EX-99.2 3 ex992.htm EXHIBIT 99.2 Exhibit 99.2
EXHIBIT 99.2

UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
 
Introduction
 

The following tables present unaudited pro forma consolidated financial information of Sun Healthcare Group, Inc. (“Sun”) as of and for the year ended December 31, 2006.
 
The unaudited pro forma consolidated financial information relates to the following transactions:
 
1. the proposed acquisition of Harborside Healthcare Corporation (“Harborside”);
 
2. entering into new credit facilities, the issuance of senior subordinated notes and the refinancing of outstanding indebtedness of Sun and of Harborside (collectively, the “Acquisition Financing Transactions”), all in connection with the acquisition of Harborside; and
 
3. various acquisitions and proposed acquisitions made or to be made by Harborside (collectively, the “Harborside Transactions”), consisting of (a) the purchase of a 75% interest in Physicians Homecare, a Massachusetts home health provider, for $5.0 million (the “PHC Acquisition”), on May 1, 2006; (b) the purchase of three facilities in Connecticut, two on August 1, 2006 and one on November 1, 2006, for a total purchase price of $25.9 million (the “Connecticut Acquisition”); (c) the purchase of eleven facilities in Kentucky on October 1, 2006 for a total purchase price of $49.1 million (the “Kentucky Acquisition”); (d) the proposed acquisition of the real estate underlying five facilities in Connecticut (the “Moffie Portfolio”) that are currently leased and operated by Harborside for a net purchase price of $61.7 million, pursuant to the exercise of a purchase option, which is expected to close in the second quarter of 2007; and (e) the proposed acquisition of the real estate underlying four facilities in Massachusetts (the “NHP Portfolio”) that are currently leased and operated by Harborside for a net purchase price of $20.6 million, pursuant to the exercise of a purchase option, which is expected to close in the fourth quarter of 2007.
 
The unaudited pro forma consolidated balance sheet as of December 31, 2006 gives effect to the Harborside acquisition, the Acquisition Financing Transactions and the acquisition of the Moffie Portfolio and the NHP Portfolio as if they had occurred on December 31, 2006. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2006 gives effect to the Harborside acquisition, the Acquisition Financing Transactions and all the Harborside Transactions as if they had occurred on January 1, 2006.
 
Sun and Harborside have had no intercompany activity that would require elimination in preparing the unaudited pro forma consolidated financial information.
 
The unaudited pro forma consolidated financial information was prepared using the purchase method of accounting for the Harborside Transactions and the Harborside acquisition. The pro forma adjustments and the resulting unaudited pro forma consolidated financial statements were prepared based on available information and certain assumptions and estimates described in the notes to the unaudited pro forma consolidated financial information. The cost of Harborside, including the Harborside Transactions, has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values as of the expected date of acquisition. Any differences between the fair value of the consideration paid and the fair value of the assets
1
acquired and liabilities assumed will be recorded as goodwill. The amounts allocated to acquired assets and assumed liabilities in the unaudited pro forma balance sheet are based on these preliminary estimates. Accordingly, the pro forma purchase price allocation adjustments are preliminary and are subject to revision based on a final determination of fair value after closing the acquisition. The preliminary allocation has been made solely for the purpose of providing unaudited pro forma consolidated financial information.
 
The unaudited pro forma consolidated financial statements do not purport to represent what our financial position or results of operations would have been had the acquisition of Harborside occurred on the date indicated or to project our financial position or results of operations for any future period. Furthermore, the unaudited pro forma consolidated financial statements do not reflect changes which may occur as a result of activities after the acquisition of Harborside closes. The unaudited pro forma financial statements should be read in conjunction with Harborside’s consolidated financial statements and related notes filed with the Securities and Exchange Commission (the SEC) in a Form 8-K on March 12, 2007, and our financial statements filed with the SEC in our annual report on Form 10-K for the year ended December 31, 2006.
2
Unaudited Pro Forma Consolidated Balance Sheet
As of December 31, 2006
(in thousands)

            
 (3)
           
Pro Forma
  
   
 
As Reported
  
As Reported
  
 
Harborside
  
 
Transaction
      
Combined
Sun and
  
   
Sun
  
 Harborside
  
 Transactions
  
 Adjustments
      
Harborside
  
Assets:
                                      
   Cash and cash equivalents
  
$
131,935
  
$
21,919
  
$
-
  
$
545,000
    
(5a
)
$
9,604
  
                       
(326,063
)
  
(5a
)
      
                       
(363,187
)
  
(5a
)
      
   Accounts receivables, net
    
117,091
    
74,141
    
-
    
-
          
191,232
  
   Inventories, net
    
4,808
    
-
    
-
    
1,375
    
(4a
)
  
7,379
  
                       
1,196
    
(4b
)
      
   Other receivables, net
   
2,211
    
-
    
-
    
5,568
    
(4a
)
  
7,779
  
   Assets held for sale
    
7,172
    
-
    
-
    
-
          
7,172
  
   Restricted cash, current
    
32,752
    
-
    
-
    
-
          
32,752
  
   Prepaid expenses
    
3,305
    
28,015
    
-
    
(7,433
)
  
(4a
)
  
23,887
  
   Deferred income taxes
    
-
    
20,511
    
-
    
(20,511
)
  
(4h
)
  
-
  
               Total current assets
    
299,274
    
144,586
    
-
    
(164,055
)
        
279,805
  
                                       
   Property and equipment, net
    
217,544
    
289,483
    
81,940
    
-
          
588,967
  
   Intangible assets, net
    
10,398
    
-
    
-
    
2,120
    
(4c
)
  
12,518
  
   Goodwill
    
55,092
    
6,494
    
7,860
    
(14,354
)
  
(4d
)
  
341,538
  
                       
286,446
    
(4e
)
      
   Restricted cash, non-current
    
29,083
    
7,940
    
-
    
-
          
37,023
  
   Notes receivable, net
    
577
    
7,487
    
(7,487
)
  
-
          
577
  
   Deferred financing fees, net
    
3,293
    
8,465
    
-
    
16,213
    
(5a
)
  
22,845
  
                       
(5,126
)
  
(5b
)
      
   Other assets, net
   
6,162
    
-
    
-
    
490
    
(4a
)
  
6,652
  
                                       
               Total assets
  
$
621,423
  
$
464,455
  
$
82,313
  
$
121,734
        
$
1,289,925
  
3
Unaudited Pro Forma Consolidated Balance Sheet (Continued)
As of December 31, 2006
(in thousands)

            
 (3)
           
Pro Forma
  
   
 
As Reported
  
 
As Reported
  
 
Harborside
  
 
Transaction
      
Combined
Sun and
  
   
Sun
  
 Harborside
  
 Transactions
  
 Adjustments
      
Harborside
  
Liabilities:
                                      
   Accounts payable
  
$
43,400
  
$
27,989
  
$
-
  
$
-
        
$
71,389
  
   Accrued compensation and benefits
    
42,723
    
28,243
    
-
    
-
          
70,966
  
   Accrued self-insurance obligations,
                                      
      current portion
    
48,689
    
12,872
    
-
    
-
          
61,561
  
   Income taxes payable
    
8,799
    
223
    
-
    
-
          
9,022
  
   Other accrued liabilities
    
33,736
    
13,599
    
-
    
7,229
    
(5c
)
  
54,711
  
   
 
    
 
    
 
    
147
    
(4a
)
      
   Liabilities held for sale
    
1,672
    
-
    
-
    
-
          
1,672
  
   Current portion of deferred income
    
-
    
147
    
-
    
(147
)
  
(4a
)
  
-
  
   Current portion of long-term debt
    
23,516
    
5,881
    
-
    
(20,003
)
  
(5a
)
  
9,394
  
   Current portion of capital leases
    
494
    
-
    
-
    
-
          
494
  
               Total current liabilities
    
203,029
    
88,954
    
-
    
(12,774
)
        
279,209
  
                                       
   Accrued self-insurance obligations,
                                      
      net of current portion
    
81,559
    
18,748
    
-
    
-
          
100,307
  
   Long-term capital leases, net of current
    
696
    
-
    
-
    
-
          
696
  
   Long-term debt, net of current
    
149,459
    
235,063
    
30,033
    
(237,567
)
  
(5a
)
  
176,988
  
   Senior term loan
    
-
    
-
    
-
    
290,000
    
(5a
)
  
290,000
  
   Senior term loan - delay draw
    
-
    
-
    
52,280
    
2,720
    
(5a
)
  
55,000
  
   Senior subordinated notes
    
-
    
-
    
-
    
200,000
    
(5a
)
  
200,000
  
   Unfavorable lease obligations
    
13,423
    
-
    
-
    
1,549
    
(4a
)
  
14,972
  
   Long-term portion of deferred income
    
-
    
1,549
    
-
    
(1,549
)
  
(4a
)
  
-
  
   Deferred income taxes
    
2,412
    
24,220
    
-
    
(24,220
)
  
(4h
)
  
2,412
  
   Other long-term liabilities
    
26,712
    
-
    
-
    
-
          
26,712
  
   Redeemable preferred stock
    
-
    
60,239
    
-
    
(60,239
)
  
(4d
)
  
-
  
               Total liabilities
    
477,290
    
428,773
    
82,313
    
157,920
          
1,146,296
  
                                       
   Minority interest
    
-
    
370
    
-
    
-
          
370
  
                                       
Stockholders' equity:
                                      
   Common stock
    
429
    
156
    
-
    
(156
)
  
(4d
)
  
429
  
   Additional paid-in capital
    
553,275
    
181,506
    
-
    
(181,506
)
  
(4d
)
  
553,275
  
   Retained earnings (deficit)
    
(409,480
)
  
37,396
    
-
    
(37,396
)
  
(4d
)
  
(410,354
)
 
                      
(874
)
  
(5b
)
      
     
144,224
    
219,058
    
-
    
(219,932
)
        
143,350
  
   Less:
                                      
      Treasury stock
    
(91
)
  
(183,746
)
  
-
    
183,746
    
(4d
)
  
(91
)
      Total stockholders' equity
   
144,133
    
35,312
    
-
    
(36,186
)
        
143,259
  
           Total liabilities and stockholders'
                                      
               equity
  
$
621,423
  
$
464,455
  
$
82,313
  
$
121,734
        
$
1,289,925
  


See Notes to Unaudited Pro Forma Consolidated Financial Information
4
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2006
(in thousands, except per share data)

           
 (3)
          
 Pro Forma
  
                       
 Combined
  
 
As Reported
Sun
  
 As Reported Harborside
  
 Harborside Transactions
  
 Transaction Adjustments
    
Sun and Harborside
  
                                       
Total net revenues
  
$
1,045,637
  
$
592,830
  
$
60,205
  
$
166
    
(4a
)
$
1,698,838
  
Costs and expenses:
                                      
   Operating salaries and benefits
    
598,516
    
-
    
35,623
    
326,905
    
(4a
)
  
952,372
  
                       
(8,672
)
  
(4f
)
      
   Self-insurance for workers’ compensation
                
      and general and professional liability
                                      
      insurance
    
32,694
    
-
    
642
    
11,945
    
(4a
)
  
45,281
  
   Operating administrative expenses
    
27,986
    
-
    
-
    
-
          
27,986
  
   Other operating costs
    
218,789
    
485,275
    
16,452
    
(348,208
)
  
(4a
)
  
372,308
  
   Facility rent expense
    
56,734
    
28,590
    
(9,746
)
  
(1,494
)
  
(4a
)
  
73,117
  
                       
196
    
(4c
)
      
                       
(1,163
)
  
(4f
)
      
   General and administrative expenses
    
49,856
    
26,832
    
-
    
1,431
    
(4a
)
  
78,119
  
   Depreciation and amortization
    
14,866
    
18,240
    
5,192
    
(1,714
)
  
(4a
)
  
36,584
  
   Provision for losses on accounts receivable
11,124
    
-
    
40
    
9,587
    
(4a
)
  
20,751
  
   Interest, net
    
18,506
    
14,466
    
8,019
    
19,528
    
(5d
)
  
62,298
  
                       
1,714
    
(4a
)
      
                       
(2,134
)
  
(5b
)
      
                       
2,199
    
(5a
)
      
   Management fee
    
-
    
600
    
1,456
    
(600
)
  
(4g
)
  
1,456
  
   Diligence costs
    
-
    
2,554
    
-
    
(2,554
)
  
(4g
)
  
-
  
   Minority interest
    
-
    
287
    
-
    
-
          
287
  
   Loss on contract termination
    
975
    
-
    
-
    
-
          
975
  
   Loss on sale of assets, net
    
172
    
-
    
-
    
-
          
172
  
Total costs and expenses
    
1,030,218
    
576,844
    
57,678
    
6,966
          
1,671,706
  
                                       
Income (loss) before income taxes and
                                      
   discontinued operations
    
15,419
    
15,986
    
2,527
    
(6,800
)
        
27,132
  
Income tax expense (benefit)
    
731
    
4,459
    
-
    
(2,014
)
  
(4i
)
  
3,176
  
Income (loss) from continuing operations
  
$
14,688
  
$
11,527
  
$
2,527
  
$
(4,786
)
      
$
23,956
  
                                       
Basic and diluted earnings per common and
                
   common equivalent share:
                                      
   Income from continuing operations
  
$
0.46
                          
$
0.56
  
                                       
Weighted average number of common and
                      
   Common equivalent shares outstanding:
                        
   Basic
    
31,638
                
11,153
    
(4j
)
  
42,791
  
   Diluted
    
31,788
                
11,153
    
(4j
)
  
42,941
  
                                       
 
See Notes to Unaudited Pro Forma Consolidated Financial Information
5
Notes to Unaudited Pro Forma Consolidated Financial Information

1.  Basis of Pro Forma Presentation

          On October 19, 2006, Sun announced that it entered into a definitive agreement to acquire Harborside in a transaction in which Sun would pay approximately $349 million in cash for all of Harborside’s outstanding stock and to refinance or assume Harborside’s debt of approximately $241 million.

2.  Preliminary Purchase Price

          The estimated purchase price of the proposed acquisition of Harborside is as follows assuming the transaction closed on December 31, 2006 and after including indebtedness incurred since such date for certain acquisitions and expected to be incurred prior to closing to acquire certain facilities that are currently leased by Harborside (in thousands):

 
Cash
  
$
349,400
        
 
Assumption of Harborside debt obligations, net of cash acquired
   
301,338
  (a)  
 
 
 
Estimated direct transaction costs
    
21,016
        
 
Total
  
$
671,754
        

(a)      Includes $240,944 of Harborside debt as of December 31, 2006 and also includes debt to be incurred in connection with the following transactions, which are expected to occur subsequent to the closing of the acquisition of Harborside: (i) the acquisition of the Moffie Portfolio for $61,713 as of December 31, 2006; (ii) the acquisition of the NHP Portfolio for $20,600 as of December 31, 2006; less (iii) cash acquired of $21,919 from Harborside as of December 31, 2006.
      
         Under the purchase method of accounting, the total estimated purchase price as shown in the table above will be allocated to Harborside's net tangible and intangible assets based upon their estimated fair values as of the date of completion of the proposed transaction. Any excess of the purchase price over the estimated fair value of the net tangible and intangible assets will be recorded as goodwill.

          Based upon the estimated purchase price and assumptions regarding valuations of acquired assets and assumed liabilities (including those acquired in connection with the Harborside Transactions), the preliminary purchase price allocation, which may change based upon the completion of valuations to be performed by a third party valuation firm and an independent actuary, is as follows (in thousands):

Net working capital
$
  19,789
  
Property and equipment
  
371,423
  
Other long-term assets
  
12,643
  
Identified intangibles
  
2,120
  
Goodwill
  
286,446
  
Other long-term liabilities
  
(20,297
)
Minority interest
  
(370
)
Total
 $
671,754
  
6
          The depreciation and amortization related to the fair value adjustments are reflected as pro forma adjustments to the unaudited pro forma consolidated financial statements.

          Goodwill represents the excess of the purchase price over the fair market value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill will not be amortized and will be tested for impairment on an annual basis and whenever events or circumstances occur indicating that the goodwill may be impaired. The preliminary purchase price allocation for Harborside is subject to revision as a more detailed analysis is completed, including the completion of valuations to be performed by a third party valuation firm and an independent actuary, and additional information on the fair values of Harborside's assets and liabilities becomes available. Any change in the fair value of the assets or liabilities of Harborside will change the amount of the purchase price allocable to goodwill. The final purchase price allocation may differ materially from the allocation presented here.

3.  Harborside Transactions

          The following unaudited pro forma consolidated financial information includes historical results and related pro forma adjustments (including purchase accounting) to include facilities acquired by Harborside in 2006 or to be acquired by Harborside in 2007, that were not included in its historical results as of the date or for the entire period presented, as follows (in thousands):

Assets to be Acquired, Adjusted for Purchase Accounting and Related Debt
As of December 31, 2006

   
(d)
  
 (e)
       
                 
   
Moffie
  
 NHP
  
 Harborside
  
   
Portfolio
  
 Portfolio
  
 Transactions
  
Fair Value of Assets and Liabilities to be Acquired:
                    
   Property and equipment
  
$
63,552
  
$
18,388
  
$
81,940
  
   Goodwill
    
5,648
    
2,212
    
7,860
  
   Notes payable to Harborside from Moffie
    
(7,487
)
  
-
    
(7,487
)
   Long-term debt
    
61,713
    
20,600
    
82,313
  
                     
7
Harborside Transactions
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2006
(in thousands)

   
(a)
  
 (b)
  
 (c)
  
 (d)
  
 (e)
  
 (f)
       
                           
 Harborside
       
   
PHC
  
 KY
 
 CT
 
 Moffie
  
 NHP
  
 Transaction
  
 Harborside
  
   
Acquisition
  
 Acquisition
  
 Acquisition
  
 Portfolio
  
 Portfolio
  
 Adjustments
  
 Transactions
  
                                             
Total net revenues
  
$
2,035
  
$
27,569
  
$
30,601
  
$
-
  
$
-
  
$
-
  
$
60,205
  
Costs and expenses:
                                            
   Operating salaries and benefits
    
1,611
    
13,167
    
20,845
    
-
    
-
    
-
    
35,623
  
   Self-insurance for workers’ compensation              
                
      and general and professional liability        
                            
      Insurance
    
36
    
428
    
178
    
-
    
-
    
-
    
642
  
   Other operating costs
    
322
    
8,182
    
7,948
    
-
    
-
    
-
    
16,452
  
   Facility rent expense
    
69
    
2,016
    
85
    
(7,700
)
  
(2,200
)
  
(2,016
)
  
(9,746
)
   Depreciation and amortization
    
7
    
395
    
1,404
    
2,773
    
613
    
-
    
5,192
  
   Provision for losses on accounts receivable  
40
    
-
    
-
    
-
    
-
    
-
    
40
  
   Interest, net
    
144
    
310
    
864
    
5,185
    
1,516
    
-
    
8,019
  
   Management fee
    
-
    
1,257
    
199
    
-
    
-
    
-
    
1,456
  
Total costs and expenses
    
2,229
    
25,755
    
31,523
    
258
    
(71
)
  
(2,016
)
  
57,678
  
                                             
Income before income taxes and  
                                        
   discontinued operations
  
$
(194
)
$
1,814
  
$
(922
)
$
(258
)
$
71
  
$
2,016
  
$
2,527
  
8
(a)
Reflects pre-acquisition unaudited historical results of operations for the PHC Acquisition for the four months ended April 30, 2006 (as the eight months ended December 31, 2006 are already included in Harborside’s as reported results).
   
(b)
Reflects pre-acquisition unaudited historical results of operations for the Kentucky Acquisition for the nine months ended September 30, 2006 (as the three months ended December 31, 2006 are already included in Harborside’s as reported results).
   
(c)
Reflects pre-acquisition unaudited historical results of operations for the Connecticut Acquisition for the seven months ended June 30, 2006 (as the five months ended December 31, 2006 are already included in Harborside’s as reported results).
 
On August 1, 2006, Harborside acquired two of the three facilities in the Connecticut Acquisition for $18,925 and commenced management of the third facility until the acquisition of such facility by Harborside on November 1, 2006 for $6,975.
   
(d)
The adjustments on the pro forma balance sheet to the assets to be acquired, adjusted for purchase accounting and related debt reflect purchase accounting adjustments for the acquisition of the Moffie Portfolio for $61,713 as if it had been acquired on December 31, 2006.
 
The adjustments to the unaudited pro forma combined statement of operations reflect the impact of the acquisition of the Moffie Portfolio (converting from leased to owned properties) as if it had occurred on January 1, 2006.
   
(e)
The adjustments on the pro forma balance sheet to the assets to be acquired, adjusted for purchase accounting and related debt reflect purchase accounting adjustments for the acquisition of the NHP Portfolio for $20,600 as if it had been acquired on December 31, 2006.
 
The adjustments to the unaudited pro forma combined statement of operations reflect the impact of the acquisition of the NHP Portfolio (converting from leased to owned properties) as if it had occurred on January 1, 2006.
   
(f)
Reflects with respect to the 2006 Kentucky Acquisition, the elimination of rent expense as Harborside acquired ownership of the properties in connection with such transaction.

4.  Transaction Adjustments

          Pro forma transaction adjustments are necessary to reflect the estimated purchase price, to adjust amounts related to Harborside's assets and liabilities to a preliminary estimate of their fair values, and to reflect other transactions directly related to the proposed transaction.

          The accompanying unaudited pro forma consolidated financial statements reflect the following pro forma adjustments (in thousands):

(a)
To reclassify Harborside’s financial statement presentation to conform to Sun’s financial statement presentation:
9
Unaudited Selected Reclassified Consolidated Balance Sheet
As of December 31, 2006

   
As Reported
  
Reclassification
  
As Reclassified
      
   
 Harborside 
  
   Entries   
  
  Harborside  
      
   
(in thousands)
  
Assets:
                          
   Inventories, net
  
$
-
  
$
1,375
  
$
1,375
        
   Other receivables, net
    
-
    
5,568
    
5,568
        
   Prepaid expenses
    
28,015
    
(7,433
)
  
20,582
        
         Total reclassified current assets
    
28,015
    
(490
)
  
27,525
        
                           
   Other assets, net
    
-
    
490
    
490
        
         Total reclassified long-term assets
    
-
    
490
    
490
        
                           
         Total reclassified assets
  
$
28,015
  
$
-
  
$
28,015
        
                           
Liabilities:
                          
   Other accrued liabilities
  
$
13,599
  
$
147
  
$
13,746
        
   Current portion of deferred income
    
147
    
(147
)
  
-
        
         Total reclassified current liabilities
    
13,746
    
-
    
13,746
        
                           
Unfavorable lease obligations
    
-
    
1,549
    
1,549
        
Long-term portion of deferred income
    
1,549
    
(1,549
)
  
-
        
         Total reclassified long-term liabilities
    
1,549
    
-
    
1,549
        
                           
         Total reclassified liabilities
  
$
15,295
  
$
-
  
$
15,295
        
 
 
Unaudited Reclassified Consolidated Statement of Operations
For the Year Ended December 31, 2006

   
As Reported
  
Reclassification
  
As Reclassified
  
   
      Harborside     
  
   Entries   
  
      Harborside    
  
 
  
(in thousands)
                     
Total net revenues
  
$
592,830
  
$
166
  
$
592,996
  
Costs and expenses:
                    
   Operating salaries and benefits
    
-
    
326,905
    
326,905
  
   Self-insurance for workers' compensation and
      general and professional liability insurance
    
-
    
11,945
    
11,945
  
   Other operating costs
    
485,275
    
(348,208
)
  
137,067
  
   Facility rent expense
    
28,590
    
(1,494
)
  
27,096
  
   General and administrative expenses
    
26,832
    
1,431
    
28,263
  
   Depreciation and amortization
    
18,240
    
(1,714
)
  
16,526
  
   Provision for losses on accounts receivable
    
-
    
9,587
    
9,587
  
   Interest, net
    
14,466
    
1,714
    
16,180
  
   Management fee
    
600
    
-
    
600
  
   Diligence costs
    
2,554
    
-
    
2,554
  
   Minority interest
    
287
    
-
    
287
  
Total costs and expenses
    
576,844
    
166
    
577,010
  
                     
Income before income taxes and discontinued
                    
   operations
    
15,986
    
-
    
15,986
  
Income tax
    
4,459
    
-
    
4,459
  
Income from continuing operations
  
$
11,527
  
$
-
  
$
11,527
  
10
(b)
To increase Harborside’s inventory balance by $1,196 to conform to Sun’s accounting treatment. This adjustment will be a non-recurring charge to Sun’s statement of operations after completion of the proposed transaction.

(c)
In the pro forma balance sheet as of December 31, 2006, to record the preliminary purchase price allocation to other intangible assets of $2,120 and related amortization expense.

   
Finite-
Lived
  
Infinite-
Lived
  
Total
  
Favorable lease intangibles
(average 7 year-life)
  
$
1,370
  
$
-
  
$
1,370
  
Certificates of need / licenses
    
-
   
750
    
750
  
   
$
1,370
  
$
750
  
$
2,120
  

 
In the pro forma statement of operations for the year ended December 31, 2006, to adjust facility rent expenses for the amortization of favorable lease intangibles of $196.

(d)
To record the amounts representing the elimination of Harborside’s goodwill, redeemable preferred stock and stockholder’s equity and the elimination of goodwill attributable to the Harborside Transactions.

(e)
To record the allocation of $286,446 of excess purchase price of Harborside over its recorded assets and liabilities, as required under purchase accounting rules.

(f)
To adjust operating salaries and benefits in the year ended December 31, 2006 for estimated net decreases in operating expenses. Positions at Harborside’s corporate office and certain regional positions will be eliminated for an estimated annual net savings of approximately $8,672. Additional annual savings of $1,163 are expected to be realized through termination or transfer of Harborside’s corporate office lease. Sun may be unable to fully realize these estimated net cost savings. 

(g)
To eliminate the management fee paid to Investcorp by Harborside of $600 in addition to the diligence costs incurred by Harborside of $2,554 in connection with this acquisition.

(h)
Elimination of Harborside's deferred tax assets and liabilities as Sun has fully reserved its net deferred tax assets as of December 31, 2006 due to the uncertainty of their realization.  None of the goodwill arising from the acquisition of Harborside is deductible for tax purposes.

(i)
To record a reduction of $2,014 in the tax provision, which resulted in a pro forma effective tax rate of 11.7%.  This pro forma effective tax rate was lower than the expected 40% combined federal and state tax rate primarily due to the realization of post-emergence deferred tax assets of Sun, for which no benefit was previously recorded.  Using an effective tax rate of 40%, the pro forma tax expense would have been $10,853.

(j)
Shares used to calculate unaudited pro forma income from continuing operations per basic and diluted shares were calculated by adding 11,500 shares of Common Stock assumed to be issued on January 1, 2006, of which 347 were already included in Sun’s as reported basic and diluted shares outstanding as of December 31, 2006.
11
5.  Acquisition Financing Adjustments

     Certain pro forma adjustments have been made to reflect financing transactions associated with the proposed transaction. Sun currently anticipates entering into the financing transactions to acquire Harborside and refinance the outstanding balance on Harborside's existing credit facility (in thousands):

(a)
To record the payments to be made from the proceeds of the new indebtedness:

Sources:
                
                   
Borrowings:
                  
Senior term loan
        
$
290,000
      
Delayed draw senior term loan
          
55,000
(1)
  
 
Senior revolving loan
          
-
      
Senior subordinated notes
          
200,000
      
           
545,000
      
Cash:
                  
Existing cash at Harborside
          
21,919
      
Existing cash at Sun
          
122,331
      
           
144,250
      
                   
     Subtotal
          
689,250
      
                   
Uses:
                  
Refinance existing debt - Sun
  
$
38,749
(2)
          
Refinance existing debt - Harborside
    
218,821
            
Cash payment for Moffie equity, net
    
31,680
            
Cash payment for NHP equity, net
    
20,600
            
Financing fees
   
16,213
(3)
          
     Subtotal
    
326,063
    
(326,063
)
    
           
363,187
      
Remaining funds available for Harborside
merger:
                  
Cash payment for Harborside equity
    
349,400
            
Estimated direct transaction costs
    
13,787
    
(363,187
)
    
   
$
689,250
  
$
-
      

(1)
Includes borrowing of $31,680 (which is in addition to the $30,033 of indebtedness being assumed) to purchase Moffie Portfolio, $20,600 to purchase NHP Portfolio and the remaining of $2,720 to purchase Harborside.
   
(2)
Refinanced Sun debt includes $20,003 of current portion of long term debt and $18,746 of long term debt.
   
(3)
Financing fees include $8,838 related to the revolving credit facility with a term of six years and the senior term loan with a term of 7 years, and $7,375 related to the senior subordinated notes with a term of 8 years. Such fees would be amortized and included as part of interest expense in the amount of $2,199 for the pro forma statement of operations for the year ended December 31, 2006.
12
(b)
To reflect the non-cash write-off of deferred loan costs associated with the refinancing of existing indebtedness of both Sun and Harborside and to record the related reduction in interest expense of $2,134 for the amounts that had been amortized for the year ended December 31, 2006. See Note 5(a) for deferred loan costs associated with new indebtedness. Elimination of Harborside deferred loan costs impacts the preliminary purchase price allocation and calculation of goodwill.

Sun
$
874
 
Harborside
  
4,252
  
 
 $
5,126
  

(c)
Direct transaction costs of $21,016 primarily include estimated investment banking fees, legal fees, accounting fees, and estimated severance costs for Harborside, of which $13,787 will be paid at closing and $7,229 will be accrued.

(d)
To record pro forma interest expense based upon an assumed debt structure as follows:


   
 Blended
      
Year Ended
  
 
Interest Rate
  
Debt
  
December 31, 2006
  
                     
Pro Forma
Debt, including
  capital leases,
  at closing
    
8.26
%
$
732,572
  
$
60,519
  
       
Sun historical interest costs
  
(18,506
)
Harborside historical interest costs, including
  adjustments for the Harborside Transactions
  
(22,485
)
       
Adjustment to interest expense, net
$
19,528
  

     The interest expense calculation presented above uses the 3-month LIBOR rate as of March 5, 2007, which was 5.33%, to determine the interest rate applied to the borrowings under the new senior credit facilities. The pro forma cash interest does not include the net impact of amortization of deferred financing costs of $2,199 for the year ended December 31, 2006. Each 0.125% increase or decrease in interest rate on debt expected to be issued in connection with the transaction would result in an annual interest expense increase or decrease, respectively, of $761.
 
13