EXHIBIT 10.6
Amendment No. 1
to
EMPLOYMENT AGREEMENT

THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (“Agreement”) effective as of
October 12, 2006, by and between William A. Mathies (“Mr. Mathies”) and Sun
Health Specialty Services, Inc., a New Mexico corporation (“SHSS”);
 
WHEREAS, SHSS is a wholly owned subsidiary of SunBridge Healthcare Corporation
(“SunBridge” or “Company”) which is a wholly owned subsidiary of Sun Healthcare
Group, Inc. (“SHG”);
 
WHEREAS, SunBridge and its direct and indirect subsidiaries (collectively, “the
LTC subsidiaries”) provide inpatient services throughout the United States, in
many instances under the “SunBridge” trade name;
 
WHEREAS, SHSS has Services Agreements with the LTC subsidiaries to provide
employees, including Mr. Mathies, to the LTC subsidiaries;
 
WHEREAS, effective January 1, 2006, Mr. Mathies was appointed President and
Chief Operating Officer of SunBridge, the other LTC subsidiaries and SHG
Services, Inc., the subsidiary of SHG that is a holding company for other
operating subsidiaries of SHG that are not LTC subsidiaries (“SHG Services”);
and
 
WHEREAS, SHSS and Mr. Mathies entered into an Employment Agreement dated as of
February 28, 2002 (the “Employment Agreement”), and they desire to amend the
Employment Agreement on the terms and conditions (including the terms and
conditions of his bonus eligibility, as approved by the Compensation Committee
of the Board of Directors of SHG on March 28, 2006) set forth below (capitalized
terms used in this Agreement without definition shall have the meanings provided
in the Employment Agreement).
 
NOW, THEREFORE, in consideration of the above recitals and the mutual covenants
and agreements contained herein, Mr. Mathies and SHSS agree as follows:
 
1.    Section 2 of the Employment Agreement is hereby amended and restated as
follows:
 
Section 2: Duties and Responsibilities. Mr. Mathies shall devote his full
employment time, efforts, skills and attention exclusively to advancing and
rendering profitable the business interests of SunBridge, the other LTC
subsidiaries and SHG Services by serving as President and Chief Operating
Officer thereof.
 
2.    Section 3(b) of the Employment Agreement is hereby amended and restated as
follows:
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(b) Cash Bonus/Incentive Compensation. In addition to the Base Salary provided
for in Section 3(a) above, Mr. Mathies shall be eligible to receive an annual
bonus (“Bonus”) in accordance with Schedule A hereto, as it may be amended from
time to time by the Compensation Committee of the Board of Directors of SHG;
provided, however, that no amendment shall be effective if it reduces the
potential amount of the Bonus, when compared to the prior year, unless such
amendment has been agreed to in writing by Mr. Mathies. Such Bonus shall be
payable at the same time as other annual bonuses are paid to senior management
personnel. Subject to the provisions of Section 6(b) and Section 6(d), in order
to have earned and to be paid any such Bonus, Mr. Mathies must be employed by
SHSS or one of its affiliates on the date of such payment. It is intended that
the Bonus described in this Section 3(b) qualify as "performance based
compensation" under Section 162(m) of the Internal Revenue Code, to the extent
necessary to preserve the Company’s ability to deduct such bonus.

3.    Section 7(b), Section 7(c), Section 7(d) and Section 7(e) of the
Employment Agreement are hereby amended and restated as follows:
 
(b) Determination of Gross-Up Payment. Subject to the provisions of Section
7(c), all determinations required under this Section 7, including whether a
Gross-Up Payment is required, the amount of the payments constituting parachute
payments, and the amount of the Gross-Up Payment, shall be made by the
Accounting Firm, which shall provide detailed supporting calculations both to
SHG and Mr. Mathies within fifteen business days of Mr. Mathies’ date of
termination or any other date reasonably requested by SHG or Mr. Mathies on
which a determination under Section 7 is necessary or advisable. Within five
days of the receipt by Mr. Mathies and SHG of the Accounting Firm’s
determination of the initial Gross-Up Payment, SHG shall pay the amount of such
Gross-Up Payment to the applicable taxing authorities for the benefit of Mr.
Mathis. If the Accounting Firm determines that no Excise Tax is payable by Mr.
Mathies, SHG shall cause the Accounting Firm to provide Mr. Mathies and SHG with
an opinion that SHG has substantial authority under the Internal Revenue Code
and regulations thereunder not to report an Excise Tax on Mr. Mathies’ federal
income tax return. Any determination by the Accounting Firm shall be binding
upon Mr. Mathies and SHG. If the initial Gross-Up Payment is insufficient to
cover the amount of the Excise Tax that is ultimately determined to be owing by
Mr. Mathies with respect to any payment (hereinafter an “Underpayment”), SHG,
after exhausting its remedies under Section 7(c) below, shall promptly pay to
the applicable taxing authorities for the benefit of Mr. Mathies (or directly to
Mr. Mathies in the event Mr. Mathies previously paid the related tax amounts) an
additional Gross-Up Payment in respect of the Underpayment.
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(c)   Procedures. Mr. Mathies shall notify SHG in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by SHG
of a Gross-Up Payment. Such notice shall be given as soon as practicable after
Mr. Mathies knows of such claim and Mr. Mathies shall apprise SHG of the nature
of the claim and the date on which the claim is requested to be paid. Mr.
Mathies agrees not to pay the claim until the expiration of the thirty-day
period following the date on which Mr. Mathies notifies SHG, or such shorter
period ending on the date the taxes with respect to such claim are due (the
"Notice Period"). If SHG notifies Mr. Mathies in writing prior to the expiration
of the Notice Period that it desires to contest the claim, Mr. Mathies shall:
(i) give SHG any information reasonably requested by SHG relating to the claim;
(ii) take such action in connection with the claim as SHG may reasonably
request, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by SHG and reasonably
acceptable to Mr. Mathies; (iii) cooperate with SHG in good faith in contesting
the claim; and (iv) permit SHG to participate in any proceedings relating to the
claim. Mr. Mathies shall permit SHG to control all proceedings related to the
claim and, at its option, permit SHG to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by SHG, Mr. Mathies agrees
either to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner and to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts as SHG shall determine; provided, however, that if SHG directs
Mr. Mathies to pay such claim and pursue a refund, SHG shall pay such claim on
Mr. Mathies’ behalf (the "Claim Payment"). SHG’s control of the contest related
to the claim shall be limited to the issues related to the Gross-Up Payment and
Mr. Mathies shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or other taxing authority. If
SHG does not notify Mr. Mathies in writing prior to the end of the Notice Period
of its desire to contest the claim, SHG shall pay to the applicable taxing
authorities on Mr. Mathies’ behalf an additional Gross-Up Payment in respect of
the excess parachute payments that are the subject of the claim. Any Gross-Up
Payment shall be made without additional tax consequences to Mr. Mathies.
 
(d)   Repayments. If, after a Claim Payment is made by SHG, Mr. Mathies becomes
entitled to a refund with respect to the claim to which such Claim Payment
relates, Mr. Mathies shall pay SHG the amount of the refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after a
Claim Payment is made by Sun, a determination is made that Mr. Mathies shall not
be entitled to any refund with respect to the claim and SHG does not promptly
notify Mr. Mathies of its intent to contest the denial of refund, then the
amount of the Claim Payment shall offset the amount of the additional Gross-Up
Payment then owing to Mr. Mathies.
 
(e) Further Assurances. SHSS shall indemnify Mr. Mathies and hold him harmless,
on an after-tax basis, from any costs, expenses, penalties, fines, interest or
other liabilities (“Losses”) incurred by Mr. Mathies with respect to the
exercise by SHG of any of its rights under Section 7, including, without
limitation, any Losses related to SHG’s decision to contest a claim or any
imputed income to him resulting from any Claim Payment or action taken on Mr.
Mathies’ behalf by SHSS hereunder. SHSS shall pay all legal fees and expenses
incurred under Section 7 and shall promptly reimburse Mr. Mathies for the
reasonable expenses incurred by him in connection with any actions taken by SHSS
or SHG or required to be taken by Mr. Mathies hereunder. SHSS shall also pay all
of the fees and expenses of the Accounting Firm, including, without limitation,
the fees and expenses related to the opinion referred to in Section 7(b).
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4.    Except for the changes set forth herein, the Employment Agreement shall
remain in full force and effect.

5.     Miscellaneous.
 

 
(a)
Amendments, Waivers, Etc. Except as otherwise provided herein, no provision of
this Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing signed by both parties. No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.

 

 
(b)
Entire Agreement. The Employment Agreement, as amended by this Agreement, sets
forth the entire agreement and understanding of the parties hereto with respect
to the matters covered hereby and supersedes all prior agreements and
understandings of the parties with respect to the subject matter hereof. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not expressly set forth in the Employment Agreement, as amended hereby, and the
Employment Agreement, as so amended, shall supersede all prior agreements,
negotiations, correspondence, undertakings and communications of the parties,
oral or written, with respect to the subject matter hereof.

 

 
(c)
Counterparts. This Agreement may be executed in one or more counterparts, each
of which, when so executed and delivered, shall be deemed an original, but all
such counterparts together shall constitute one and the same instrument.

 
[Signatures Commence on Immediately Following Page]
 

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The parties hereto have executed this Agreement as of the date first above
written.
 

  /s/ William A. Mathies                                        October 12, 2006
William A. Mathies      
 
 
SUN HEALTH SPECIALTY SERVICES, INC. 
 
By /s/ Michael Newman                        October 12, 2006
Its Vice President      
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Schedule A
 
Mr. Mathies shall be eligible to receive a Bonus for any fiscal year based on
the criteria set forth below. There are two components to his Bonus: EBITDA and
EVC, which are defined and outlined below. In the event performance thresholds
are met as outlined below, his minimum bonus shall be no less than 10% of his
Base Salary, and his maximum Bonus shall not exceed 120% of his Base Salary.
 
1.     Mr. Mathies shall be eligible for a payment of up to 60% of his Base
Salary based on earnings before interest, taxes, depreciation and amortization
of Sun (“EBITDA”), as published by Sun in its press release announcing financial
results for the year in which the Base Salary was earned, but excluding the
effect of actuarial adjustments for self-insurance for general and professional
liability. The Compensation Committee reserves the right to make adjustments to
the calculation, including the inclusion or exclusion of discontinued
operations. The Compensation Committee shall establish the EBITDA target each
year. The EBITDA component of the Bonus shall be paid based upon actual EBITDA
attained as a percentage of the target EBITDA as follows: if actual EBITDA is
less than 95% of target EBITDA, the amount of this component will be zero; if
actual EBITDA is 95% of target EBITDA, the amount will be 5% of Base Salary; if
actual EBITDA is 100% of target EBITDA, the amount will be 25% of Base Salary
(if actual EBITDA is greater than 95% but less than 100% of target EBITDA, the
amount will be pro rated between 5% and 25% of Base Salary); and if actual
EBITDA is 120% (or greater) of target EBITDA, the amount will be 60% of Base
Salary (if actual EBITDA is greater than 100% but less than 120% of target
EBITDA, the amount will be pro rated between 25% and 60% of Base Salary).  
 
2.     Mr. Mathies shall be eligible for a payment of up to 60% of his Base
Salary based on equity value creation (“EVC”). EVC shall be calculated as
follows (such calculations to be based on the audited consolidated financial
statements of SHG for the year in which the Base Salary was earned): (i) 9.0 x
EBITDA (as calculated above), (ii) less long-term debt, including the current
portion, (iii) plus unrestricted cash, (iv) less 25% of accrued self-insurance
obligations, including the current portion and net of restricted cash; provided,
however, that the Compensation Committee reserves the right to exclude
discontinued operations and to require pro forma calculations of EVC to take
into account acquisitions, divestitures and material restructurings. The
Compensation Committee shall establish the EVC targets each year. The EVC
component of the Bonus shall be paid based upon the actual EVC attained as a
percentage of the target EVC, as follows: if actual EVC is less than 90% of
target EVC, the amount of this component will be zero; if actual EVC is 90% of
target EVC, the amount will be 5% of Base Salary; if actual EVC is 100% of
target EVC, the amount will be 25% of Base Salary (if actual EVC is greater than
90% but less than 100% of target EVC, the amount will be pro rated between 5%
and 25% of Base Salary); and if actual EVC is 140% (or greater) of target EVC ,
the amount will be 60% of Base Salary (if actual EVC is greater than 100% but
less than 140% of target EVC, the amount will be pro rated between 25% and 60%
of Base Salary).  
 

 
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