Irvine, Calif. (Aug. 4, 2004) - Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced total net revenues of $212.7 million and net income of $7.3 million for the quarter ended June 30, 2004 (net income of $0.48 per share on a fully-diluted basis), compared with total net revenues of $203.9 million and a net loss of $11.6 million for the comparable quarter in 2003.
     The 2004 second-quarter net income included the reduction of $6.0 million of excess liability reserves for general and professional liability and workers’ compensation insurance. The reduction of excess reserves for general and professional liabilities was $2.5 million, comprised of $2.0 million related to continuing operations for the first six months of the current year, $0.1 million related to continuing operations for prior periods and $0.4 million related to discontinued operations for prior periods. The reduction of reserves relating to workers’ compensation insurance was $3.5 million, comprised of $1.0 million related to continuing operations for the first six months of the current year, $1.6 million related to continuing operations for prior periods and $0.9 million related to discontinued operations for prior periods. The 2004 second-quarter net income also included the forgiveness of $3.7 million of debt related to the refinancing of six inpatient facilities and a gain on discontinued operations of $1.7 million. The 2003 second-quarter net loss excluded $5.6 million for loss on discontinued operations, a $2.8 million gain related to discounted payments to trade vendors and the recovery of bankruptcy-related preference payments, and a $2.7 million gain on sale of assets.
     In July 2004, Sun commenced efforts to sell the portion of its laboratory and radiology operations located in California, which will be considered an asset held for sale in the third quarter of 2004. The California laboratory and radiology operations that Sun plans to sell contributed net revenues of $5.3 million and net operating losses of $3.6 million to Sun’s laboratory and radiology services segment for the second quarter of 2004. Those net revenues and net operating losses will be reclassified into discontinued operations for the third quarter of 2004.
     "The second quarter demonstrates continued improvement in the company’s financial performance year over year," said Richard K. Matros, chairman and chief executive officer. "Our operations show good progress and importantly, we have begun to show marked improvement in our workers’ compensation and general and professional liability costs sooner than anticipated."
     Sun reported net revenues of $421.7 million and a net loss of $3.1 million for the six months ended June 30, 2004, compared with total net revenues of $399.8 million and a net loss of $24.8 million for the comparable period in 2003. Net revenues and net losses for the California laboratory and radiology operations for the six months ended June 30, 2004, were $6.7 million and $8.8 million, respectively. The net loss for the first six months included the reduction of excess liability reserves for insurances and the forgiveness of debt as discussed above. The 2004 six-month net loss also included a gain on sale of assets of $0.4 million and a gain on discontinued operations of $0.2 million. The 2003 six-month net loss included $11.5 million for loss on discontinued operations, a $4.1 million gain related to discounted payments to trade vendors and the recovery of bankruptcy-related preference payments and a $3.0 million gain on sale of assets.

Operating Results

      Net revenues from the inpatient services operations, which comprised 69.8 percent of Sun’s total revenue from continuing operations for the quarter ended June 30, 2004, increased 7.9 percent from $137.6 million for the quarter ended June 30, 2003, to $148.5 million for the same period in 2004. The revenue gain primarily results from higher per diem rates in all payor categories and an increase in Medicare patients. EBITDAR for the continuing operations of inpatient services increased from $15.0 million for the quarter ended June 30, 2003, to $23.8 million for the same period in 2004.
      Sun’s net revenues from its continuing ancillary business operations, comprised of SunDance Rehabilitation Corporation, CareerStaff Unlimited, Inc., SunPlus Home Health Services, Inc., and Sun Alliance Healthcare Services, Inc., net of intersegment eliminations, decreased $2.1 million from $66.2 million for the quarter ended June 30, 2003, to $64.1 million for the same period in 2004. EBITDAR for those operations decreased over the same period from $8.1 million to $3.8 million. The decrease was primarily attributable to the California laboratory and radiology operations that Sun is seeking to sell.  

Second Quarter Highlights

     During the second quarter of 2004, Sun (i) divested two of its under-performing long-term care facilities, (ii) completed the restructure of the master lease of 33 facilities leased from Omega Healthcare Investors, Inc. (NYSE:OHI) and in that transaction converted approximately $7.8 million of rental obligations into 760,000 shares of its common stock plus a cash payment of $0.5 million, (iii) restructured $21.2 million of mortgage debt related to six facilities that became due in May 2004 as follows: $14.5 million was refinanced, $3.0 million was paid off, and $3.7 million was forgiven, and (iv) entered into option agreements that are exercisable in increments over a period of seven years to purchase nine entities that own nine facilities that it currently leases and operates in New Hampshire. Sun intends to divest five of its facilities and its California laboratory and radiology operations during 2004. Matros noted, "Although we are looking at opportunities to grow, the decision to sell our California laboratory and radiology business segment is the right decision for our company. After assessing the potential upside of this particular business unit, it simply is not enough to justify the investment in the continuing operations."

Conference Call

     Sun’s senior management will hold a conference call to discuss its second quarter operating results on Thursday, Aug. 5, 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 3 p.m. EDT on Aug. 5 until midnight EDT on Aug. 11 by calling (800) 642-1687 and using access code 8823401.

About Sun Healthcare Group, Inc.

      Sun Healthcare Group, Inc., with executive offices located 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 high-quality therapy through SunDance Rehabilitation Corporation, medical staffing through CareerStaff Unlimited, Inc., home care through SunPlus Home Health Services, Inc., and medical laboratory and mobile radiology services through SunAlliance Healthcare Services, Inc.