Irvine, Calif. (May 20, 2003) - Sun Healthcare Group, Inc. (OTC-SUHG.OB) today announced its operating results for its first quarter ended March 31, 2003.
      For the quarter ended March 31, 2003, Sun reported total net revenues of $442.3 million and a net loss, before reorganization costs, income taxes, discontinued operations and extraordinary item, of $12.0 million, compared with total net revenues of $453.1 million and a net loss, before reorganization costs, income taxes, discontinued operations and extraordinary item, of $6.0 million for the three-month period ended March 31, 2002. Sun’s results of operations were negatively impacted by net reductions in Medicare reimbursements of $7.6 million and an increase in patient liability costs of 41.9 percent or $4.9 million in the first quarter of 2003. Without these reimbursement cuts and increases to patient liability expenses, Sun’s total net revenues and net income, before reorganization costs, income taxes, discontinued operations and extraordinary item, would have been $449.9 million and $0.5 million, respectively. The Company operated 217 long-term and other inpatient care facilities with 24,274 licensed beds on March 31, 2003, as compared with 244 facilities with 27,632 licensed beds on March 31, 2002.
      For the quarter ended March 31, 2003, Sun’s net revenues from its ancillary and corporate operations, which include SunScript Pharmacy Corporation, SunDance Rehabilitation Corporation, CareerStaff Unlimited, SunPlus Home Health Services, Inc. and Shared Healthcare Systems, Inc., increased $3.1 million, from $110.7 million for the three months ended March 31, 2002, to $113.8 million for the same period in 2003. The net segment loss, before restructuring costs, gain on sale of assets, reorganization costs, income taxes, discontinued operations and extraordinary item, for those operations increased $0.4 million over the same period, from a loss of $6.5 million to a loss of $6.9 million. Sun’s ancillary and corporate results of operations were negatively impacted by reductions in Medicare reimbursements and changes in state Medicaid rates. As disclosed in previous SEC filings, reductions in Medicare reimbursement cuts of $1.1 million to the ancillary operations’ first quarter revenues adversely impacted these results.
      Net revenues from the long-term and inpatient care operations, which comprised 74.3 percent of Sun’s total revenue in the first quarter of 2003, decreased $13.9 million to $328.5 million for the three months ended March 31, 2003, from $342.4 million for the same period in 2002. The net segment loss, before restructuring costs, gain on sale of assets, reorganization costs, income taxes, discontinued operations and extraordinary item from the long-term and inpatient care operations increased $2.0 million from $1.5 million for the three months ended March 31, 2002, to $3.5 million for the same period in 2003. Sun’s inpatient care results of operations were negatively impacted by reductions in Medicare reimbursements of $8.7 million, which was partially offset by a market basket increase of $2.2 million. Without the reimbursement cuts and before restructuring costs, gain on sale of assets, reorganization costs, income taxes, discontinued operations and extraordinary item, Sun’s inpatient care net revenues and net income would have been $335.0 million and $3.0 million, respectively.
      Sun expects that its professional liability costs will continue to increase in the future with the growing trend in the number and the magnitude of litigation claims filed within the industry and because of the related difficulties of obtaining insurance coverage for those types of claims.
      "We have made substantial progress in our inpatient and ancillary services quarter over quarter," said Richard K. Matros, Sun’s chairman and chief executive officer. "Unfortunately, the progress we have made has been offset by reduced Medicare reimbursements and increased patient liability costs."
      As previously announced, Sun is restructuring its facility portfolio to obtain, among other things, rent concessions with respect to certain facilities and to transition certain under-performing facilities to other operators. In connection with this initiative, Sun divested 21 facilities between December 31, 2002, and March 31, 2003, and those 21 facilities accounted for $1.4 million in net loss during the first quarter of 2003. Sun divested an additional 16 facilities in April 2003 and has identified 43 percent of its current facilities for possible divestiture. As of April 30, 2003, Sun withheld approximately $26.0 million in accrued rent and mortgage payments on facilities that are being restructured. Sun was released from paying $9.2 million of that amount in April.
      "We continue to advance with our restructuring," said Mr. Matros. "We have successfully divested many of the facilities that we had targeted for divestiture, and we are having good dialogues with many of the landlords for the remaining facilities to be divested. As part of the restructuring, we are also looking into possible sales of assets to provide liquidity that we will need for operations in the next several months. In addition, we have implemented steps to reduce our operating and overhead costs without affecting the quality of care that we provide to our residents."
      The Company emerged from bankruptcy on February 28, 2002, and adopted the provisions of fresh-start accounting effective March 1, 2002. Under these provisions, the terms of the Company’s reorganization plan were implemented, assets and liabilities were adjusted to their estimated fair values, and a new entity was deemed created for financial reporting purposes. As a consequence, the financial results for the quarter ended March 31, 2003, are generally not comparable to the financial results for the same periods in the prior year. Financial results in the attached financial highlights and consolidated statements of operations and cash flows labeled "Predecessor Company" refer to periods prior to the adoption of fresh-start reporting, while those labeled "Reorganized Company" refer to periods following the Company’s reorganization.
      Sun and its subsidiaries have continued to receive funding under their Revolving Credit Agreement, even though the Company is in covenant default of its loan agreements and has not obtained current waivers of the defaults.
      Sun’s senior management will hold a conference call to discuss the Company’s first quarter operating results on Thursday, May 22, at 12 p.m. EST / 9 a.m. PST. To listen to the conference call, dial (877) 516-8526 and refer to Sun Healthcare Group. A recording of the conference call will be available from 1 p.m. EST on May 22 until midnight EST on May 29 by dialing (800) 642-1687 and using access code 9768245.

First Quarter Fiscal 2003 Earnings Tables