Having cleared several key financial hurdles recently, Sun Healthcare CEO Rick Matros is optimistic about his company’s future.
      Sun Healthcare’s chief executive may have saved the company from liquidation with a little bit of luck, and a healthy helping of panache.
     Rick Matros has a knack for getting people to trust him, though he doesn’t always like playing by corporate rules. Sporting an ivory, flowing silk shirt and khakis, spiked salt and pepper hair and gleaming white smile, you would never be able to tell the hip, relaxed 50-year-old is the chief executive of Irvine, CA-based Sun Healthcare Group Inc: a nursing home company that was headed for liquidation just more than year ago.
      A veteran with bankruptcies, Matros was coaxed into running the company by its creditors. Much to his surprise, they agreed to his whimsical request to move the company’s headquarters from Albuquerque to Irvine, CA, an easy drive from his Newport Beach home. It was his "party line" request, and six to eight other companies didn’t bite.
      "They usually blow you off -- it doesn’t make any sense, right?" he notes.
      But Sun’s creditors were determined to get the bankruptcy mastermind, and Matros climbed on board November 2001. He now says he took over Sun "six months too late."
      "I inherited this total disaster," he says, adding he didn’t know it at the time. "There was no company."
      In February 2002, Sun’s first quarter out of bankruptcy, the company defaulted on its bank financing. The financiers assumed $60 million in cash flow for 2001, but the company’s 2001 financial statement didn’t reflect $40 million in costs. Sun also took a $35 million hit on lower Medicare reimbursements.
      It’s a wonder Sun exists today - and that it is starting to take off so soon. With surgical precision, Matros seems to have pulled the company out of its impending gloom. He may have created the industry’s most remarkable turnaround.
      In just over a year, Matros divested 134 facilities, secured $56.2 million in private financing, got his "going concern" qualification lifted by the auditors and was listed on NASDAQ in March. The stock, at 11 cents in April 2003, reached a high of $14.30 in February. It had leveled off to $8 at press time.
      "Rick has spent a lot of time and effort - blood sweat and tears - and he’s hung in there," says Stephen M. Monroe, a partner with Irving Levin Associates in New Canaan, CT, which studies the long-term care markets. "The company has ways to go, but Rick’s done an admirable job with what he has inherited."
      Though Matros still predicts a $3 million to $5 million loss for 2004, that would be less than half of the losses ($10.4 million) for 2003.
      The company brought in $834 million in revenues last year, 70 percent from its facilities.
      Results like those earned notice from knowledgeable observers.
      "With new management at the helm, Sun commenced a restructuring that has shaped the company into a leading long-term care provider, in our view," wrote Newport-based Roth Capital Partners in an analyst report. Roth initiated coverage in May with a "strong buy." It is now the only company that covers Sun.

Relief over lawsuit
      The company received more good news in June, when a Vista Superior judge threw out a lawsuit that had been weighing down the reborn chain. Sun had taken a worrisome $1.9 million hit in the first quarter in legal fees to defend 12 employees at its Escondido, CA, nursing home. The suit, which had been filed in January, charged the employees neglected to turn a resident who had bedsores, and the neglect was allegedly captured on a hidden video camera. However, prosecutors did not submit the video in front of the grand jury and the judge cited insufficient evidence.       Looking visibly relieved in his roomy, fourth-floor office, Matros said the facility would now be easier to divest to an interested party, a deal that should close by the end of the year.
      Matros says that after divesting four facilities in the first quarter, he is on track to trim five more. When he’s done, he says he will oversee 101 facilities: 84 skilled nursing, eight assisted living, six behavioral health and three long-term care hospitals.
      The firm is now 70 percent concentrated on the East Coast, whereas 50 percent of the old company was in California and Massachusetts. Matros says in order to mitigate risk he does not want to have more than 15 percent of his portfolio in any one state. And he says he’s ready to get into the market to acquire facilities, possibly this year.
      "We don’t have any real parameters relative to what we’re going after," he says, "so we’re willing to look at ones and twosies. We’d like regional chains with 10 to 20 facilities, but if there are bigger consolidation opportunities, then we’re open to that as well."
      Though Sun leases 87 percent of its facilities, Matros says, when he has enough cash to make the transfer, he’d like to own all of his facilities.

Stopped paying rent
      So how did Matros perform this master plan and turn disaster into opportunity?
      His first step was to stop paying rent on 60 percent of the facilities he intended to divest, effective Feb. 1, 2003. The buildings were in poor shape and were owned by a half dozen real estate investment trusts and a few dozen mom-and-pop operations. Though the move was risky, Matros explained to the owners his only other choice was to liquidate the company and file for creditor protection. Similarly, the REITs had incentive to stay out of court so they could divest the properties and find new management more easily and more quickly.
      "Frankly, we had nothing to lose," says Matros. "We weren’t getting any help from our banks. We were burning up so much cash. The REITs worked with us. The mom-and-pops -- that was a little bit more difficult. They were understandably angry with us, so the conversations there were a little more forceful."
      Next, Matros looked to sell the ancillary businesses to generate cash. He sold the company’s pharmacy business, SunScript Pharmacy Corporation, to Omnicare last July for $90 million. He also agreed to sell SunDance Rehabilitation Corporation to Beverly Enterprises at the end of December 2003 for $34 million.
      But in a surprising move, Matros said he reversed the deal at the end of January to show investors that Sun no longer needed the liquidity. Beverly’s Chief Executive, William R. Floyd, said they could not agree with Sun on "certain key issues that arose during the due-diligence process."
      Reversing the planned sale was a big move for Sun. SunDance accounted for nearly 20% of the company’s 2003  percent revenues and in announcing the reversal in January, Matros says he lost about six months’ worth of the business: Employees quit, a few contracts walked away and his new contract pipeline dried up. But Matros says it was worth the gamble: SunDance Rehabilitation now has 340 contracts, and the rehab company will help build the parent company’s Medicare census.
      "The easiest asset we had left to move was the rehab company," Matros said. "It’s a profitable company. It has nice growth opportunities. We wouldn’t have sold our pharmacy last summer if we didn’t have to, but it’s not a perfect world."
      Overall, Sun was able to hold on to four businesses: rehabilitation services, a staffing company, a home health business and radiology services.

Bankruptcy king
      Though Matros is the epitome of the laid-back Californian, he’s originally from Long Island, NY. While growing up there, he said he would "cut school and go to Jones Beach, and you know, make out with my girlfriend on the boardwalk."
      A career-defining event came when he volunteered at Wellsville Nursing Home in Wellsville, NY, while studying psychology at Alfred University. He was inspired to go on to get a master’s degree in gerontology from the University of Southern California.
      He first tasted bankruptcy when he was just 23 years old. He was in his third week as an administrator for Extendicare, a small company in southern California.
      "That was the old days when we actually got a call from the corporate office that said, ’We have no cash. We can’t meet your payroll,’" says Matros. "I was freaking out."
      He decided to stick with the company through bankruptcy.
      "I found, really to my surprise, that I liked it," he says. "I had a proclivity for the business side that I didn’t know existed."
      In 1983, he went to Beverly Enterprises as a regional vice president, and then vice president for two years. "I had a bit of a hard time fitting in, just because I wasn’t very corporate," he recalled.
      Then he joined Care Enterprises in Tustin in 1988 and took that company through bankruptcy. Again, the creditors were on his side.
      Matros merged Care with Regency Health Services and ran Regency until 1997, when he sold it to Sun. A year later, he founded Bright NOW! Dental in Santa Ana, which manages about 300 dental practices nationwide.

Risks pay off
      The father of daughters ages 22 and 20, and a 13-year-old son, Matros goes to Prince concerts and Los Angeles Lakers games. He rocks out to hip-hop stars Eminem, OutKast and the Wu-Tang Clan.
      Not surprisingly, he says he rebels against corporate culture and rules.
      "Last year was really awful because I was sitting in a room with accountants and lawyers," he says.
      But rebelling and his taking a risk on rents ended up saving the company.
      Rents are now seven percent of revenues, down from 10 percent from last year. Same-store facilities have a healthy average 90 percent occupancy rate. And the company now has enough cash flow to be able to consider acquisitions.
      Staying out of bankruptcy, and working with the creditors out of court was Sun’s saving grace. Matros says it was worth it, even though Sun was not able to clear its balance sheet of its debts: the courts would have done so. Sun, however, could not afford the $2.5 million a month in legal fees. Staying out of court means Sun has workers’ compensation and tort claim legacies they are still paying. And he worries about Medicare cuts in 2005 and tort reform, but recognizes these are out of his control.
      Matros still marvels that the former management acted like "kings," erecting fancy buildings and spending wildly and lavishly, including millions on artwork for corporate offices. Moving forward, he said, the company will be drastically different than the one he inherited.
      In hindsight, Matros says it may have been a blessing that he didn’t know how bad Sun’s situation was when he took the helm. He’s now feeling good about the company’s future.
     "We would have liquidated and there would have been no company, and at the time, that would have been the right decision to make," says Matros. "It’s funny how things work out."