Document:

sunrise_fountainssettlement1.htm - Generated by SEC Publisher for SEC Filing

Exhibit 10.3

SETTLEMENT AGREEMENT

        This SETTLEMENT AGREEMENT (this “Agreement”) is made as of October 26, 2009 by and among SUNRISE SENIOR LIVING INVESTMENTS, INC., a Virginia corporation (“SSLI”), SUNRISE SENIOR LIVING, INC., a Delaware corporation (“SSL”), FOUNTAINS SENIOR LIVING HOLDINGS, LLC, a Delaware limited liability company, formerly known as Sunrise IV Senior Living Holdings, LLC (“Borrower”), SUNRISE SENIOR LIVING MANAGEMENT, INC., a Virginia corporation (“Sunrise Manager”), US SENIOR LIVING INVESTMENTS, LLC, a Delaware limited liability company (“Investor Member”), and HSH NORDBANK AG, NEW YORK BRANCH, as Administrative Agent for Lenders (“Administrative Agent”).

        Reference is made to each of the following agreements:

        (a) that certain Operating Deficits Agreement dated as of June 30, 2005 between SSL and Administrative Agent (the “ODA”);

        (b) that certain Membership Interest Pledge and Security Agreement (Sunrise Senior Living Investments, Inc.) dated as of June 30, 2005 between SSLI and Administrative Agent (the “Membership Interest Pledge”); and

        (c) that certain Common Terms Agreement dated as of June 30, 2005, as amended by that certain First Amendment to Common Terms Agreement dated as of December 22, 2005 by and among Borrower, SSL, Administrative Agent, certain lenders party thereto, and certain other parties as described therein (the “Common Terms Agreement”);

in each case as such agreements have been heretofore amended, restated, supplemented or otherwise modified (and collectively with all other documents executed in connection with the financing evidenced by the Common Terms Agreement and the Loan Agreement (as hereinafter defined), the “Documents”).

        The parties hereto wish, upon the occurrence of certain events, to release SSLI, SSL, Sunrise Manager, Administrative Agent, as Administrative Agent for Lenders, and Lenders from all of their respective obligations under the Documents (the “Mutual Release”). This Agreement evidences the foregoing agreement of the parties to document the conditions to and the operation of the Mutual Release.

A.    Each of the parties hereto acknowledges and agrees that upon the making or waiver of the Required Payments and Events set forth in Annex I hereto (the “Required Payments & Events”), each of the Sunrise Release Events set forth in Annex II hereto (the “Sunrise Release Events”) shall, without any further action on the part of any person, be deemed to have concurrently occurred. The date on which all of the Required Payments and Events have occurred or have been waived is herein referred to as the “Closing Date”. The parties hereto hereby waive all other conditions precedent required by the Documents for any of the Sunrise Release Events to occur (including, without limitation, any requirement for prior notice). Any other provision of the Documents which would otherwise prohibit, limit or condition the occurrence of the Sunrise Release Events is hereby waived to the extent necessary to permit the Sunrise Release Events to occur as set forth herein. Administrative Agent hereby confirms that it is executing this

Agreement in its capacity as Administrative Agent for the Lenders, pursuant to and in accordance with the terms of that certain Acquisition and Construction Loan Agreement dated as of June 30, 2005, as amended and restated by that certain Amended and Restated Acquisition and Construction Loan Agreement dated as of December 22, 2005 by and among Borrower, Administrative Agent and the Lenders (as so amended and restated, the “Loan Agreement”), and the Lenders have consented to this Agreement.

B.    Upon the occurrence of the Closing Date, (i) the Administrative Agent, in its capacity as Administrative Agent for the Lenders, agrees to deliver to SSLI and SSL a release in the form attached hereto as Annex III(a) (the “Sunrise Release”) and (ii) SSLI and SSL agree to deliver a release to Administrative Agent and Lenders in the form attached hereto as Annex III(b) (the “Agent/Lenders Release”; the Agent/Lenders Release together with the Sunrise Release, collectively, the “Releases”). Notwithstanding anything contained herein to the contrary, the mutual execution and delivery of the Releases shall constitute an irrevocable confirmation that all of the Required Payments & Events have occurred or been waived and that the Closing Date has occurred. In addition, upon and after the Closing Date, SSLII is authorized, where permitted by applicable law, to file a UCC-3 termination statement and other similar termination statements in respect of the released lien(s) and security interest(s), including, without limitation, the financing statement attached as Annex IV hereto.

C.    Upon the occurrence of a Closing (as such term is defined in that certain Master Operations Transfer Agreement dated as of the date hereof among Sunrise Manager, Borrower and Watermark Retirement Communities, Inc. (“Watermark”) (the “OTA”)) of each Facility (as such term is defined in the Loan Agreement), the Administrative Agent, in its capacity as Administrative Agent for the Lenders, agrees to deliver to Sunrise Manager, a release in the form attached hereto as Annex III(c) (the “Manager Release”) related to each Facility which is the subject of such Closing. In connection with the foregoing, Administrative Agent hereby consents to the various parties entering into the OTA and that certain Amendment to Master Owner/Manager Agreement, dated as of the date hereof among Borrower, Investor Member and Sunrise Manager (the “MOMA Amendment”). Furthermore, that certain Manager’s Agreement and Consent to Assignment dated as of June 30, 2005 made by Sunrise Manager for the benefit of Administrative Agent is hereby amended by deleting Section 3 thereof in its entirety and replacing it with the following:

	       “3. 	     The Manager agrees that fees of the Manager shall be paid to the Manager only as 
	 	     provided in the Management Contracts, subject to the provisions of that certain 
	 	     Amendment to Master Owner/Manager Agreement, dated as of October 23, 2009 
	 	     by and among Borrower, US Senior Living Investments, LLC and Manager.” 

D.    This Agreement may be executed in any number of counterparts and in separate counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute the same agreement.

E.    THIS AGREEMENT SHALL, IN ACCORDANCE WITH SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CONFLICT OF LAWS

2

PRINCIPLES THEREOF THAT WOULD CALL FOR THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.

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3

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date hereof.

                                                               

                                                               SUNRISE SENIOR LIVING INVESTMENTS, 

                                                               INC., a Virginia corporation

                                                               By: /s/ Anne H. Stuart 

                                                                     Name: Anne H. Stuart

                                                                     Title: Vice President

                                                               SUNRISE SENIOR LIVING, INC., a Delaware 

                                                               corporation

                                                               By: /s/ D. Gregory Neeb 

                                                                     Name: D. Gregory Neeb

                                                                     Title: Chief Investment Officer

                                                               SUNRISE SENIOR LIVING MANAGEMENT, 

                                                               INC., a Virginia corporation

                                                               By: /s/ Anne H. Stuart

                                                                     Name: Anne H. Stuart

                                                                     Title: Vice President

[signature continue on the following page]

                                                               FOUNTAINS SENIOR LIVING HOLDINGS, 

                                                               LLC, a Delaware limited liability company

                                                               By: US Senior Living Investments, LLC, its Sole 

                                                               Member

                                                               By: /s/ Jill A. Russo 

                                                                     Name: Jill A. Russo

                                                                     Title: Vice President

                                                               US SENIOR LIVING INVESTMENTS, LLC, a 

                                                               Delaware limited liability company

                                                               By: /s/ Jill A. Russo 

                                                                     Name: Jill A. Russo

                                                                     Title: Vice President

[signature continue on the following page]

                                                               HSH NORDBANK AG, NEW YORK BRANCH, 

                                                               a German banking corporation acting through its New York 

                                                               Branch, as Administrative Agent and Lender

                                                               By: /s/ Oliver Schenkenberg

                                                                     Name: Oliver Schenkenberg

                                                                     Title: Vice President

                                                               By: /s/ Gregory J. Nuber

                                                                     Name: Gregory J. Nuber 

                                                                     Title: Senior Vice President

[no further signatures]ex101.htm

    

      EXHIBIT
10.1

      EMPLOYMENT
AGREEMENT

      

      THIS
EMPLOYMENT AGREEMENT (“Agreement”) is entered into this 26th day of October,
2009 (the “Effective Date”), 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 Amended and Restated Employment
Agreement dated December  17, 2008 (the
“Existing  Agreement”); and

       

      WHEREAS,
this Agreement replaces and supersedes the Existing Agreement in its
entirety.

       

      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
4 and 5 hereof, the initial term of employment of Mr. Matros under this
Agreement is for a period of three (3) years, commencing on the Effective Date,
and terminating on the third anniversary of the Effective Date.  On
the first anniversary of the Effective Date, and on each anniversary of the
Effective Date thereafter, this Agreement shall be renewed for a one (1) year
period (the period from and after the Effective Date until the termination of
this Agreement  is referred to as the “Term”) unless (i) earlier
terminated pursuant to the provisions of Sections 4 and 5 hereof, or (ii)
written notice of non-renewal is given by either party to the other at least 60
days prior to the anniversary of the Effective Date occurring in any given year,
in which case this Agreement shall be terminated on anniversary of the Effective
Date occurring in the second year following the year in which such notice of
non-renewal was provided.  Notwithstanding the foregoing, the Term
shall terminate, at the latest, on the tenth anniversary of the Effective
Date.

       

      Section
2:   Duties
and Responsibilities.  Mr. Matros is employed as CEO and is
engaged as Chairman of the Board of Directors of Sun (“Board of
Directors”).  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, (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,
subject to the provisions of Sun’s Governance Guidelines, as in effect from time
to time.  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 the event that Mr. Matros
serves

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      as
director or senior executive officer of one or more direct or indirect
subsidiaries of Sun, he shall do so 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 $875,000 (“Base Salary”), such salary
      to be payable in accordance with Sun’s customary payroll practices (but
      not less frequently than monthly).  Annually during the Term, on
      or prior to each anniversary of the Effective Date, the Board of Directors
      or the Compensation Committee of the Board of Directors (the “Compensation
      Committee”) 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.

              

      

       

      
        	
                 
      

              	
                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 Sun Healthcare
      Group, Inc. Executive Bonus Plan (the “Plan”), as it may be amended from
      time to time by the Compensation Committee; provided, however, that no
      amendment shall be effective if it reduces the percentage of Base
      Salary that would constitute the target 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.  Notwithstanding the foregoing, but subject to the
      provisions of Section 5, 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.

              

      

       

      
        	
                 
      

              	
                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.

              

      

       

      
        	
                 
      

              	
                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

              

      

       

      
        
          
            2

          

          
             

            
              

            

          

          
             

          

        

      

      
      

      
      

      
        	
              	
                 

              	
                charter
      and bylaws 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:  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
5.  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 5(a).  “Good Cause” for
      termination shall mean any one of the
following:

              

      

       

      
        	
                 
      

              	
                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

              

      

       

      
      

       

       

      
        
          3

          
            

          

        

        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 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 and
      indirect subsidiaries.  If such termination is made by Sun other
      than by reason of Mr. Matros’ death, Disability (as defined in Section
      4(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
      5(b).

              

      

       

      
        	
                 
      

              	
                c.

              	
                Termination
      by Mr. Matros for Good Reason.  Mr. Matros may, at any
      time at his option within sixty (60) days following the initial existence
      of the particular  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 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
      5(b).  Mr. Matros’ continued employment shall not, by itself,
      constitute consent to or a waiver of rights with respect to any
      circumstances constituting Good Reason
  hereunder.

              

      

       

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

       

      (i)           A
meaningful and detrimental reduction in Mr. Matros’ authority, duties or
responsibilities or a meaningful and detrimental change in his reporting
responsibilities;(ii)A material
failure of Sun to comply with the

      
         

        
          4

        

        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
(iii) 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
4(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 5(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
  5(a).

                  

          

           

        

      

      Section
5:   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 4(a), 4(d) or 4(e), Mr. Matros, or
      his estate where applicable, shall be paid any earned but unpaid Base
      Salary through the date of Mr. Matros’ separation from service with Sun
      (the “Severance Date”)  and any accrued and unused paid time off
      through the Severance Date, 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 Severance
      Date (collectively, the “Accrued Obligations”).  In addition, in
      the case of a termination of employment pursuant to Sections 4(e), but not
      Sections 4(a) or 4(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
  

              

      

       

       

      
        
          
             

          

          
            5

            
              

            

          

          
             

          

        

        any event
within seventy-five (75) days after the Severance Date, 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
shall cease as of the Severance Date, except to the extent Mr. Matros may elect
to continue coverage 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 4(a), 4(d) or 4(e), Mr. Matros shall not be entitled
to any compensation or benefits under this Agreement except as set forth in this
Section 5(a).

         

      

      
        	
                 
      

              	
                b.

              	
                Payment
      Upon Termination by Sun without Good Cause or by Mr. Matros for Good
      Reason.  In the event of a termination of Mr. Matros’
      employment during the Term pursuant to Sections 4(b) or 4(c), subject to
      the provisions of Section 7(f):

              

      

       

      
        	
                 
      

              	
                1.

              	
                Mr.
      Matros shall be entitled to a severance benefit in an amount equal to (i)
      Mr. Matros’ then current annual Base Salary multiplied by 2.25, plus (ii)
      any accrued and unpaid Bonus for any prior fiscal year, plus (iii) a pro
      rata portion of the Bonus for the fiscal year in which the termination
      occurs (determined by multiplying the Bonus 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 year of termination that Mr. Matros is employed by the
      Company and the denominator of which is 365 or 366, as
      applicable).  The amount payable pursuant to clause (i) above
      shall be paid to Mr. Matros in a lump sum cash payment in the month
      immediately following the month in which the Severance Date
      occurs.  The amount payable pursuant to clause (ii) above shall
      be paid to Mr. Matros at the time that annual bonuses are paid to senior
      management personnel with respect to the applicable fiscal year, but in
      any event within seventy-five (75) days after the Severance
      Date.  The amount payable pursuant to clause (iii) shall be paid
      to Mr. Matros at the time that annual bonuses are paid to senior
      management personnel with respect to the applicable fiscal year in which
      the Severance Date occurs, but in any event within seventy-five (75) days
      after the conclusion of such fiscal
year.

              

      

       

      
        	
                 
      

              	
                2.

              	
                In
      the event such termination occurs on or within two years following the
      date of a Change in Control, Mr. Matros shall not be entitled to the
      amount described in Section 5(b)(1) above but shall instead be entitled to
      an amount equal to (i) the sum of his then current annual Base Salary and
      his target Bonus for the then current fiscal year multiplied by 2, plus (ii)
      any

              

      

       

      
        
          
             

          

          
            6

            
              

            

          

          
             

          

        

      

      
 

      accrued
and unpaid Bonus for any prior fiscal year, plus (iii) a pro rata portion of the
target Bonus for the fiscal year in which the termination occurs (assuming the
Company achieves 100% of the financial performance target or targets for such
fiscal year that are utilized in determining the amount of the Bonus and
determined by multiplying the amount Mr. Matros would have received 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). The amounts payable pursuant to clauses (i)
and (iii) above shall be paid to Mr. Matros in a lump sum in the month
immediately following the month in which the Severance Date occurs. The amount
payable pursuant to clause (ii) above shall be paid to Mr. Matros at the time
that annual bonuses are paid to senior management personnel with respect to the
applicable fiscal year, but in any event within seventy-five (75) days after the
Severance Date.

      
         

      

      
        	
                 
      

              	
                3.

              	
                Mr.
      Matros’ participation in any other retirement and benefit plans and
      perquisites shall cease as of the Severance Date, except Sun shall pay
      premiums pursuant to COBRA for continuing coverage under Sun’s health
      plans for Mr. Matros and his eligible dependents (as determined under
      Sun’s health plans), or, at Mr. Matros’ option (which shall be
      communicated by written notice to Sun prior to the month such election is
      to take effect), provide a separate cash payment monthly equal to the
      amount of the COBRA premium until the earlier of (i) the eighteen-month
      anniversary (or, in the case of a Change in Control termination referred
      to in Section 5(b)(2) above, the twenty-four-month anniversary) of the
      last day of the month in which the Severance Date occurs or (ii) the date
      of Mr. Matros becomes eligible to participate in a plan of another
      employer or (iii), as to any of his eligible dependents, the date on which
      the eligible dependent becomes eligible to participate in a plan of
      another employer.  Any cash payment due to Mr. Matros pursuant
      to this Section 5(b)(3) shall be paid by Sun not later than the end of the
      month to which such payment
relates.

              

      

       

      
        	
                 
      

              	
                4.

              	
                Upon
      any such termination, Mr. Matros shall be entitled to receive any Accrued
      Obligations payable to Mr. Matros as set forth in Section
      5(a).

              

      

       

      
        	
                 
      

              	
                5.

              	
                Notwithstanding
      the foregoing, Mr. Matros’ right to receive the severance payments
      described in this Section 5(b) shall be and is conditioned upon his
      execution and delivery of (and not revoking) 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 Sun within twenty-one (21) days
      following the Severance Date.

              

      

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

       

      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, Mr. Matros
shall be entitled (in addition to the benefits described in Section 5(b)(1)
which were triggered in connection with the original Severance Date) to the
difference between the non-discounted present value of the benefits described in
Section 5(b)(2) above less the non-discounted present value of the benefits
described in Section 5(b)(1) above (each determined as of the Severance Date),
which difference shall be paid to Mr. Matros upon or within thirty (30) days
following the occurrence of such Change in Control.

       

      
        	
                 
      

              	
                c.

              	
                “Change
      in Control.”  For purposes of this Section 5, 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 not more than one (1) year (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;

              

      

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

       

      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 and provided further that in no
event shall any transaction be considered a Change in Control if it does not
constitute a change in the ownership or effective control of Sun or a change in
the ownership of a substantial portion of Sun’s assets, each within the meaning
of Section 409A of the United States Internal Revenue Code of 1986, as amended
(the “Code”) and the Treasury Regulations promulgated thereunder (“Section
409A”).  In addition, notwithstanding Sections 5(c)(1), 5(c)(2),
5(c)(3) and 5(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.  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
6:   Reduction
in Compensation to Avoid Excise Tax.  Notwithstanding anything
herein to the contrary, if the excise tax imposed by Section 4999 of the Code or
any similar or successor tax (the “Excise Tax”) applies to any payments,
benefits and/or amounts received (or otherwise to be received) by Mr. Matros
pursuant to Section 5(b) or otherwise, including, without limitation, amounts
received or deemed received, within the meaning of any provision of the Code, by
Mr. Matros as a result of (and not by way of limitation) any automatic vesting,
lapse of restrictions and/or accelerated target or performance achievement
provisions, or otherwise, applicable to outstanding grants or awards to Mr.
Matros under any of Sun’s incentive plans (collectively, the “Total Payments”),
then the Total Payments shall be reduced (but not below zero) so that the
maximum amount of the Total Payments (after reduction) shall be one dollar
($1.00) less than the amount which would cause the Total Payments to be subject
to the Excise Tax; provided that such reduction to the Total Payments shall be
made only if the total after-tax benefit to Mr. Matros is greater after giving
effect to such reduction than if no such reduction had been made.  If
such a reduction is required, the Company shall reduce or eliminate the Total
Payments by first reducing or eliminating any accelerated vesting of stock
options that then have a term of one year or less and are then under-water, then
by reducing or eliminating any cash severance benefits, then by reducing or
eliminating any accelerated vesting of any other stock options, then by reducing
or eliminating any accelerated vesting of other equity awards, and then by
reducing or eliminating any other remaining Total Payments, in each case in
reverse order beginning with the payments which are to be paid the farthest in
time from the date of the 

      

        
          
             

          

          
            9

            
              

            

          

          
             

          

        

        related
change in control event. The preceding provisions of this Section 6 shall take
precedence over the provisions of any other plan, arrangement or agreement
governing Mr. Matros’ rights and entitlements to any benefits or compensation.
The Company agrees that, prior to and in connection with any Change in Control,
the Company will reasonably consider alternatives (if any) Mr. Matros may have
to eliminate or mitigate the impact of any Excise Tax on his Total
Payments.

         

      

      
        	
                 
      

              	
                a.

              	
                Determination
      of Reduction.  The amount of the reduction in
      compensation shall be determined by an accounting firm retained by Sun
      (the “Accounting Firm”) using such formulas as the Accounting Firm deems
      appropriate.  No compensation to Mr. Matros shall be reduced
      pursuant to the provisions of this Section 6 if the Accounting Firm
      determines that the payments to Mr. Matros are not subject to an Excise
      Tax.

              

      

       

      
        	
                 
      

              	
                b.

              	
                Payment
      of Excise Tax.   If a reduction
      in compensation that results in no Excise Tax being payable does not
      result in Mr. Matros having a more positive after-tax financial position
      than he would have enjoyed without the reduction but with the resulting
      application of the Excise Tax, then, at the option of Mr. Matros, he can
      choose to pay the amount of the Excise Tax and avoid the reduction in
      compensation.  The amount of the Excise Tax shall be determined
      by the Accounting Firm using such formulas as the Accounting Firm deems
      appropriate.  In the event the Mr. Matros chooses to pay the
      Excise Tax, he will have no right of reimbursement or payment of
      additional compensation from the
Company.

              

      

       

      Section
7:  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 7 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 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 

              

      

      

        
          
             

          

          
            10

            
              

            

          

          
             

          

        

      

      
        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 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.

              	
                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.

              

      

       

      
        	
                 
      

              	
                f.

              	
                Violation
      of Covenants.

              

      

       

      
        	
                 
      

              	
                1.

              	
                Without
      intending to limit the remedies available to Sun, Mr. Matros acknowledges
      that a breach of any of the covenants in this Section 7 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 this Section 7 or such other relief as may be
      required to specifically enforce any of the covenants in this Section
      7.

              

      

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

       

      
        	
                 
      

              	
                2.

              	
                In
      the event that Mr. Matros breaches any of the covenants in this Section 7,
      Sun shall be entitled to cease payment of any further compensation or
      benefits pursuant to Section 5(b) or otherwise (other than compensation
      payable pursuant to Section 5(b)(1)(ii)) and recover from Mr. Matros any
      amounts paid to him pursuant to the provisions of Section 5(b)(1)(i),
      Section 5(b)(2)(i) or Section
5(b)(2)(iii).

              

      

       

      Section
8:    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.

              

      

       

      
        	
                 
      

              	
                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 7(f) 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

              

        
          
             

          

          
            12

            
              

            

          

          
             

          

        

      

      
        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:

              

      

       

      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 5
      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 8(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
      

              

        
          
             

          

          
            13

            
              

            

          

          
             

          

        

      

      
        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),
      5(b)(3)  and 8(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), 5(b)(3)and 8(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
      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

              	 
      

      

      

       

      
        
           

        

        
          14

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