administrative expenses 62,302 64,835 Depreciation and amortization 40,355 31,221 Provision for losses on accounts receivable 14,108 8,983 Interest, net of interest income of $1,781 and $3,255, respectively 54,603 44,347 Loss on extinguishment of debt, net - 3,173 (Gain) loss on sale of assets, net (977) 23 -------------- -------------- Total costs and expenses 1,757,558 1,515,102 -------------- -------------- Income before income taxes and discontinued operations 66,626 43,174 Income tax benefit (47,348) (10,914) -------------- -------------- Income from continuing operations 113,974 54,088 -------------- -------------- Discontinued operations: (Loss) income from discontinued operations, net of related taxes (1,686) 3,622 Loss on disposal of discontinued operations, net of related taxes (3,001) (200) -------------- -------------- (Loss) income from discontinued operations, net (4,687) 3,422 -------------- -------------- Net income $ 109,287 $ 57,510 ============== ============== Basic income per common and common equivalent share: Income from continuing operations $ 2.63 $ 1.28 (Loss) income from discontinued operations, net (0.11) 0.08 -------------- -------------- Net income $ 2.52 $ 1.36 ============== ============== Diluted income per common and common equivalent share: Income from continuing operations $ 2.59 $ 1.25 (Loss) income from discontinued operations, net (0.10) 0.08 -------------- -------------- Net Income $ 2.49 $ 1.33 ============== ============== Weighted average number of common and common equivalent shares outstanding: Basic 43,331 42,350 Diluted 43,963 43,390 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Three For the Three Months Ended Months Ended December 31, December 31, 2008 2007 -------------- -------------- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 82,421 $ 35,352 Adjustments to reconcile net income to net cash provided by operating activities, including discontinued operations: Loss on extinguishment of debt - 3,173 Depreciation and amortization 10,812 7,900 Amortization of favorable and unfavorable lease intangibles (436) (713) Provision for losses on accounts receivable 5,312 565 Loss (gain) on sale of assets, including discontinued operations, net (104) 827 Stock-based compensation expense 1,532 994 Deferred taxes (64,675) (33,582) Minority interest 160 - Other (22) (226) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (13,853) (6,309) Restricted cash (1,227) 1,223 Prepaid expenses and other assets 1,487 4,367 Accounts payable 11,145 (45) Accrued compensation and benefits (1,238) (424) Accrued self-insurance obligations 8,179 (4,198) Income taxes payable (2,782) (3,538) Other accrued liabilities (12,879) (13,450) Other long-term liabilities 1,859 13,924 -------------- -------------- Net cash provided by operating activities 25,691 5,840 -------------- -------------- Cash flows from investing activities: Capital expenditures (14,011) (10,123) Purchase of leased real estate - (23,242) Proceeds from sale of assets held for sale 4,557 1,600 Acquisitions, net of cash acquired (2,326) (10,956) -------------- -------------- Net cash used for investing activities (11,780) (42,721) -------------- -------------- Cash flows from financing activities: Long-term debt borrowings - 20,000 Principal repayments of long-term debt and capital lease obligations (2,207) (12,872) Distribution of partnership equity (65) (146) Proceeds from issuance of common stock 81 678 -------------- -------------- Net cash (used for) provided by financing activities (2,191) 7,660 -------------- -------------- Net increase (decrease) in cash and cash equivalents 11,720 (29,221) Cash and cash equivalents at beginning of period 80,433 85,053 -------------- -------------- Cash and cash equivalents at end of period $ 92,153 $ 55,832 ============== ============== SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Twelve For the Twelve Months Ended Months Ended December 31, December 31, 2008 2007 -------------- -------------- (audited) (audited) Cash flows from operating activities: Net income $ 109,287 $ 57,510 Adjustments to reconcile net income to net cash provided by operating activities, including discontinued operations: Loss on extinguishment of debt - 3,173 Depreciation and amortization 40,614 31,801 Amortization of favorable and unfavorable lease intangibles (1,879) (1,315) Provision for losses on accounts receivable 15,283 10,345 Loss (gain) on sale of assets, including discontinued operations, net 2,151 224 Impairment charge for discontinued operation 1,800 - Stock-based compensation expense 5,270 3,678 Deferred taxes (51,128) (33,582) Minority interest 979 100 Other (10) (866) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (31,654) (9,899) Restricted cash 3,215 2,497 Prepaid expenses and other assets (4,213) 16,127 Accounts payable 4,032 (17,266) Accrued compensation and benefits (2,367) 14,486 Accrued self-insurance obligations 4,773 (12,108) Income taxes payable (1,806) 4,779 Other accrued liabilities (12,201) 3,616 Other long-term liabilities 5,688 10,537 -------------- -------------- Net cash provided by operating activities 87,834 83,837 -------------- -------------- Cash flows from investing activities: Capital expenditures (42,543) (33,450) Purchase of leased real estate (8,956) (56,462) Proceeds from sale of assets held for sale 18,354 7,589 Acquisitions, net of cash acquired (11,734) (369,194) Accrued acquisition costs, net - 740 Insurance proceeds received for damaged property 628 - -------------- -------------- Net cash used for investing activities (44,251) (450,777) -------------- -------------- Cash flows from financing activities: Net repayments under revolving credit facility - (9,994) Long-term debt borrowings 20,290 347,000 Principal repayments of long-term debt and capital lease obligations (29,627) (54,509) Distribution of partnership equity (418) (714) Proceeds from issuance of common stock 2,493 1,459 Release of third-party collateral - 25,640 Deferred financing costs - (18,045) -------------- -------------- Net cash (used for) provided by financing activities (7,262) 290,837 -------------- -------------- Net increase (decrease) in cash and cash equivalents 36,321 (76,103) Cash and cash equivalents at beginning of period 55,832 131,935 -------------- -------------- Cash and cash equivalents at end of period $ 92,153 $ 55,832 ============== ============== SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M) (in thousands) For the Three For the Three Months Ended Months Ended December 31, December 31, 2008 2007 -------------- -------------- (audited) (audited) Total net revenues $ 466,968 $ 442,535 -------------- -------------- Net income $ 82,421 $ 35,352 -------------- -------------- Income from continuing operations 83,832 34,856 Income tax benefit (67,467) (21,251) Loss on extinguishment of debt, net - 3,173 Gain on sale of assets, net (900) - -------------- -------------- Net segment income $ 15,465 $ 16,778 Interest, net 13,459 15,479 Depreciation and amortization 10,801 7,801 -------------- -------------- EBITDA $ 39,725 $ 40,058 Center rent expense 18,329 18,361 -------------- -------------- EBITDAR $ 58,054 $ 58,419 Operating administrative costs 13,498 11,599 General and administrative expenses 15,774 17,826 -------------- -------------- Total operating and general and admin expenses 29,272 29,425 EBITDAM $ 68,997 $ 69,483 EBITDARM $ 87,326 $ 87,844

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

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M) (in thousands) For the For the Year Ended Year Ended December 31, December 31, 2008 2007 -------------- -------------- (audited) (audited) Total net revenues $ 1,824,184 $ 1,558,276 -------------- -------------- Net income $ 109,287 $ 57,510 -------------- -------------- Income from continuing operations 113,974 54,088 Income tax benefit (47,348) (10,914) Loss on extinguishment of debt, net - 3,173 (Gain) loss on sale of assets, net (977) 23 -------------- -------------- Net segment income $ 65,649 $ 46,370 Interest, net 54,603 44,347 Depreciation and amortization 40,355 31,221 -------------- -------------- EBITDA $ 160,607 $ 121,938 Center rent expense 73,764 70,532 -------------- -------------- EBITDAR $ 234,371 $ 192,470 Operating administrative costs 51,171 39,950 General and administrative expenses 62,302 64,835 -------------- -------------- Total operating and general and admin expenses 113,473 104,785 EBITDAM $ 274,080 $ 226,723 EBITDARM $ 347,844 $ 297,255

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M) ($ in thousands) For the Three Months Ended December 31, 2008 (unaudited) Rehabil- Elimination itation Medical of Inpatient Therapy Staffing Other & Affiliated Consoli- Services Services Services Corp Seg Revenue dated --------- -------- -------- -------- ------- -------- Nonaffiliated revenue $ 414,180 $ 24,012 $ 28,768 $ 8 $ - $466,968 Affiliated revenue - 16,543 467 - (17,010) - --------- -------- -------- -------- ------- -------- Total revenue 414,180 40,555 29,235 8 (17,010) 466,968 Net segment income (loss) $ 37,296 $ 1,979 $ 2,824 $(26,634) $ - $ 15,465 Interest, net 3,540 - (6) 9,925 - 13,459 Depreciation and amortization 9,646 137 195 823 - 10,801 --------- -------- -------- -------- ------- -------- EBITDA $ 50,482 $ 2,116 $ 3,013 $(15,886) $ - $ 39,725 Center rent expense 17,978 108 243 - - 18,329 --------- -------- -------- -------- ------- -------- EBITDAR $ 68,460 $ 2,224 $ 3,256 $(15,886) $ - $ 58,054 Operating and general and administrative expenses 11,260 1,927 311 15,774 - 29,272 --------- -------- -------- -------- ------- -------- EBITDAM $ 61,742 $ 4,043 $ 3,324 $ (112) $ - $ 68,997 EBITDARM $ 79,720 $ 4,151 $ 3,567 $ (112) $ - $ 87,326 EBITDA margin 12.2% 5.2% 10.3% 8.5% EBITDAM margin 14.9% 10.0% 11.4% 14.8% EBITDAR margin 16.5% 5.5% 11.1% 12.4% EBITDARM margin 19.2% 10.2% 12.2% 18.7% SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M) ($ in thousands) For the Year Ended December 31, 2008 (audited) Rehabil- Elimination itation Medical of Inpatient Therapy Staffing Other & Affiliated Consoli- Services Services Services Corp Seg Revenue dated ---------- -------- -------- --------- ------- ---------- Nonaffiliated revenue $1,616,740 $ 89,619 $117,788 $ 37 $ - $1,824,184 Affiliated revenue - 60,856 2,622 - (63,478) - ---------- -------- -------- --------- ------- ---------- Total revenue 1,616,740 150,475 120,410 37 (63,478) 1,824,184 Net segment income (loss) $ 154,330 $ 8,462 $ 9,690 $(106,833) $ - $ 65,649 Interest, net 13,670 (1) (20) 40,954 - 54,603 Deprecia- tion and amortiza- tion 35,958 533 806 3,058 - 40,355 ---------- -------- -------- --------- ------- ---------- EBITDA $ 203,958 $ 8,994 $ 10,476 $ (62,821) $ - $ 160,607 Center rent expense 72,394 394 976 - - 73,764 ---------- -------- -------- --------- ------- ---------- EBITDAR $ 276,352 $ 9,388 $ 11,452 $ (62,821) $ - $ 234,371 Operating and general and admini- strative expenses 41,381 6,806 2,983 62,303 - 113,473 ---------- -------- -------- --------- ------- ---------- EBITDAM $ 245,339 $ 15,800 $ 13,459 $ (518) $ - $ 274,080 EBITDARM $ 317,733 $ 16,194 $ 14,435 $ (518) $ - $ 347,844 EBITDA margin 12.6% 6.0% 8.7% 8.8% EBITDAM margin 15.2% 10.5% 11.2% 15.0% EBITDAR margin 17.1% 6.2% 9.5% 12.8% EBITDARM margin 19.7% 10.8% 12.0% 19.1% SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M) ($ in thousands) For the Three Months Ended December 31, 2007 (unaudited) Rehabil- Elimination itation Medical of Inpatient Therapy Staffing Other & Affiliated Consoli- Services Services Services Corp Seg Revenue dated --------- -------- -------- -------- ------- -------- Nonaffiliated revenue $ 393,255 $ 20,150 $ 29,120 $ 10 $ - $442,535 Affiliated revenue - 12,964 677 - (13,641) - --------- -------- -------- -------- ------- -------- Total revenue 393,255 33,114 29,797 10 (13,641) 442,535 Net segment income (loss) $ 43,993 $ 2,348 $ 2,433 $(31,996) $ - $ 16,778 Interest, net 3,402 - 3 12,074 - 15,479 Depreciation and amortization 5,481 146 196 1,978 - 7,801 --------- -------- -------- -------- ------- -------- EBITDA $ 52,876 $ 2,494 $ 2,632 $(17,944) $ - $ 40,058 Center rent expense 18,053 54 254 - - 18,361 --------- -------- -------- -------- ------- -------- EBITDAR $ 70,929 $ 2,548 $ 2,886 $(17,944) $ - $ 58,419 Operating and general and administrative expenses 9,573 1,304 721 17,827 - 29,425 --------- -------- -------- -------- ------- -------- EBITDAM $ 62,449 $ 3,798 $ 3,353 $ (117) $ - $ 69,483 EBITDARM $ 80,502 $ 3,852 $ 3,607 $ (117) $ - $ 87,844 EBITDA margin 13.4% 7.5% 8.8% 9.1% EBITDAM margin 15.9% 11.5% 11.3% 15.7% EBITDAR margin 18.0% 7.7% 9.7% 13.2% EBITDARM margin 20.5% 11.6% 12.1% 19.9% SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M) ($ in thousands) For the Year Ended December 31, 2007 (audited) Rehabil- Elimination itation Medical of Inpatient Therapy Staffing Other & Affiliated Consoli- Services Services Services Corp Seg Revenue dated ---------- -------- -------- --------- -------- ---------- Nonaffiliated revenue $1,367,919 $ 82,198 $108,082 $ 77 $ - $1,558,276 Affiliated revenue - 44,857 3,150 - (48,007) - ---------- -------- -------- --------- -------- ---------- Total revenue 1,367,919 127,055 111,232 77 (48,007) 1,558,276 Net segment income (loss) $ 132,429 $ 7,753 $ 8,221 $(102,033) $ - $ 46,370 Interest, Net 11,487 11 16 32,833 - 44,347 Deprecia- tion and amortiza- tion 25,997 528 749 3,947 - 31,221 ---------- -------- -------- --------- -------- ---------- EBITDA $ 169,913 $ 8,292 $ 8,986 $ (65,253) $ - $ 121,938 Center rent expense 69,417 208 907 - - 70,532 ---------- -------- -------- --------- -------- ---------- EBITDAR $ 239,330 $ 8,500 $ 9,893 $ (65,253) $ - $ 192,470 Operating and general and admini- strative expenses 31,998 4,978 2,974 64,835 - 104,785 ---------- -------- -------- --------- -------- ---------- EBITDAM $ 201,911 $ 13,270 $ 11,960 $ (418) $ - $ 226,723 EBITDARM $ 271,328 $ 13,478 $ 12,867 $ (418) $ - $ 297,255 EBITDA margin 12.4% 6.5% 8.1% 7.8% EBITDAM margin 14.8% 10.4% 10.8% 14.5% EBITDAR margin 17.5% 6.7% 8.9% 12.4% EBITDARM margin 19.8% 10.6% 11.6% 19.1% SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES PRO FORMA WITH HARBORSIDE CONSOLIDATED INCOME STATEMENTS (in thousands, except per share data) PRO FORMA AS REPORTED WITH HARBORSIDE For the For the Year Ended Year Ended December 31, December 31, 2008 2007 ------------ ------------ (audited) (unaudited) Total net revenues $ 1,824,184 $ 1,719,176 ------------ ------------ Costs and expenses: Operating salaries and benefits 1,029,279 979,735 Self-insurance for workers' compensation and general and professional liability insurance 59,715 48,590 Operating administrative costs 51,171 42,296 Other operating costs 373,238 354,352 Center rent expense 73,764 77,486 General and administrative expenses 62,302 70,231 Depreciation and amortization 40,355 35,922 Provision for losses on accounts receivable 14,108 16,883 Interest, net of interest income of $1,781 and $3,573, respectively 54,603 48,940 Loss on extinguishment of debt, net - 3,173 (Gain) loss on sale of assets, net (977) 23 ------------ ------------ Total costs and expenses 1,757,558 1,677,631 ------------ ------------ Income before income taxes and discontinued operations 66,626 41,545 Income tax benefit (47,348) (11,734) ------------ ------------ Income from continuing operations 113,974 53,279 ------------ ------------ Discontinued operations: (Loss) income from discontinued operations, net of related taxes (1,686) 2,565 Loss on disposal of discontinued operations, net of related taxes (3,001) (200) ------------ ------------ (Loss) income from discontinued operations, net (4,687) 2,365 ------------ ------------ Net income $ 109,287 $ 55,644 ============ ============ Basic income per common and common equivalent share: Income from continuing operations $ 2.63 $ 1.26 (Loss) income from discontinued operations, net (0.11) 0.05 ------------ ------------ Net income $ 2.52 $ 1.31 ============ ============ Diluted income per common and common equivalent share: Income from continuing operations $ 2.59 $ 1.23 (Loss) income from discontinued operations, net (0.10) 0.05 ------------ ------------ Net Income $ 2.49 $ 1.28 ============ ============ Weighted average number of common and common equivalent shares outstanding: Basic 43,331 42,350 Diluted 43,963 43,390 Note: The pro forma table above and the pro forma table pages that follow were prepared as if the acquisition of Harborside Healthcare Corporation, which closed in April 2007, had occurred on January 1, 2007. SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES PRO FORMA WITH HARBORSIDE RECONCILIATION OF NET INCOME TO EBITDA(M) and EBITDAR(M) (in thousands) PRO FORMA AS REPORTED WITH HARBORSIDE For the For the Year Ended Year Ended December 31, December 31, 2008 2007 ------------ ------------ (audited) (unaudited) Total net revenues $ 1,824,184 $ 1,719,176 ------------ ------------ Net income $ 109,287 $ 55,644 ------------ ------------ Income from continuing operations 113,974 53,279 Income tax benefit (47,348) (11,734) Loss on extinguishment of debt, net - 3,173 (Gain) loss on sale of assets, net (977) 23 ------------ ------------ Net segment income $ 65,649 $ 44,741 Interest, net 54,603 48,940 Depreciation and amortization 40,355 35,922 ------------ ------------ EBITDA $ 160,607 $ 129,603 Center rent expense 73,764 77,486 ------------ ------------ EBITDAR $ 234,371 $ 207,089 Operating administrative costs 51,171 42,296 General and administrative expenses 62,302 70,231 ------------ ------------ Total operating and general and admin expenses 113,473 112,527 EBITDAM $ 274,080 $ 242,130 EBITDARM $ 347,844 $ 319,616

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES PRO FORMA WITH HARBORSIDE RECONCILIATION OF NET SEGMENT INCOME (LOSS) TO EBITDA(M) and EBITDAR(M) ($ in thousands) For the Year Ended December 31, 2007 (unaudited) Rehabil- Elimination itation Medical of Inpatient Therapy Staffing Other & Affiliated Consoli- Services Services Services Corp Seg Revenue dated ---------- -------- -------- --------- -------- ---------- Nonaffi- liated revenue $1,526,858 $ 82,198 $110,725 $ 77 $ (682) $1,719,176 Affiliated revenue - 44,857 3,151 - (48,008) - ---------- -------- -------- --------- -------- ---------- Total revenue 1,526,858 127,055 113,876 77 (48,690) 1,719,176 Net segment income (loss) $ 141,359 $ 7,753 $ 8,156 $(113,340) $ 813 $ 44,741 Interest, net 16,363 11 15 32,537 14 48,940 Deprecia- tion and amortiza- tion 30,373 528 765 4,256 - 35,922 ---------- -------- -------- --------- -------- ---------- EBITDA $ 188,095 $ 8,292 $ 8,936 $ (76,547) $ 827 $ 129,603 Center rent expense 76,346 208 932 - - 77,486 ---------- -------- -------- --------- -------- ---------- EBITDAR $ 264,441 $ 8,500 $ 9,868 $ (76,547) $ 827 $ 207,089 Operating and general and admini- strative expenses 34,342 4,978 2,974 70,233 - 112,527 ---------- -------- -------- --------- -------- ---------- EBITDAM $ 222,437 $ 13,270 $ 11,910 $ (6,314) $ 827 $ 242,130 EBITDARM $ 298,783 $ 13,478 $ 12,842 $ (6,314) $ 827 $ 319,616 EBITDA margin 12.3% 6.5% 7.8% 7.5% EBITDAM margin 14.6% 10.4% 10.5% 14.1% EBITDAR margin 17.3% 6.7% 8.7% 12.0% EBITDARM margin 19.6% 10.6% 11.3% 18.6% Sun Healthcare Group, Inc. and Subsidiaries Selected Operating Statistics Continuing Operations For the For the Three Months Ended Twelve Months Ended December 31, December 31, PRO FORMA AS AS AS WITH REPORTED REPORTED REPORTED HARBORSIDE ------------------------ --------------------------- 2008 2007 2008 2007 Consolidated Company Revenues - Non-affiliated (in thousands) Inpatient Services 414,180 393,255 1,616,740 1,526,858 Rehabili- tation Therapy Services 24,012 20,150 89,619 82,198 Medical Staffing Services 28,768 29,120 117,788 110,725 Other - non-core businesses 8 10 37 (605) -------- -------- ---------- ---------- Total $466,968 $442,535 $1,824,184 $1,719,176 ======== ======== ========== ========== Revenue Mix - Non-affiliated (in thousands) Medicare 136,305 29% 123,005 28% 522,555 29% 467,294 27% Medicaid 186,484 40% 184,454 42% 729,023 40% 722,837 42% Private & Other 116,343 25% 115,408 25% 465,771 25% 452,102 26% Managed Care / Insurance 23,799 5% 16,274 4% 91,691 5% 63,403 4% Veterans 4,037 1% 3,394 1% 15,144 1% 13,540 1% -------- --- -------- --- ---------- --- ---------- --- Total $466,968 100% $442,535 100% $1,824,184 100% $1,719,176 100% ======== === ======== === ========== === ========== === Inpatient Services Stats Number of Centers 207 207 207 207 Number of available beds: 22,544 22,548 22,544 22,548 Occupancy %: 88.5% 89.6% 88.9% 89.8% Payor Mix % based on patient days: Medicare - SNF Beds 15.6% 15.6% 16.1% 15.7% Managed care / Ins. - SNF Beds 3.9% 2.9% 3.9% 2.9% -------- -------- ---------- ---------- Total SNF skilled mix 19.5% 18.5% 20.0% 18.6% -------- -------- ---------- ---------- Medicare 14.2% 14.2% 14.7% 14.3% Medicaid 60.2% 60.7% 59.7% 60.8% Private and other 21.1% 21.6% 21.1% 21.4% Managed care / Insurance 3.5% 2.6% 3.5% 2.6% Veterans 1.0% 0.9% 1.0% 0.9% Revenue Mix % of revenues: Medicare - SNF Beds 32.5% 31.7% 32.4% 31.1% Managed care / Ins. - SNF Beds 6.1% 4.4% 6.0% 4.3% -------- -------- ---------- ---------- Total SNF skilled mix 38.6% 36.1% 38.4% 35.4% -------- -------- ---------- ---------- Medicare 32.0% 30.7% 31.5% 30.1% Medicaid 45.0% 46.9% 45.1% 47.3% Private and other 16.3% 17.4% 16.9% 17.6% Managed care / Insurance 5.7% 4.1% 5.6% 4.1% Veterans 1.0% 0.9% 0.9% 0.9% Revenues PPD: LTC only Medicare (Part A) $ 446.09 $ 412.64 $ 424.23 $ 392.77 Medicare Blended Rate (Part A & B) $ 482.20 $ 444.56 $ 456.05 $ 423.02 Medicaid $ 168.79 $ 163.48 $ 166.62 $ 160.79 Private and other $ 169.63 $ 165.99 $ 169.87 $ 164.90 Managed care / Insur- ance $ 363.95 $ 328.17 $ 351.93 $ 330.00 Veterans $ 223.76 $ 206.59 $ 216.85 $ 205.78 Rehab contracts Affiliated 118 107 118 107 Non-affiliated 327 309 327 309 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES NORMALIZING ADJUSTMENTS - 4th QUARTER COMPARISON (in thousands, except per share data) AS REPORTED - 4th QUARTER 2008 -------------------------------------------------------------- Income from Continuing Net Revenue EBITDAR EBITDA Pre-tax Operations Disc Ops Income ------- ------- ------- ------- -------- ------- -------- As Reported 4th QUARTER 2008 466,968 58,054 39,725 16,365 83,832 (1,411) 82,421 Percent of Revenue 12.4% 8.5% 3.5% 18.0% -0.3% 17.7% Normalizing Adjustments: Benefit for income taxes - - - - (74,012) - (74,012) Gain on sale of property - - - (900) (540) - (540) Prior periods self- insurance costs - 3,550 3,550 3,550 2,130 450 2,580 ------- ------- ------- ------- -------- ------- -------- Adjusted As Reported - 4th QUARTER 2008 466,968 61,604 43,275 19,015 11,410 (961) 10,449 ======= ======= ======= ======= ======== ======= ======== Percent of Revenue 13.2% 9.3% 4.1% 2.4% -0.2% 2.2% Diluted EPS: As Reported $ 1.91 $ (0.03) $ 1.88 As Adjusted $ 0.26 $ (0.02) $ 0.24 AS REPORTED - 4th QUARTER 2007 -------------------------------------------------------------- Income from Continuing Net Revenue EBITDAR EBITDA Pre-tax Operations Disc Ops Income ------- ------- ------- ------- -------- ------- -------- As Reported - 4th QUARTER 2007 442,535 58,419 40,058 13,605 34,856 496 35,352 Percent of Revenue 13.2% 9.1% 3.1% 7.9% 0.1% 8.0% Normalizing Adjustments: Benefit for income taxes - - - - (26,040) (1,787) (27,827) Debt refinancing fee - - - 3,173 2,062 - 2,062 Release of insurance reserves related to prior periods - (2,642) (2,642) (2,642) (1,717) (557) (2,274) Prior acquisition claim settlement - (2,276) (2,276) (2,276) (1,479) - (1,479) Harborside integration costs - 1,007 1,007 1,007 655 - 655 ------- ------- ------- ------- -------- ------- -------- Adjusted As Reported - 4th QUARTER 2007 442,535 54,508 36,147 12,867 8,337 (1,848) 6,489 ======= ======= ======= ======= ======== ======= ======== Percent of Revenue 12.3% 8.2% 2.9% 1.9% -0.4% 1.5% Diluted EPS: As Reported $ 0.78 $ 0.01 $ 0.79 As Adjusted $ 0.19 $ (0.04) $ 0.15

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

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

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

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES NORMALIZING ADJUSTMENTS - YEAR TO DATE COMPARISON (in thousands, except per share data) AS REPORTED - TWELVE MONTHS 2008 ---------------------------------------------------------------- Income from Continuing Net Revenue EBITDAR EBITDA Pre-tax Operations Disc Ops Income --------- ------- ------- ------- -------- ------- -------- As Reported - Twelve Months 2008 1,824,184 234,371 160,607 66,626 113,974 (4,687) 109,287 Percent of Revenue 12.8% 8.8% 3.7% 6.2% -0.3% 6.0% Normalizing Adjustments: Benefit for income taxes - - - - (74,012) - (74,012) Gain on sale of property - - - (900) (540) - (540) Release of insurance reserves related to prior periods - (2,650) (2,650) (2,650) (1,590) (222) (1,812) Prior periods self- insurance costs - 3,550 3,550 3,550 2,130 450 2,580 Harborside integration costs - 1,469 1,469 1,469 881 - 881 --------- ------- ------- ------- -------- ------- -------- Adjusted As Reported - Twelve Months 2008 1,824,184 236,740 162,976 68,095 40,843 (4,459) 36,384 ========= ======= ======= ======= ======== ======= ======== Percent of Revenue 13.0% 8.9% 3.7% 2.2% -0.2% 2.0% Diluted EPS: As Reported $ 2.59 $ (0.10) $ 2.49 As Adjusted $ 0.93 $ (0.10) $ 0.83 AS REPORTED - TWELVE MONTHS 2007 ---------------------------------------------------------------- Income from Continuing Net Revenue EBITDAR EBITDA Pre-tax Operations Disc Ops Income --------- ------- ------- ------- -------- ------- -------- As Reported - Twelve Months 2007 1,558,276 192,470 121,938 43,174 54,088 3,422 57,510 Percent of Revenue 12.4% 7.8% 2.8% 3.5% 0.2% 3.7% Normalizing Adjustments: Benefit for income taxes - - - - (26,040) (1,787) (27,827) Debt refinancing fee - - - 3,173 2,062 - 2,062 Write-off of deferred financing costs - - - 615 400 - 400 Prior acquisition claim settlement - (2,276) (2,276) (2,276) (1,479) - (1,479) Release of insurance reserves related to prior periods - (8,598) (8,598) (8,598) (5,588) (2,536) (8,124) Harborside integration costs - 4,495 4,495 4,495 2,922 - 2,922 --------- ------- ------- ------- -------- ------- -------- Adjusted As Reported - Twelve Months 2007 1,558,276 186,091 115,559 40,583 26,365 (901) 25,464 ========= ======= ======= ======= ======== ======= ======== Percent of Revenue 11.9% 7.4% 2.6% 1.7% -0.1% 1.6% Diluted EPS: As Reported $ 1.25 $ 0.08 $ 1.33 As Adjusted $ 0.61 $ (0.02) $ 0.59

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

 SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES NORMALIZING ADJUSTMENTS - YEAR TO DATE COMPARISON (in thousands, except per share data) AS REPORTED - TWELVE MONTHS 2008 ---------------------------------------------------------------- Income from Continuing Net Revenue EBITDAR EBITDA Pre-tax Operations Disc Ops Income --------- ------- ------- ------- -------- ------- -------- As Reported - Twelve Months 2008 1,824,184 234,371 160,607 66,626 113,974 (4,687) 109,287 Percent of Revenue 12.8% 8.8% 3.7% 6.2% -0.3% 6.0% Normalizing Adjustments: Benefit for income taxes - - - - (74,012) - (74,012) Gain on sale of property - - - (900) (540) - (540) Release of insurance reserves related to prior periods - (2,650) (2,650) (2,650) (1,590) (222) (1,812) Prior periods self- insurance costs - 3,550 3,550 3,550 2,130 450 2,580 Harborside integration costs - 1,469 1,469 1,469 881 - 881 --------- ------- ------- ------- -------- ------- -------- Adjusted As Reported - Twelve Months 2008 1,824,184 236,740 162,976 68,095 40,843 (4,459) 36,384 ========= ======= ======= ======= ======== ======= ======== Percent of Revenue 13.0% 8.9% 3.7% 2.2% -0.2% 2.0% Diluted EPS: As Reported $ 2.59 $ (0.10) $ 2.49 As Adjusted $ 0.93 $ (0.10) $ 0.83 PRO FORMA SUN & HARBORSIDE - TWELVE MONTHS 2007 ---------------------------------------------------------------- Income from Continuing Net Revenue EBITDAR EBITDA Pre-tax Operations Disc Ops Income --------- ------- ------- ------- -------- ------- -------- Pro Forma Sun & Harborside - Twelve Months 2007 1,719,176 207,089 129,603 41,545 53,279 2,365 55,644 Percent of Revenue 12.0% 7.5% 2.4% 3.1% 0.1% 3.2% Normalizing Adjustments: Benefit for income taxes - - - - (26,040) (1,787) (27,827) Debt refinancing fee - - - 3,173 2,062 - 2,062 Write-off of deferred financing costs - - - 615 400 - 400 Prior acquisition claim settlement - (2,276) (2,276) (2,276) (1,479) - (1,479) Release of insurance reserves related to prior periods - (8,598) (8,598) (8,598) (5,588) (2,536) (8,124) Harborside bad debt expense - 5,860 5,860 5,860 3,809 - 3,809 Harborside integration costs - 4,495 4,495 4,495 2,922 - 2,922 Harborside investor fees - 275 275 275 179 - 179 Harborside merger costs - 192 192 192 125 - 125 --------- ------- ------- ------- -------- ------- -------- Adjusted Pro Forma Sun & Harborside - Twelve Months 2007 1,719,176 207,037 129,551 45,281 29,669 (1,958) 27,711 ========= ======= ======= ======= ======== ======= ======== Percent of Revenue 12.0% 7.5% 2.6% 1.7% -0.1% 1.6% Diluted EPS: Pro Forma $ 1.23 $ 0.05 $ 1.28 Adjusted Pro Forma $ 0.68 $ (0.04) $ 0.64

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

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

Contributing Sources

Market Wire

N@N

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