Nature of Business

12 Months Ended

Dec. 31, 2011

(1) Nature of Business

References throughout this document to the Company include Sun Healthcare Group, Inc. and our consolidated subsidiaries. In accordance with the Securities and Exchange Commission's "Plain English" guidelines, this Annual Report has been written in the first person. In this document, the words "we," "our," "ours" and "us" refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.

Business

Our subsidiaries provide long-term, subacute and related specialty healthcare in the United States. We operate through three principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, and (iii) medical staffing services. Inpatient services represent the most significant portion of our business. We operated 199 healthcare facilities in 25 states as of December 31, 2011.

2011 Restructuring

On July 29, 2011, the Centers for Medicare and Medicaid Services ("CMS") released its final rule for skilled nursing facilities for the 2012 federal fiscal year, which commenced on October 1, 2011 (the "CMS Final Rule"). As a result of the expected negative impact of the CMS Final Rule on our business, we implemented a broad-based mitigation initiative, which includes infrastructure cost reductions without affecting the quality of our patient care. These reductions in infrastructure costs were, and continue to be, necessary to mitigate the impact on our business and remain in compliance with financial covenants under the Credit Agreement. During our third quarter ended September 30, 2011, in connection with our mitigation initiative, we incurred $2.4 million of restructuring costs, which consisted primarily of severance benefits resulting from reductions of staff.

Equity Offering

In August 2010, we completed a public offering of 30,762,500 shares of our common stock. The shares were issued at a public offering price of $7.75 per share, resulting in proceeds of $224.8 million, net of the underwriter's discount and other professional fees. The net proceeds and other cash on hand were used to repay $225.0 million of our term loans (see Note 3 - "Long-Term Debt, Capital Lease Obligations and Hedging Arrangements").

2010 Restructuring

On November 15, 2010, our former parent, Sun Healthcare Group, Inc. ("Old Sun"), completed a restructuring by separating its real estate assets and operating assets into two separate publicly traded companies. The restructuring consisted of certain key transactions to effect the reorganization, such that (i) substantially all of Old Sun's owned real property and related mortgage indebtedness owed to third parties were transferred to or assumed by Sabra Health Care REIT, Inc ("Sabra"), a Maryland corporation and a wholly owned subsidiary of Old Sun, or one or more subsidiaries of Sabra, and (ii) all of Old Sun's operations and other assets and liabilities were transferred to or assumed by SHG Services, Inc., a Delaware corporation and a wholly owned subsidiary of Old Sun ("New Sun"), or one or more subsidiaries of New Sun.

On November 15, 2010, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of New Sun common stock (the "Separation"), together with a pro rata cash distribution to Old Sun's stockholders aggregating approximately $10 million. Old Sun then merged with and into Sabra, with Sabra surviving the merger and Old Sun's stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun's common stock (the "REIT Conversion Merger"). Immediately following the Separation and REIT Conversion Merger, New Sun changed its name to Sun Healthcare Group, Inc. Pursuant to master lease agreements that were entered into between subsidiaries of Sabra and of New Sun in connection with the Separation, subsidiaries of Sabra lease to subsidiaries of New Sun the properties that Sabra's subsidiaries own following the REIT Conversion Merger.

The Separation was accounted for as a reverse spinoff where New Sun was designated as the "accounting" spinnor and Sabra was designated as the "accounting" spinnee. Accordingly, the assets and liabilities distributed were recorded based on their historical carrying values.

The historical carrying values of assets and liabilities distributed to Sabra in the Separation are as follows (in thousands):

Cash	$$	66,862
Restricted cash		5,527
Property and equipment, net of accumulated depreciation and
amortization of $91,878		484,801
Intangible and other assets, net		16,116
Long-term debt and mortgage notes payable		(386,678	)
Accrued interest on mortgage notes payable		(1,425	)
Other accrued liabilities		(2,326	)
Deferred tax liabilities		(20,670	)
Due to Sun Healthcare Group, Inc.		(5,307	)
Net distribution	$$	156,900

For accounting purposes, the historical consolidated financial statements of Old Sun became the historical consolidated financial statements of New Sun after the distribution on November 15, 2010.

Exchange of Shares in the Separation

In connection with the Separation on November 15, 2010, stockholders of Old Sun received one share of New Sun in exchange for every three shares of Old Sun. All prior period share amounts have been adjusted to give retroactive effect to the exchange of shares in the Separation.

Transaction Costs

Our results of operations for 2010 include $29.1 million of transaction costs related to the Separation and REIT Conversion Merger, which consist primarily of fees for professional services such as investment banker, legal and accounting fees.

As we continue to focus on reducing costs and maximizing occupancy, we have evaluated and will continue to evaluate certain restructuring activities in our operations and administrative functions. During the year ended December 31, 2009, we incurred $1.3 million of restructuring costs, of which $1.0 million was paid during 2009 and the remainder paid in 2010. The costs consisted primarily of severance benefits resulting from reductions of administrative staff and costs related to closure of a center in Massachusetts.