Irvine, Calif. (Nov. 2, 2004) - Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced total net revenues of $204.5 million and net income of $0.8 million for the quarter ended Sept. 30, 2004 (net income of $0.05 per share on a fully diluted basis), compared with total net revenues of $203.4 million and net income of $39.1 million for the comparable quarter in 2003.
     The 2004 third-quarter net income from continuing operations was $7.7 million as compared to a net loss of $12.0 million from continuing operations for the same period in 2003. The 2004 third-quarter net income was positively impacted by $10.1 million of net adjustments, which was comprised of (i) an $11.9 million gain recorded as a cumulative effect of a change in accounting principle as a result of the consolidation of nine entities, as described below, (ii) a $1.5 million loss on sale of assets related primarily to the write-down of land and buildings held for sale, and (iii) a $0.3 million charge for restructuring costs. The 2003 third-quarter net loss included (i) a $4.1 million charge for restructuring costs, and (ii) a $0.7 million loss on sale of assets. The 2004 third-quarter EBITDAR for continuing operations was $12.6 million as compared to $8.8 million for continuing operations for the same period in 2003.
      As a result of the previously reported option agreements to purchase nine entities that collectively own nine facilities that the Company currently leases and operates in New Hampshire, Sun is required to consolidate those nine entities pursuant to FASB Interpretation No. 46 ("FIN 46"). The Company’s consolidated assets and liabilities will increase by approximately $54.2 million and $41.2 million, respectively, based upon the fair value of the assets and liabilities of those nine entities as of Sept. 30, 2004. "Overall, the consolidation of the nine entities favorably impacts our financial statements," said Richard K. Matros, chairman and chief executive officer. "The consolidation resulted in a $13.1 million improvement in the balance sheet and a recurring positive quarterly EBITDA impact of approximately $0.8 million. Depreciation and interest charges associated with those nine entities totaled $1.3 million, which resulted in a quarterly net loss of approximately $0.5 million for those nine entities."
     On Nov. 1, 2004, Sun sold its clinical laboratory and radiology operations located in California for $0.5 million cash and a $2.8 million promissory note. Those operations contributed net revenues of $5.0 million and net operating losses of $3.0 million in the third-quarter of 2004. Net revenues and net losses for the nine months ended Sept. 30, 2004, for those operations were $11.6 million and $11.5 million, respectively. Net revenues and net operating losses for the three and nine month periods were reported as discontinued operations.
     On Nov. 1, 2004, Sun acquired a small home healthcare agency in southern California that will improve the Company’s market strength in that geographic area.
     Sun reported net revenues of $619.6 million and a net loss of $2.4 million for the nine months ended Sept. 30, 2004, compared with total net revenues of $592.2 million and a net income of $14.3 million for the comparable period in 2003.
     The net income from continuing operations for the nine months ended Sept. 30, 2004 was $12.8 million as compared to a net loss of $25.6 million from continuing operations for the same period in 2003. The 2004 nine-month net income was positively impacted by $12.8 million of net adjustments, which was comprised of (i) an $11.9 million gain recorded as a cumulative effect of a change in accounting principle as a result of the consolidation of nine entities as described above, (ii) a $3.7 million forgiveness of debt related to the refinancing of six inpatient facilities, (iii) a $1.6 million charge for restructuring, and (iv) a $1.2 million loss related primarily to the write-down of land and buildings held for sale. The 2003 nine-month net loss included a $10.0 million charge for restructuring costs, offset by a $2.2 million gain on sale of assets. The EBITDAR for continuing operations for the nine months ended Sept. 30, 2004, was $45.1 million as compared to $32.6 million for the same period in 2003.

Operating Results
      Net revenues from the inpatient services operations, which comprised 72.4 percent of Sun’s total revenue from continuing operations for the quarter ended Sept. 30, 2004, increased 5.9 percent from $139.6 million for the quarter ended Sept. 30, 2003, to $147.8 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 8.6% from $15.1 million for the quarter ended Sept. 30, 2003, to $16.4 million for the same period in 2004.
      Sun’s net revenues from its continuing ancillary business operations, comprised primarily of SunDance Rehabilitation Corporation, CareerStaff Unlimited, Inc., SunPlus Home Health Services, Inc., and SunAlliance Healthcare Services, Inc., net of intersegment eliminations, decreased $7.2 million from $63.7 million for the quarter ended Sept. 30, 2003, to $56.5 million for the same period in 2004. EBITDAR for those operations decreased over the same period from $5.5 million to $4.5 million.
     "We are pleased with the performance in our largest and core segment of inpatient services operations. We continue to make improvements in that segment," said Matros. "In addition, we have increased our focus on our ancillary operations and believe that we have identified and are addressing the operational issues affecting those businesses, particularly SunDance and CareerStaff. Our rehabilitation therapy services are showing strong signs of recovery from disruptions related to the previously contemplated sale of SunDance. Effective Nov. 1, 2004, we hired a new president, Rick Peranton, for the CareerStaff operations and we expect to see gradual improvement in that segment. Overall, we believe we have a business strategy that will continue to improve operationally and provide opportunities for growth organically and via acquisition."

Earnings Guidance for 2004
      For the year ended Dec. 31, 2004, Sun expects that its total revenues from continuing operations will remain at approximately $840.0 million to $850.0 million due to the sale of the California clinical laboratory and radiology operations. EBITDAR from continuing operations is expected to increase to approximately $58.0 million to $62.0 million as compared to the $50.0 million to $55.0 million given previously. EBITDA from continuing operations is expected to increase to approximately $18.0 million to $20.0 million as compared to the $8.0 million to $10.0 million given previously. Company guidance for net earnings is impacted by higher than expected losses from its California clinical laboratory and radiology operations, which were sold on Nov. 1, 2004, and the addition of $2.6 million of depreciation and interest charges for the last two quarters of the year related to the FIN 46 consolidation. Taking these into consideration, the actual net loss could be $7.0 million to $5.0 million as compared to the $5.0 million to $3.0 million given previously. This guidance assumes, among other things, no acquisitions, a stable reimbursement environment and the divestiture of the remaining three long-term care facilities by year-end. Weighted shares outstanding for the year are expected to be 14.5 million. "We are pleased that our EBITDAR and EBITDA guidance for 2004 is stronger than initially expected as we have improved more quickly than we anticipated," said Matros.

Conference Call
      Sun’s senior management will hold a conference call to discuss its third-quarter operating results on Thursday, Nov. 4, 2004, at 1 p.m. EST/ 10 a.m. PST. 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. EST on Nov. 4, 2004, until midnight EST on Nov. 10, 2004, by calling (800) 642-1687 and using access code 1609127.

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 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.