Fighting bankruptcy

Modern Healthcare

Julie Piotrowski

January 5, 2004

HealthSouth Corp. is not the only rehabilitation provider working to stave off bankruptcy protection. Sun Healthcare Group last week announced it would sell its rehabilitation businesses to post-acute competitor Beverly Enterprises for $34 million.

Beverly subsidiary Aegis Therapies would acquire the company's SunDance Rehabilitation Corp. and SunDance Rehabilitation Agency as part of Sun's ongoing corporate restructuring efforts. Sun emerged from Chapter 11 in February 2002 and said at the time it would operate as a smaller company focused on its core businesses of operating skilled-nursing, long-term-care and assisted-living facilities.

For Fort Smith, Ark.-based Beverly, the acquisition falls in line with the nursing home chain's strategic plan to grow the service side of its business, where capital expenditure requirements are lower and margins are higher. The deal is expected to close at the end of this month, pending customary regulatory approvals and approval by Beverly's board of directors.

``Adding SunDance Rehabilitation will accelerate the already dramatic growth of Aegis Therapies,'' William Floyd, Beverly's chairman, president and chief executive officer, said in a news release.

Aegis brought in roughly $235 million in revenue last year for Beverly, which operates 378 skilled-nursing facilities, 21 assisted-living centers and 23 hospice and home-care centers. Sun Healthcare has shed more than a hundred of its underperforming skilled nursing and other long-term-care facilities in the past year and now owns and operates 116 facilities, company spokeswoman Melissa Tommaso said. Because of skyrocketing liability insurance costs, Sun, like eldercare leaders Kindred Healthcare and Beverly, ended all of its business operations in Florida and Texas.

In its most recent quarterly report for the three months ended Sept. 30, 2003, Sun raised the possibility of a second bankruptcy filing and said it does not have adequate cash or sources of financing to meet its contractual obligations, including operating lease commitments associated with the facilities it is divesting. ``If we are unable to generate sufficient cash flows or obtain other financing, there is a substantial prospect that we, including our parent entity and/or one or more of our subsidiaries, would be required to seek protection under the U.S. Bankruptcy Code,'' the company said.

Tommaso said Sun has no plans to seek bankruptcy protection. ``The bankruptcy potential is not an option that they're pursuing right now,'' she said. ``But it's public disclosure to state that the potential is still there.''

In addition to restructuring its leases, Irvine, Calif.-based Sun completed the sale of its pharmaceutical services and software development operations in July and November respectively and is considering selling other ancillary businesses and assets, according to the quarterly report. The company said it also has ``intensified collection efforts'' on accounts receivable and is implementing more extensive efforts to reduce operating and overhead costs.

As part of its efforts, Sun paid restructuring costs of $4.1 million during the third quarter. For that period, Sun reported a net loss of $39.1 million on net revenue of $226.5 million.

Sun and its subsidiaries sought bankruptcy protection in October 1999, citing $2.1 billion in liabilities and $1.8 billion in assets. The company had lost $589 million on revenue of $601 million in the quarter ended June 30, 1999, and went on to divest nearly two-thirds of its U.S. operations and all of its international operations during reorganization.

Earlier this fall, Sun announced it had received $75 million of financing from CapitalSource Finance and other lenders. The credit facility increased Sun's liquidity by about $20 million. The company had previously been in default with various financial covenants.

``The financial covenants that were negotiated with CapitalSource are a more realistic set of requirements for the restructuring enterprise,'' Richard Matros, Sun's chairman and CEO, said in a news release. ``We are not through with our restructuring yet, but we are hopeful that with this new lending relationship, we move one step closer to successfully completing those efforts.''

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