Sun Healthcare

Irvine, Calif. (Aug. 1, 2007) - Sun Healthcare Group, Inc. (NASDAQ GM: SUNH) today announced results for the second quarter ended June 30, 2007.

Consolidated and Consolidated Pro Forma Results
Total net revenue for the quarter ended June 30, 2007, was $446.7 million, up 73 percent compared to $258.5 million for the comparable period one year ago. Net income for the quarter ended June 30, 2007, was $13.0 million, compared to net income of $7.3 million for the comparable period one year ago, resulting in a 30 percent increase in diluted earnings per share to $0.30 from $0.23 for the comparable period one year ago (based on 43.735 million weighted-average shares outstanding as of June 30, 2007). The pro forma information in the table below was prepared as if the acquisition of Harborside Healthcare Corporation, which closed in April 2007, had occurred on April 1, 2006. The information in the table also contains the normalizing adjustments described below.

Pre-tax normalizing adjustments in the quarter ended June 30, 2007, consisted of a $0.6 million charge related to the write-off of certain deferred financing costs associated with a credit facility which was refinanced in April 2007, a $0.9 million charge for integration costs associated with the Harborside acquisition, and $9.0 million of income from adjustments of prior period self-insurance reserves ($3.0 million of which were related to discontinued operations). Pre-tax normalizing adjustments in the quarter ended June 30, 2006 consisted of $8.0 million of income from adjustments of prior period self-insurance reserves ($2.6 million of which were related to discontinued operations) and, in the pro forma results, $0.1 million of costs related to Harborside investor fees.
On a normalized pro forma basis, comparing the quarter ended June 30, 2007, to the same period in 2006, Sun reported:

revenue increased $27.5 million, or 6.6 percent;

EBITDAR increased $9.2 million, or 19.6 percent;

EBITDAR margin improved 130 basis points to 12.6 percent;

EBITDA increased $8.8 million, or 34.7 percent;

EBITDA margin improved 160 basis points to 7.7 percent;

income from continuing operations increased $3.7 million, or 76.9 percent, increasing diluted earnings per share from continuing operations by $0.08; and

net income increased $4.6 million, or 132.6 percent, increasing diluted earnings per share by $0.11.
Commenting on the results, Richard K. Matros, chairman and chief executive officer of Sun, stated, "While we have completed only one quarter since the close of the Harborside acquisition, we are very pleased with the margin improvement we have realized thus far. The integration itself is going as expected. The synergies in the quarter of approximately $1.0 million are in line with our expectations for the quarter as are the integration costs. Both the synergies and integration costs will ramp up as we have previously stated in the next two quarters. We believe this acquisition has completed the transformation of the company’s asset base, thereby providing us with a platform from which we can generate respectable, organic growth on a go-forward basis."
Total net revenue for the six-month period ended June 30, 2007, was $720.2 million, up 40 percent compared to $515.2 million in the comparable period a year ago. Net income for the six-month period ended June 30, 2007, was $17.0 million compared to net income of $8.4 million for the comparable period one year ago, resulting in a 44 percent increase in diluted earnings per share to $0.39 from $0.27 a year ago (based on 43.761 million weighted-average shares outstanding at June 30, 2007). The pro forma information in the table below was prepared as if the Harborside acquisition had occurred on Jan.1, 2006. The information in the table also contains the normalizing adjustments described below.

Inpatient Business
For its core inpatient business, on a normalized pro forma basis (assuming the Harborside acquisition occurred at the beginning of the respective periods) comparing the quarter and six months ended June 30, 2007 to the same periods in 2006, Sun reported:

Quarter ended June 30, 2007 (pro forma):

revenue increased $23.0 million, or 6.1 percent, to $397.8 million from $374.8 million;

net segment EBITDAR increased $7.9 million, or 13.1 percent, to $68.1 million from $60.2 million;

net segment EBITDAR margin for 2007 was 17.1 percent compared to 16.1 percent in 2006;

net segment EBITDA increased $7.4 million, or 19.2 percent, to $46.1 million from $38.6 million;

net segment EBITDA margin for 2007 was 11.6 percent compared to 10.3 percent in 2006;

net segment income increased $10.5 million, or 43.3 percent, to $34.8 million from $24.3 million;

rehabilitation RUGS utilization increased 340 basis points to 82.4 percent as a percent of total Medicare days; and

Rehabilitation Extensive Service Days ("REX days") as a percent of total Medicare days increased 220 basis points to 37.2 percent.
The revenue gain of $23.0 million in the quarter was primarily attributable to:

a $7.5 million increase in Medicare Part A revenue principally due to increased SNF rates;

a $3.4 million increase in private revenue principally due to increased rates;

a $4.4 million increase in managed care/commercial insurance revenue due principally to higher customer base;

a $1.7 million increase in Medicare Part B revenue; and

a $6.0 million increase in Medicaid revenue resulting from a $7.0 million rate improvement which was partially offset by a $1.0 million decrease in Medicaid customer base.

Six months ended June 30, 2007 (pro forma):

revenue increased $43.6 million, or 5.8 percent, to $788.8 million from $745.3 million;

net segment EBITDAR increased $12.4 million, or 10.6 percent, to $129.5 million from $117.0 million;

net segment EBITDAR margin for 2007 was 16.4 percent compared to 15.7 percent in 2006;

net segment EBITDA increased $11.9 million, or 15.9 percent, to $86.4 million from $74.5 million;

net segment EBITDA margin for 2007 was 10.9 percent compared to 10.0 percent in 2006; and

net segment income increased $13.0 million, or 27.6 percent, to $60.1 million from $47.1 million.
Matros further stated, "A number of key metrics drove our inpatient margin expansion this quarter. While Medicare occupancy in our skilled nursing centers was down 10 basis points, inpatient occupancy was up 40 basis points on a pro forma basis to 89 percent. Medicare mix, as a percent of revenue in the company’s skilled nursing centers, increased 70 basis points driven by a continued increase in acuity as evidenced by our 7.8 percent increase in Medicare Part A revenue. Additionally, when we look at our skilled mix, which includes managed care and commercial insurance with Medicare, the improvement in the quarter is 160 basis points to 35.6 percent. REX days increased 220 basis points to 37.2 percent of total Medicare days and Rehab RUGS utilization increased 340 basis points to 82.4 percent of total Medicare days. The company’s Rehab Recovery Suites (RRS) show dramatic differences when looking at some of these same statistics. Medicare occupancy in those centers with RRS is 18.6 percent as compared to 15.8 percent on a consolidated SNF basis. For these same centers, RUGS extensive service days are 47.5 percent of total Medicare days and Rehab RUGS utilization is 89.8 percent."

Ancillary Businesses
For its ancillary businesses, on a pro forma basis (assuming the Harborside acquisition occurred at the beginning of the respective periods) comparing the quarter and six months ended June 30, 2007, to the same periods in 2006, Sun reported:

for the quarter, revenue increased $6.3 million, or 11.6 percent, to $60.3 million from $54.1 million;

for the quarter, EBITDA increased $0.8 million, or 23.5 percent, to $4.7 million from $3.8 million;

for the six-month period, revenue increased $10.3 million, or 9.6 percent, to $117.9 million from $107.5 million; and

for the six-month period, EBITDA increased $4.3 million, or 122.7 percent, to $7.8 million from $3.5 million.

Conference Call
      Sun’s senior management will hold a conference call to discuss the Company’s 2007 second-quarter operating results on Thursday, Aug. 2, 2007, at 1 p.m. EDT / 10 a.m. PDT. To listen to the conference call, dial (877) 516-8526 and refer to Sun Healthcare Group. A recording of the call will be available from 4 p.m. EDT on Aug. 2, 2007, until midnight EDT on Aug. 9, 2007, by calling (800) 642-1687 and using access code 6879959.

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 facilities 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 facilities; potential liability for losses not covered by, or in excess of, our insurance; the effects of government regulations and investigations; our ability to generate cash flow sufficient to operate our business and pay interest and other costs of the indebtedness incurred in our acquisition of Harborside Healthcare Corporation; our ability to integrate the operations of Harborside; 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 Form 10-K 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.