ex106.htm


    Exhibit
10.6

     

    AMENDED
AND RESTATED

    EMPLOYMENT
AGREEMENT

     

    THIS
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) is entered into this
17th day of December, 2008, by and between Richard K. Matros (“Mr.
Matros”) and Sun Healthcare
Group, Inc., a Delaware corporation (“Sun” or “Company”).

     

    WHEREAS,
Mr. Matros has served as the Chairman of the Board of Directors and Chief
Executive Officer (“CEO”) of Sun since November 2001;

     

    WHEREAS,
Sun and Mr. Matros are parties to that certain Employment Agreement dated
October 12, 2006, as amended on October 31, 2007 and March 31, 2008 (the
“Existing  Agreement”); and

     

    WHEREAS,
Sun and Mr. Matros wish to amend and restate the Existing Agreement upon the
terms set forth in this Agreement to comply with Section 409A of the Internal
Revenue Code of 1986, as amended effective as of the date hereof.

     

    NOW,
THEREFORE, in consideration of the above recitals and the mutual covenants and
agreements contained herein, Mr. Matros and Sun agree as follows:

     

    Section
1:    Term of
Employment.  Sun agrees to employ Mr. Matros and Mr. Matros
agrees to accept employment with Sun, subject to the terms and conditions of
this Agreement. Unless earlier terminated pursuant to the provisions of Sections
5 and 6 hereof, the initial term of employment of Mr. Matros under this
Agreement is for a period of three (3) years (the “Initial Term”), commencing as
of March 28, 2006 (the “Effective Date”), and terminating March 27, 2009.
Thereafter, this Agreement shall be renewed for successive one (1) year periods
(each such period a “Renewal Term”) (the Initial Term and all full or partial
Renewal Terms occurring prior to termination or non-renewal of this Agreement
being collectively referred to as the “Term”) unless earlier terminated pursuant
to the provisions of Sections 5 and 6 hereof, or by written notice of
non-renewal given by either party to the other not less than ninety (90) days
prior to the expiration of the Initial Term or then current Renewal Term, as the
case may be.

     

    Section
2:    Duties
and Responsibilities.  Mr. Matros is employed as CEO and is
engaged as Chairman of the Board of Directors of Sun.  During the
Term, Mr. Matros shall devote his full employment time, efforts, skills and
attention exclusively to advancing and rendering profitable the business
interests of Sun, its direct and indirect subsidiaries and their lines of
business; provided, however,
that to the extent the following activities do not materially interfere or
conflict with his duties and responsibilities hereunder and as imposed by
applicable laws, rules and regulations, Mr. Matros may (i) continue to serve as
a member of the boards of directors of the companies previously disclosed in
writing to the Board of Directors of Sun (“Board of Directors”), (ii) engage in
charitable, civic and religious affairs and (iii) with the prior written consent
of the Board of Directors, serve as a member of the board of directors of other
companies.  Mr. Matros agrees to report to and render such services,
commensurate with his positions as Chairman or CEO, as the Board of Directors
may from time to time reasonably direct.  In addition, at the
reasonable request of the Board of Directors, Mr. Matros shall serve as


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    director
or senior executive officer of one or more direct or indirect subsidiaries of
Sun without additional compensation.

     

    Section
3:    Compensation, Benefits and
Related Matters.

     

    
      	
              a.  

            	
              Annual
      Base Salary.  Sun shall pay during the Term to Mr. Matros
      a base salary at an annual rate of $700,000 (“Base Salary”), such salary
      to be payable in accordance with Sun’s customary payroll practices (but
      not less frequently than monthly).  If Sun’s EBITDA for fiscal
      year 2006 equals or exceeds the amount of EBITDA set forth in Sun’s budget
      for 2006 as approved by the Board of Directors, Mr. Matros’ base salary
      will be increased to an annual rate of $750,000 retroactive to November 5,
      2005.  On or about each anniversary of the Effective Date during
      the Term, the Board of Directors or the Compensation Committee of the
      Board of Directors shall review Mr. Matros’ annual base salary for
      possible merit increases in its sole discretion, and any increase in Mr.
      Matros’ annual base salary rate shall thereafter constitute “Base Salary”
      for purposes of this Agreement.  The parties intend that such
      retroactive increase not be treated as or deemed to be deferred
      compensation for purposes of Section 409A of the Internal Revenue Code of
      1986, as amended (the “Code”) and the rules and regulations promulgated
      thereunder (“Section 409A”).

            


    

     

    
      	
              b.  

            	
              Cash
      Bonus/Incentive Compensation. In addition to the Base Salary
      provided for in Section 3(a) above, Mr. Matros shall be entitled to
      receive an annual bonus (“Bonus”) in accordance with the SunHealthcare
      Group, Inc. Executive Bonus Plan (the “Plan”), as it may be amended from
      time to time by the Compensation Committee of the Board of Directors;
      provided, however, that no amendment shall be effective if it reduces
      the percentage of Base Salary that would constitute the
      minimum or maximum potential amount of the Bonus as compared to the
      prior year, unless such amendment has been agreed to in writing by Mr.
      Matros.  The
      Bonus shall be payable at the same time as other annual bonuses are paid
      to senior management personnel with respect to that
      fiscal year.  Subject to the provisions of Section 6, in order
      to have earned and to be paid any such Bonus, Mr. Matros must be employed
      by Sun 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 Code to the extent necessary to preserve Sun’s
      ability to deduct such Bonus.  In the event the minimum
      financial performance threshold is met as set forth in the Plan, Mr.
      Matros’ minimum Bonus shall be no less than 10% of his Base Salary for the
      applicable fiscal year.

            


    

     

    
      	
              c.  

            	
              Restricted
      Stock and Options.  Mr. Matros shall participate in such
      restricted stock and option plans of the Company as are made available
      generally to senior executive officers of the Company.  Any
      grants under such plans shall be made by the Board of Directors (or
      appropriate committee thereof) in its sole discretion and such plans are
      subject to change during the Term at the sole discretion of the
      Company.

            


    

     

     

    
      
        
        

      

      
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              d.  

            	
              Retirement
      and Benefit Plans.  During the Term, Mr. Matros shall be
      entitled to participate in all retirement plans, health benefit programs,
      insurance programs and other similar employee welfare benefit arrangements
      available generally to senior executive officers of Sun from time to
      time.  Such plans, programs and arrangements are subject to
      change during the Term at the sole discretion of the
    Company.

            


    

     

    
      	
              e.  

            	
              Paid
      Time Off.  During the Term, Mr. Matros shall be entitled
      to paid time off in accordance with Sun’s policy for senior executive
      officers.

            


    

     

    
      	
              f.  

            	
              Indemnification
      Liability/Insurance.  Mr. Matros shall be entitled to
      indemnification by Sun to the fullest extent permitted by applicable law
      and the charter and by laws of Sun.  In addition, Sun shall
      maintain during Mr. Matros’ employment customary director’s and officers’
      liability insurance and Mr. Matros shall be covered by such
      insurance.

            


    

     

    
      	
              g.  

            	
              Taxes.  All
      compensation payable to Mr. Matros shall be subject to withholding for all
      applicable federal, state and local income taxes, occupational taxes,
      Social Security and similar mandatory
  withholdings.

            


    

     

    
      	
              h.  

            	
              Expenses.  Mr.
      Matros shall be entitled to reimbursement for expenses incurred by him in
      connection with the discharge of his duties hereunder.  All such
      expense reimbursement shall be subject to and shall be submitted,
      documented and paid in accordance with the expense reimbursement policies
      of the Company, as such policies may change from time to
      time.  Mr. Matros agrees that he will provide such documentation
      to the Company promptly after expenses are
  incurred.

            


    

     

    Section
4:   [Reserved]

     

    Section
5:   Termination.  Sun
may, at any time, in its sole discretion, terminate Mr. Matros as Chairman and
CEO and from all other positions with Sun and its direct and indirect
subsidiaries; provided, however, that Sun shall provide Mr. Matros with at least
five (5) business days prior written notice of such termination and shall make
the payments associated with such termination in accordance with Section
6.  Notwithstanding any provision in Section 1 hereof, the Term shall
end on the date of Mr. Matros’ termination of employment in accordance with this
Agreement.

     

    
      	
              a.  

            	
              Termination
      by Sun for “Good Cause.”  Sun may at any time, by written
      notice to Mr. Matros at least five (5) business days prior to the date of
      termination specified in such notice and specifying the acts or omissions
      believed to constitute Good Cause (as defined below), terminate Mr. Matros
      as Chairman and CEO and from all other positions with Sun and its direct
      and indirect subsidiaries for Good Cause.  Sun may relieve Mr.
      Matros of his duties and responsibilities pending a final determination of
      whether Good Cause exists, and such action shall not constitute Good
      Reason (as defined below) for purposes of this
      Agreement.  Payment to Mr. Matros upon a termination for Good
      Cause is set forth in Section 6(a).  “Good Cause” for
      termination shall mean any one of the
following:

            


    

     

    
      
        
        

      

      
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              1.  

            	
              Any
      felony criminal conviction (including conviction pursuant to a nolo
      contendere plea) under the laws of the United States or any state or other
      political subdivision thereof which, in the sole discretion of the Board
      of Directors, renders Mr. Matros unsuitable for the position of either
      Chairman or CEO;

            


    

     

    
      	
              2.  

            	
              Any
      act of financial malfeasance or financial impropriety, as determined by
      the Board of Directors in good
faith;

            


    

     

    
      	
              3.  

            	
              Mr.
      Matros’ continued willful failure to perform the duties reasonably
      requested by the Board of Directors and commensurate with his positions as
      Chairman and CEO (other than any such failure resulting from his
      incapacity due to his physical or mental condition) after a written demand
      for substantial performance is delivered to him by the Board of Directors,
      which demand specifically identifies the manner in which the Board of
      Directors believes that he has not substantially performed his duties, and
      which performance is not substantially corrected by him within ten (10)
      days of receipt of such demand;

            


    

     

    
      	
              4.  

            	
              Any
      material workplace misconduct or willful failure to comply with Sun’s
      general policies and procedures as they may exist from time to time by Mr.
      Matros which, in the good faith determination of the Board of Directors,
      renders Mr. Matros unsuitable for the position of either Chairman or
      CEO;

            


    

     

    
      	
              5.  

            	
              Any
      material breach by Mr. Matros of the provisions of this Agreement which
      has not been cured by Mr. Matros thirty (30) days following delivery of
      notice to Mr. Matros specifying such material breach, or the repetition of
      any such material breach after it has been cured;
  or

            


    

     

    
      	
              6.  

            	
              Any
      act of moral turpitude, as determined by the Board of Directors in good
      faith.

            


    

     

    
      	
              b.  

            	
              Termination
      by Sun without Good Cause.  Sun may at any time, by
      written notice to Mr. Matros at least five (5) business days prior to date
      of termination specified in such notice, terminate Mr. Matros as Chairman
      and CEO and from all other positions with Sun and its direct and indirect
      subsidiaries.  If such termination is made by Sun other than by
      reason of Mr. Matros’ death, Disability (as defined in Section 5(e)) or
      expiration of the Term, and Good Cause does not exist, such termination
      shall be treated as a termination without Good Cause and Mr. Matros shall
      be entitled to payment in accordance with Section
  6(b).

            


    

     

    
      	
              c.  

            	
              Termination
      by Mr. Matros for Good Reason.  Mr. Matros may, at any
      time at his option within sixty (60) days following an event or condition
      that constitutes Good Reason (as defined below), resign for Good Reason as
      Chairman and CEO and from all other positions with Sun and its direct and
      indirect subsidiaries by written notice to Sun at least thirty (30) days
      prior to the date of termination 

            


    

     

    
      
        
        

      

      
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              specified
      in such notice; provided, however, that Sun has not substantially
      corrected the event or condition that would constitute Good Reason prior
      to the date of termination.  Payment to Mr. Matros upon a
      termination for Good Reason is set forth in Section
  6(b).

            


    

     

    “Good
Reason” shall mean the occurrence of any one of the following events or
conditions without Mr. Matros’ written consent:

     

    
      	
              (a)  

            	
              A
      meaningful and detrimental reduction in Mr. Matros’ authority, duties or
      responsibilities or a meaningful and detrimental change in his reporting
      responsibilities;

            


    

     

    
      	
              (b)  

            	
              A
      material failure of Sun to comply with the compensation provisions set
      forth in Sections 3(a) and 3(b) or benefits provisions set forth in
      Sections 3(d) - 3(f) (collectively, the “Benefits”) (other than a
      reduction of Benefits uniformly applicable to other members of senior
      management); or

            


    

     

    
      	
              (c)  

            	
              A
      material relocation of Mr. Matros’ principal work location from its
      current location in Orange County,
California;

            


    

     

    provided that Sun is provided
with notice and opportunity to cure such breach and Mr. Matros terminates his
employment with Sun, in each case within the time periods prescribed under this
Section 5(c).

    


    
      	
              d.  

            	
              Voluntary
      Resignation.  Mr. Matros may, at any time at his option
      with thirty (30) calendar days written notice to Sun, voluntarily resign
      without Good Reason as Chairman and CEO and from all other positions with
      Sun and its direct and indirect subsidiaries.  Payment to Mr.
      Matros upon his voluntary resignation without Good Reason is set forth in
      Section 6(a).  Resignation from Sun shall automatically
      constitute resignation from all positions of any
    subsidiary.

            


    

     

    
      	
              e.  

            	
              Death
      or Disability.  Mr. Matros’ employment under this
      Agreement and the Term shall terminate automatically as of the date of Mr.
      Matros’ death.  Sun may, at any time by written notice to Mr.
      Matros at least five (5) business days prior to the date of termination
      specified in such notice, terminate Mr. Matros as Chairman and CEO and
      from all other positions with Sun and its direct or indirect subsidiaries
      by reason of his Disability.  “Disability” shall mean any
      physical or mental condition or illness that prevents Mr. Matros’ from
      performing his duties hereunder in any material respect for a period of
      120 substantially consecutive calendar days, as determined by a physician
      selected by Sun or, if Mr. Matros is incapacitated, reasonably acceptable
      to the Director of Medicine or equivalent senior physician at Hoag
      Hospital.  Payment to Mr. Matros upon his termination by reason
      of his death or Disability is set forth in Section
  6(a).

            


    

     

    
      
        
        

      

      
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    Section
6:   Payments Upon
Termination.

     

    
      	
              a.  

            	
              Payment
      Upon Termination for Good Cause, Resignation without Good Reason, Death or
      Disability.  In the event of termination of employment
      during the Term pursuant to Sections 5(a), 5(d) or 5(e), Mr. Matros, or
      his estate where applicable, shall be paid any earned but unpaid Base
      Salary through the date of termination and any accrued and unused paid
      time off through the date of termination, which shall be paid to Mr.
      Matros or his estate or beneficiary, as applicable, in a lump sum in cash
      upon or promptly following (and in all events within 30 days after) the
      date of termination of employment (collectively, the “Accrued
      Obligations”).  In addition, in the case of a termination of
      employment pursuant to Sections 5(e), but not Sections 5(a) or 5(d), Mr.
      Matros or his estate shall be paid (i) any accrued and unpaid Bonus for
      any prior fiscal year, which shall be paid to Mr. Matros or his estate or
      beneficiary, as applicable, in a lump sum in cash at the time that annual
      bonuses are paid to senior management personnel with respect to that
      fiscal year, but in any event within seventy-five (75) days after the
      conclusion of the fiscal year to which such Bonus relates, and (ii) a pro
      rata portion (based on the number of days of employment in the fiscal year
      of termination divided by 365 or 366, as applicable) of the Bonus, if any,
      for the fiscal year in which the termination occurs, which shall be paid
      at the time that annual bonuses are paid to senior management personnel
      with respect to that fiscal year, but in any event within seventy-five
      (75) days after the conclusion of the fiscal year to which such Bonus
      relates.  Mr. Matros shall also receive his vested benefits in
      accordance with the terms of Sun’s compensation and benefit plans, and his
      participation in such plans and all other perquisites (including, but not
      limited to, his car allowance) shall cease as of the date of termination,
      except to the extent Mr. Matros may elect to continue coverage as under
      any welfare benefit plans as required by Part 6, Title I of the Employee
      Retirement Income Security Act of 1974, as amended.  Upon a
      termination under Section 5(a), 5(d) or 5(e), Mr. Matros shall not be
      entitled to any compensation or benefits under this Agreement except as
      set forth in this Section 6(a).

            


    

     

    
      	
              b.  

            	
              Payment
      Upon Termination by Sun without Good Cause, or following expiration of the
      Term, or by Mr. Matros for Good Reason.  In the event of
      a termination of Mr. Matros’ employment either: (i) during the Term
      pursuant to Sections 5(b) or 5(c), or (ii) at the expiration of the Term
      following Sun’s provision to Mr. Matros of a notice of non-extension, as
      provided in Section 1, provided that Mr. Matros was willing and able to
      execute a new employment agreement providing terms and conditions
      substantially similar to this Agreement and to continue providing services
      to Sun, Mr. Matros shall be entitled to the following payments and
      benefits:

            


    

     

    
      	
              1.  

            	
              Mr.
      Matros shall be entitled to a lump sum severance payment in an amount
      equal to the greater of: (i) the unpaid and unearned portion of his Base
      Salary for the remainder of the Initial Term or then current Renewal Term,
      as the case may be, or (ii) two (2) year’s Base Salary or, in the event
      such termination occurs on or within two years following the date of a
      

            


    

     

    
      
        
        

      

      
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              Change
      in Control, three (3) year’s Base Salary, with such amount to be paid to
      Mr. Matros in the month immediately following the month in which Mr.
      Matros’ termination of employment occurs.  Notwithstanding the
      foregoing, Mr. Matros’ right to receive the severance payment hereunder
      shall be conditioned upon his execution and delivery of a general release
      in favor of Sun, which shall not be inconsistent with the terms of this
      Agreement, and such other documents and instruments as are reasonably
      required by Sun, each of which Mr. Matros shall deliver to the Company
      within twenty-one (21) days following the date of his termination of
      employment.

            


    

     

    
      	
              2.  

            	
              Mr.
      Matros shall be entitled to: (i) any accrued and unpaid Bonus for any
      prior fiscal year, payable to Mr. Matros in a lump sum in cash at the time
      that annual bonuses are paid to senior management personnel with respect
      to that fiscal year, but in any event within seventy-five (75) days after
      the conclusion of the fiscal year to which such Bonus relates, (ii) a pro
      rata portion of the Bonus, if any, for the fiscal year in which the
      termination occurs (determined by multiplying the amount Mr. Matros would
      have received based upon actual performance had his employment continued
      through the end of the fiscal year by a fraction, the numerator of which
      is the number of days during the performance year of termination that Mr.
      Matros is employed by the Company and the denominator of which is 365 or
      366, as applicable), payable to Mr. Matros at the time that annual bonuses
      are paid to senior management personnel with respect to that fiscal year,
      but in any event within seventy-five (75) days after the conclusion of the
      fiscal year to which such Bonus relates, and (iii) any Accrued Obligations
      payable to Mr. Matros as set forth in Section
  6(a).

            


    

     

    
      	
              3.  

            	
              Mr.
      Matros’ participation in any other retirement and benefit plans and
      perquisites (including, but not limited to, his car allowance) shall cease
      as of the date of termination, except Mr. Matros and his eligible
      dependents (as determined under Sun’s health plan) shall be entitled to
      continuing coverage under Sun’s health plans on the same basis as active
      employees until the earlier of (i) the second anniversary of the date of
      termination or (ii) the date of Mr. Matros or his eligible dependents
      become eligible to participate in a plan of a successor
      employer.

            


    

     

    A
termination of Mr. Matros’ employment during the Term without Good Cause (other
than by reason of his death or Disability) within six (6) months preceding a
Change in Control shall be treated as if such termination occurred on the date
of such Change in Control if it is reasonably demonstrated that the termination
was at the request of the third party who has taken steps reasonably calculated
to effect such Change in Control or otherwise arose in connection with or in
anticipation of such Change in Control.  In such case, any additional
amount payable to Mr. Matros under Section 6(b)(1) above shall be paid to Mr.
Matros 30 days following the occurrence of such Change in Control.

    
      
        
        

      

      
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              c.  

            	
              “Change
      in Control.”  For purposes of this Section 6, a “Change
      in Control” shall be deemed to have occurred if any of the following
      events occurs:

            


    

     

    
      	
              1.  

            	
              Any
      “person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of
      the Securities Exchange Act of 1934, as amended (the “1934 Act”)), other
      than a trustee or other fiduciary holding securities under an employee
      benefit plan of the Company (an “Acquiring Person”), is or becomes the
      “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly
      or indirectly, of more than 33 1/3% of the then outstanding voting stock
      of the Company;

            


    

     

    
      	
              2.  

            	
              A
      merger or consolidation of the Company with any other corporation, other
      than a merger or consolidation which would result in the voting securities
      of the Company outstanding immediately prior thereto continuing to
      represent (either by remaining outstanding or by being converted into
      voting securities of the surviving entity) at least 51% of the combined
      voting power of the voting securities of the Company or surviving entity
      outstanding immediately after such merger or
  consolidation;

            


    

     

    
      	
              3.  

            	
              A
      sale or other disposition by the Company of all or substantially all of
      the Company’s assets;

            


    

     

    
      	
              4.  

            	
              During
      any period of two (2) consecutive years (beginning on or after the
      Effective Date), individuals who at the beginning of such period
      constitute the Board of Directors and any new director (other than a
      director who is a representative or nominee of an Acquiring Person) whose
      election by the Board of Directors or nomination for election by the
      Company’s shareholders was approved by a vote of at least a majority of
      the directors then still in office who either were directors at the
      beginning of the period or whose election or nomination was previously so
      approved, no longer constitute a majority of the Board of
      Directors;

            


    

     

    provided, however, in no event
shall any acquisition of securities, a change in the composition of the Board of
Directors or a merger or other consolidation pursuant to a plan of
reorganization under chapter 11 of the Bankruptcy Code with respect to the
Company (“Chapter 11 Plan”), or a liquidation under the Bankruptcy Code
constitute a Change in Control.  In addition, notwithstanding Sections
6(c)(1), 6(c)(2), 6(c)(3) and 6(c)(4), a Change in Control shall not be deemed
to have occurred in the event of a sale or conveyance in which the Company
continues as a holding company of an entity or entities that conduct the
business or businesses formerly conducted by the Company, or any transaction
undertaken for the purpose of reincorporating the Company under the laws of
another jurisdiction, if such transaction does not materially affect the
beneficial ownership of the Company’s capital stock.  Mr. Matros’
continued employment without objection following a Change in Control shall not,
by itself, constitute consent to or a waiver of rights with respect to any
circumstances constituting Good Reason

    
      
        
        

      

      
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    hereunder.  A
Change in Control shall not, by itself, constitute Good Reason
hereunder.

     

    
      	
              d.  

            	
              Cooperation.  Following
      the expiration or a termination of this Agreement for any reason, Mr.
      Matros shall provide such cooperation as is reasonably required by the
      Company, including, without limitation, consulting with the Company with
      respect to litigation and/or matters that relate to facts and
      circumstances that occurred during the Term of his employment by the
      Company, and executing such documents and instruments relating to such
      Term of employment as are reasonably requested by
  Sun.

            


    

     

    Section
7:   Additional
Payments.

     

    
      	
              a.  

            	
              Gross-Up
      Payments.  Notwithstanding anything herein to the
      contrary, if it is determined that any payment to Mr. Matros pursuant to
      this Agreement would be subject to the excise tax imposed by Section 4999
      of the Code or any interest or penalties with respect to such excise tax
      (such excise tax, together with any interest or penalties thereon, is
      herein referred to as an “Excise Tax”), then Mr. Matros shall be entitled
      to an additional payment (a “Gross-Up Payment”) in an amount that will
      place Mr. Matros in the same after-tax economic position that he would
      have enjoyed if the Excise Tax had not applied to the
      payment.  The amount of the Gross-Up Payment shall be determined
      by an accounting firm retained by Sun (the “Accounting Firm”) using such
      formulas as the Accounting Firm deems appropriate.  No Gross-Up
      Payment shall be payable hereunder if the Accounting Firm determines that
      the payments are not subject to an Excise
Tax.

            


    

     

    
      	
              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 Sun and Mr. Matros within fifteen days of
      Mr. Matros’ date of termination or any other date reasonably requested by
      Sun or Mr. Matros on which a determination under Section 7 is necessary or
      advisable.  Within five days of the receipt by Mr. Matros and
      Sun of the Accounting Firm’s determination of the initial Gross-Up
      Payment, Sun shall pay the amount of such Gross-Up Payment to the
      applicable taxing authorities for the benefit of Mr. Matros.  If
      the Accounting Firm determines that no Excise Tax is payable by Mr.
      Matros, Sun shall cause the Accounting Firm to provide Mr. Matros and Sun
      with an opinion that Sun has substantial authority under the Code and
      regulations thereunder not to report an Excise Tax on Mr. Matros’ federal
      income tax return.  Any determination by the Accounting Firm
      shall be binding upon Mr. Matros and Sun.  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. Matros with respect to
      any payment (hereinafter and “Underpayment”), Sun, after exhausting its
      remedies under Section 7(c) below, shall promptly pay to the applicable
      taxing authorities for the benefit of Mr. Matros (or directly to Mr.
      Matros in the event Mr. Matros

            


    

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    
      	
               

            	
              previously
      paid the related tax amounts) an additional Gross-Up Payment in respect of
      the Underpayment.

            


    

     

    
      	
              c.  

            	
              Procedures.  Mr.
      Matros shall notify Sun in writing of any claim by the Internal Revenue
      Service that, if successful, would require the payment by Sun of a
      Gross-Up Payment.  Such notice shall be given as soon as
      practicable after Mr. Matros knows of such claim and shall apprise Sun of
      the nature of the claim and the date on which the claim is requested to be
      paid.  Mr. Matros agrees not to pay the claim until the
      expiration of the thirty-day period following the date on which Mr. Matros
      notifies Sun, or such shorter period ending on the date the taxes with
      respect to such claim are due (the “Notice Period”).  If Sun
      notifies Mr. Matros in writing prior to the expiration of the Notice
      Period that it desires to contest the claim, Mr. Matros
      shall:  (i) give Sun any information reasonably requested by Sun
      relating to the claim; (ii) take such action in connection with the claim
      as Sun may reasonably request, including, without limitation, accepting
      legal representation with respect to such claim by an attorney reasonably
      selected by Sun and reasonably acceptable to Mr. Matros; (iii) cooperate
      with Sun in good faith in contesting the claim; and (iv) permit Sun to
      participate in any proceedings relating to the claim.  Mr.
      Matros shall permit Sun to control all proceedings related to the claim
      and, at its option, permit Sun 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 Sun,
      Mr. Matros 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 Sun shall
      determine; provided, however, that if Sun directs Mr. Matros to pay such
      claim and pursue a refund, Sun shall pay such claim on Mr. Matros’ behalf
      on an after-tax and interest-free basis (the “Claim
      Payment”).  Sun’s control of the contest related to the claim
      shall be limited to the issues related to the Gross-Up Payment and Mr.
      Matros 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 Sun does not notify Mr. Matros in writing prior
      to the end of the Notice Period of its desire to contest the claim, Sun
      shall pay to the applicable taxing authorities on Mr. Matros’ behalf an
      additional Gross-Up Payment in respect of the excess parachute payments
      that are the subject of the claim.

            


    

     

    
      	
              d.  

            	
              Repayments.  If,
      after a Claim Payment is made by Sun, Mr. Matros becomes entitled to a
      refund with respect to the claim to which such Claim Payment relates, Mr.
      Matros shall pay Sun 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.
      Matros shall not be entitled to any refund with respect to the claim and
      Sun does not promptly notify Mr. Matros 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.
      Matros.

            


    

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    
      	
              e.  

            	
              Further
      Assurances.  Sun shall indemnify Mr. Matros and hold him
      harmless, on an after-tax basis, from any costs, expenses, penalties,
      fines, interest or other liabilities (“Losses”) incurred by Mr. Matros
      with respect to the exercise by Sun of any of its rights under Section 7,
      including, without limitation, any Losses related to Sun’s decision to
      contest a claim or any imputed income to him resulting from any Claim
      Payment or action taken on Mr. Matros’ behalf by Sun
      hereunder.  Sun shall pay all legal fees and expenses incurred
      under Section 7 and shall promptly reimburse Mr. Matros for the reasonable
      expenses incurred by him in connection with any actions taken by Sun or
      required to be taken by Mr. Matros hereunder.  Sun 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).

            


    

     

    
      	
              f.  

            	
              Section
      409A.  Notwithstanding anything to the contrary in this
      Section 7, any payment under this Section 7 shall be paid to Mr. Matros
      promptly but in no event later than the last day of the end of Mr. Matros’
      taxable year following the taxable year in which Mr. Matros (or Sun) pays
      or remits the related taxes.

            


    

     

    Section
8:  Protection of Sun’s
Interests.

     

    
      	
              a.  

            	
              Ownership
      of Property.  Mr. Matros acknowledges and agrees that any
      and all property developed, discovered or created by him during the
      pendency of his employment by the Company, including, without limitation,
      any and all copyrights, trademarks, trade secrets or other intellectual
      property is and shall remain the sole and exclusive property of the
      Company and Mr. Matros hereby sells, assigns and otherwise transfers all
      of his right, title and interest in and to such property, if any, to the
      Company.

            


    

     

    
      	
              b.  

            	
              Confidentiality.  Mr.
      Matros agrees that he will not at any time, during or after the term of
      this Agreement, except in performance of his obligations to Sun hereunder
      or with the prior written consent of the Board of Directors, directly or
      indirectly disclose to any person or organization any secret or
      “Confidential Information” that Mr. Matros may learn or has learned by
      reason of his association with Sun and its direct and indirect
      subsidiaries.  For purposes of all of this Section 8 only, “Sun”
      shall also include Sun’s direct and indirect subsidiaries.  The
      term “Confidential Information” means any information not previously
      disclosed to the public or to the trade by Sun’s management may need
      rewording with respect to Sun’s products, services, business practices,
      facilities and methods, salary and benefit information, trade secrets and
      other intellectual property, systems, procedures, manuals, confidential
      reports, product price lists, pricing information, customer lists,
      financial information (including revenues, costs or profits associated
      with any of Sun’s products or lines of business), business plans,
      prospects or opportunities.

            


    

     

    
      	
              c.  

            	
              Exclusive
      Property.  Mr. Matros confirms that all Confidential
      Information is and shall remain the exclusive property of
      Sun.  All business records, papers and documents kept or made by
      Mr. Matros relating to the business of Sun shall
  be

            


    

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    
      	
               

            	
              and
      remain the property of Sun.  Upon the expiration or termination
      of Mr. Matros’ employment with Sun for any reason or upon the request of
      Sun at any time, Mr. Matros shall promptly deliver to Sun, and shall not
      without the consent of the Board of Directors, retain copies of,
      Confidential Information, or any written materials not previously made
      available to the public, or records and documents made by Mr. Matros or
      coming into Mr. Matros’ possession concerning the business or affairs of
      Sun.

            


    

     

    
      	
              d.  

            	
              Nonsolicitation.  Mr.
      Matros shall not, during his employment under this Agreement, and for two
      (2) years following the termination of this Agreement, for whatever reason
      or cause, in any manner induce, attempt to induce, or assist others to
      induce, or attempt to induce, any employee, agent, representative or other
      person associated with Sun or any customer, patient or client of Sun to
      terminate his or her association or contract with Sun, nor in any manner,
      directly or indirectly, interfere with the relationship between Sun and
      any of such persons or entities.

            


    

     

    
      	
              e.  

            	
              Relief.  Without
      intending to limit the remedies available to Sun, Mr. Matros acknowledges
      that a breach of any of the covenants in Section 8 may result in material
      irreparable injury to Sun for which there is no adequate remedy at law,
      that it will not be possible to measure damages for such injuries
      precisely and that, in the event of such a breach or threat thereof, Sun
      shall be entitled to obtain a temporary restraining order and/or a
      preliminary or permanent injunction restraining Mr. Matros from engaging
      in activities prohibited by Section 8 or such other relief as may be
      required to specifically enforce any of the covenants in Section
      8.

            


    

     

    
      	
              f.  

            	
              Non-Disparagement.  Mr.
      Matros shall not during his employment under this Agreement and for two
      (2) years following termination of the Agreement, for whatever reason,
      make any statements that are intended to or that would reasonably be
      expected to harm Sun or any of its subsidiaries or affiliates, their
      respective predecessors, successors, assigns and employees and their
      respective past, present or future officers, directors, shareholders,
      employees, trustees, fiduciaries, administrators, agents or
      representatives.  Sun and its officers and directors will not
      make any statements that are intended to or that would reasonably be
      expected to harm Mr. Matros or his reputation or that reflect negatively
      on Matros’ performance, skills or
ability.

            


    

     

    Section
9:   Miscellaneous
Provisions.

     

    
      	
              a.  

            	
              Amendments,
      Waivers, Etc.  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.

            


    

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    
      	
              b.  

            	
              Validity.  The
      invalidity or unenforceability of any provision of this Agreement shall
      not affect the validity or enforceability of any other provision of this
      Agreement, which shall remain in full force and
  effect.

            


    

     

    
      	
              c.  

            	
              Entire
      Agreement.  This Agreement sets forth the entire
      agreement and understanding of the parties hereto with respect to the
      matters covered hereby.  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
      this Agreement and this Agreement shall supersede all prior agreements,
      including the Existing Agreement, negotiations, correspondence,
      undertakings and communications of the parties, oral or written, with
      respect to the subject matter
hereof.

            


    

     

    
      	
              d.  

            	
              Resolution
      of Disputes.  Any disputes arising under or in connection
      with this Agreement may, at the election of Mr. Matros or Sun, be resolved
      by binding arbitration, to be held in Orange County, California in
      accordance with the rules and procedures of the American Arbitration
      Association.  If arbitration is elected, Mr. Matros and Sun
      shall mutually select the arbitrator. If Mr. Matros and Sun cannot agree
      on the selection of an arbitrator, each party shall select an arbitrator
      and the two arbitrators shall select a third arbitrator who shall resolve
      the dispute.  Judgment upon the award rendered by the arbitrator
      may be entered in any court having jurisdiction
      thereof.  Nothing herein shall limit the ability of Sun to
      obtain the injunctive relief described in Section 8(e) pending final
      resolution of matters that are sent to
  arbitration.

            


    

     

    
      	
              e.  

            	
              Attorneys’
      Fees.  Sun shall pay or reimburse Mr. Matros on an
      after-tax basis for all costs and expenses (including, without limitation,
      court costs, costs of arbitration and reasonable legal fees and expenses
      which reflect common practice with respect to the matters involved)
      incurred by Mr. Matros if Mr. Matros prevails on the merits of any claim,
      action or proceeding (i) contesting or otherwise relating to the existence
      of Good Cause in the event of Mr. Matros’ termination of employment during
      the Term for Good Cause; (ii) enforcing any right, benefit or obligation
      under this Agreement, or otherwise enforcing the terms of this Agreement
      or any provision thereof; or (iii) asserting or otherwise relating to the
      existence of Good Reason in the event of Mr. Matros’ termination of
      employment during the Term for Good
Reason.

            


    

     

    
      	
              f.  

            	
              Governing
      Law.  The validity, interpretation, construction and
      performance of this Agreement shall be governed by the laws of the State
      of California.

            


    

     

    
      	
              g.  

            	
              Notice.  For
      the purpose of this Agreement, notice, demands and all other communication
      provided for in this Agreement shall be in writing and shall be deemed to
      have been duly given when delivered by hand delivery or overnight courier
      or mailed by United States certified or registered mail, return receipt
      requested, postage prepaid, addressed as follows or to other addresses as
      each party may have furnished to the
other:

            


    

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    To
Sun:

     

    Sun
Healthcare Group, Inc.

    Attention:  General
Counsel

    18831 Von
Karman, Suite 400

    Irvine,
California 92612-1537

     

    To Mr.
Matros:

     

    Mr.
Richard Matros

    14 Scenic
Bluff

    Newport
Coast, California 92657

     

    
      	
              h.  

            	
              Section
      409A.

            


    

     

    
      	
              1.  

            	
              If
      Mr. Matros is a “specified employee” within the meaning of Treasury
      Regulation Section 1.409A-1(i) as of the date of Mr. Matros’ separation
      from service (within the meaning of Treasury Regulation Section
      1.409A-1(h)(1), without regard to the optional alternative definitions
      available thereunder) and any payment or benefit provided in Section 6
      hereof constitutes a “deferral of compensation” within the meaning of
      Section 409A, Mr. Matros shall not be entitled to any such payment or
      benefit until the earlier of: (i) the date which is six (6) months after
      his separation from service for any reason other than death, or (ii) the
      date of his death.  The provisions of this paragraph shall only
      apply if, and to the extent, required to avoid the imputation of any tax,
      penalty or interest pursuant to Section 409A.  Any amounts
      otherwise payable to Mr. Matros upon or in the six (6) month period
      following his separation from service that are not so paid by reason of
      this Section 9(h)(1) shall be paid (without interest) as soon as
      practicable (and in all events within thirty (30) days) after the date
      that is six (6) months after Mr. Matros’ separation from service (or, if
      earlier, as soon as practicable, and in all events within thirty (30)
      days, after the date of his death).

            


    

     

    
      	
              2.  

            	
              To
      the extent that any reimbursements pursuant to Sections 3(h), 6(b)(3),
      7(e) and 9(e) are taxable to Mr. Matros, any reimbursement payment due to
      Mr. Matros pursuant to such provision shall be paid to Mr. Matros on or
      before the last day of Mr. Matros’ taxable year following the taxable year
      in which the related expense was incurred.  The benefits and
      reimbursements pursuant to Sections 3(h), 6(b)(3), 7(e) and 9(e) are not
      subject to liquidation or exchange for another benefit and the amount of
      such benefits and reimbursements that Mr. Matros receives in one taxable
      year shall not affect the amount of such benefits and
      reimbursements  that Mr. Matros receives in any other taxable
      year.

            


    

     

    
      	
              3.  

            	
              It
      is intended that any amounts payable under this Agreement and Sun’s and
      Mr. Matros’ exercise of authority or discretion hereunder shall
      comply

            


    

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    
      	
               

            	
              with
      and avoid the imputation of any tax, penalty or interest under Section
      409A.  This Agreement shall be construed and interpreted
      consistent with that intent.

            


    

     

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

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      	 
      
	
                                              RICHARD
      K. MATROS

                                            
	 
      
	
                                              /s/ Richard K. Matros

                                            
	 
	 
      
	
                                              SUN
      HEALTHCARE GROUP, INC.

                                               

                                            
	 
      
	
                                              /s/ Michael Newman

                                            
	
                                              Its
      Executive Vice
President

                                            


                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

    


     

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