a.  

Annual Base Salary .   SHSS shall pay to Mr. Mathies a base salary at an annual rate of $400,000 (“Base Salary”), such salary to be payable in accordance with SHSS’s customary payroll practices (but not less frequently than monthly). The annual base salary will be reviewed at least annually for possible merit increases and any increase in Mr. Mathies’ 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. Mathies shall be entitled to receive an annual bonus (“Bonus”) in accordance with the Sun Healthcare Group, Inc. Executive Bonus Plan, as it may be amended from time to time by the Compensation Committee of the Board of Directors of SHG; provided, however, that no amendment shall be effective if it reduces the 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. Mathies.  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. Mathies must be employed by SHSS 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 the ability to deduct such Bonus. In the event the minimum financial performance threshold is met as set forth in the Plan, Mr. Mathies’ minimum Bonus shall be no less than 10% of his Base Salary for the applicable fiscal year.

c.  

Equity Incentive.   Mr. Mathies shall be entitled to the following equity incentive as of the date his employment begins:

1.  

A non-qualified stock option (“Stock Option”) to purchase 100,000 shares of Common Stock of SHG at an exercise price per share equal to the fair market value of the Common Stock. One-fifth of the shares of Common Stock underlying the Stock Option will vest on the later of (x) the date on which the Stock Option is issued or (y) the date on which Sun Healthcare Group, Inc. emerges from Chapter 11 bankruptcy proceedings (the “Initial Vesting Date”) and thereafter an additional 20% of the shares of Common Stock underlying the Stock Option will vest on each of the first four anniversaries of the Initial Vesting Date provided Mr. Mathies is employed by SHSS or any other subsidiary of SHG on each such date of vesting. The Stock Option shall have a 7 year term.  Mr. Mathies acknowledges that SHG has satisfied its obligation to grant such Stock Option.

2.  

If, during the Term, Mr. Mathies’ employment with SHSS is terminated for any reason other than his death or Disability (as defined in Section 5(e)), Good Cause (as defined in Section 5(a)) or his voluntary resignation without Good Reason (as defined in Section 5(c)), then the unvested portion of his Stock Options will thereupon immediately be vested.

d.  

Retirement and Benefit Plans.   During the Term, Mr. Mathies 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 SHSS providing services to SunBridge 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.   Mr. Mathies shall be entitled to paid time off, in addition to holiday and sick time, of not less than 160 hours per year, in accordance with SunBridge’s policy for paid time off.

f.  

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

g.  

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

a.  

Termination by SHSS for “Good Cause.   SunBridge and/or SHSS may at any time, by written notice to Mr. Mathies 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. Mathies as an officer and employee and from all other positions with SHSS, SunBridge and the other LTC subsidiaries for Good Cause. SunBridge and/or SHSS may relieve Mr. Mathies 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. Mathies upon a termination for Good Cause is set forth in Section 6(a). “Good Cause” for termination shall mean any one of the following:

1.  

Any criminal conviction under the laws of the United States or any state or other political subdivision thereof which, in the good faith determination of the Compensation Committee of SHG, renders Mr. Mathies unsuitable as an officer of SunBridge and the other LTC subsidiaries or employee.

2.  

Mr. Mathies’ continued failure to substantially perform the duties reasonably requested by the Chief Executive Officer (“CEO”) of SHG and commensurate with his position as President of SunBridge and the other LTC subsidiaries (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 CEO of SHG, which demand specifically identifies the manner in which the CEO of SHG believes that he has not substantially performed his duties, and which performance is not substantially corrected by him within a mutually agreed upon period of time for performance of such demand; and

3.  

Any material workplace misconduct or willful failure to comply with SunBridge’s general policies and procedures as they may exist from time to time by Mr. Mathies which, in the good faith determination of the Compensation Committee of SHG, renders Mr. Mathies unsuitable as an officer or employee.

b.  

Termination by SunBridge without Good Cause .   SunBridge and/or SHSS may at any time, by written notice to Mr. Mathies at least five (5) business days prior to date of termination specified in such notice, terminate Mr. Mathies as an officer or employee and from all other positions with SHSS, SunBridge and the other LTC subsidiaries. If such termination is made by SunBridge and/or SHSS other than by reason of Mr. Mathies’ death, Disability (as defined in Section 5(e)) and Good Cause does not exist, such termination shall be treated as a termination without Good Cause and Mr. Mathies shall be entitled to payment in accordance with Section 6(b).

c.  

Termination by Mr. Mathies for Good Reason.   Mr. Mathies 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 an officer and employee and from all other positions with SHSS, SunBridge and the other LTC subsidiaries by written notice to SunBridge at least thirty (30) days prior to the date of termination specified in such notice; provided, however, that

SunBridge and/or SHSS has not substantially corrected the event or condition that would constitute Good Reason prior to the date of termination. Payment to Mr. Mathies upon a termination for Good Reason is set forth in Section 6(b).

d.  

Voluntary Resignation.   Mr. Mathies may, at any time at his option with thirty (30) calendar days written notice to SunBridge, voluntarily resign without Good Reason as an officer and employee and from all positions with SHSS, SunBridge and the other LTC subsidiaries. Payment to Mr. Mathies upon his voluntary resignation without Good Reason is set forth in Section 6(a). Resignation from employment shall automatically constitute resignation from all positions of any subsidiary or affiliated corporation.

e.  

Death or Disability.   Mr. Mathies’ employment under this Agreement shall terminate automatically as of the date of Mr. Mathies’ death. SunBridge and/or SHSS may, at any time by written notice to Mr. Mathies at least five (5) business days prior to the date of termination specified in such notice, terminate Mr. Mathies as an officer and employee and from all other positions with SHSS, SunBridge and the other LTC subsidiaries by reason of his Disability. “Disability” shall mean any physical or mental condition or illness that prevents Mr. Mathies’ 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 SunBridge and/or SHSS and reasonably acceptable to Mr. Mathies or, if Mr. Mathies is incapacitated, reasonably acceptable to the Director of Medicine or equivalent senior physician at Hoag Hospital. Payment to Mr. Mathies upon his termination by reason of his death or Disability is set forth in Section 6(a).

a.  

Payment Upon Termination for Good Cause, Resignation without Good Reason, Death or Disability.   In the event of termination of his employment pursuant to Sections 5(a), 5(d) or 5(e), Mr. Mathies, 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 in accordance with Company policy, which shall be paid to Mr. Mathies 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. Mathies or his estate shall be paid (i) any accrued and unpaid bonus for any prior fiscal year, which shall be paid to Mr. Mathies 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 (determined by multiplying the bonus compensation he would have earned had he been employed for the full year by a fraction the numerator of which shall be the number of calendar days in the year in which his termination occurs that precede such termination, and the denominator of which shall be the total number of days in such year) of the bonus, if any, for the fiscal year in which the termination occurs, which shall be paid at the same time as other annual bonuses are paid to senior management personnel with respect to that fiscal year, but in any event within seventy-five (75) days